The external sector showed a mixed performance with a widened trade deficit and continued inflows in the form of services and workers’ remittances in June 2015. The wider trade deficit on a cumulative basis as at end June 2015 was offset to a greater extent by continued healthy inflows of workers’ remittances and earnings from tourism. Meanwhile, cumulative inflows to the financial account continued to moderate although inflows in June witnessed some improvement.
Gross official reserves strengthened to US dollars 7.5 billion as at end June 2015 with the receipt of proceeds from the issuance of International Sovereign Bond and Sri Lanka Development Bonds. (INTRO)
Earnings from exports in June 2015 amounted to US dollars 944 million, recording a decline of 4.2 percent, year-on-year. Despite the significant improvement in earnings from exports of transport equipment, petroleum products and spices, lower earnings from tea, textiles and garments, rubber products and seafood exports contributed to this decline. Export of transport equipment increased significantly due to the export of a cruise ship to India.
Export of petroleum products increased owing to a more than two fold growth in bunker fuel volume despite the decline in bunker fuel price by over 50 percent. Earnings from spice exports increased more than 40 percent as exports of all categories of spices performed well during the month. However, this positive expansion in exports was outweighed by the subdued performance of other main export categories. Tea exports continued to decline in June 2015 for the eleventh consecutive month, due to lower demand from main tea buyers such as Russia (a drop of 29 percent) and the Middle East (a drop of 24 percent). Weaker demand for tea in main markets resulted in a decline in export volumes as well as the unit price with the lowest export price of US dollars 4.39 per kg of tea being recorded since September 2012. Earnings from exports of textiles and garments declined reflecting lower exports to EU countries despite the growth in exports to both the USA and non-traditional markets.
Export earnings from rubber products declined during the month due to lower performance of the export of rubber tyres, surgical gloves and other rubber products. Seafood exports continued to decline in June 2015 consequent to the ban on exports of fisheries products to the EU from Sri Lanka. Accordingly, in June 2015, seafood exports to EU declined by 72 percent, year-on-year, while such exports to other markets increased by 18 percent, year-on-year.
On a cumulative basis, earnings from exports declined marginally by 0.6 percent during the first six months of the year mainly due to a lower performance of agricultural exports despite the growth in industrial exports. The leading markets for merchandise exports of Sri Lanka during the first six months of 2015 were the USA, the UK, India, Germany, Italy and China which accounted for about 55 percent of total exports.
Expenditure on imports in June 2015 increased by 13.5 percent, year-on-year, to US dollars 1,633 million. This growth was led by vehicle imports for personal usage categorized under consumer goods, which increased by 110.1 percent due to higher importation of motor cars and motorcycles, and vehicle imports for business purposes categorized under investment goods, which increased by 238.6 percent due to higher importation of auto trishaws and other motor vehicles.
Import expenditure on textiles and textile articles increased reflecting potential higher export demand in coming months and increased local demand for garments. Meanwhile, import expenditure on fuel declined by 41.3 percent, year-on-year, to US dollars 242 million in June 2015, reflecting a 70.3 percent decline in expenditure on crude oil and a 23.6 percent drop in expenditure on refined petroleum products. Lower expenditure on fuel imports was mainly due to the significant decline in oil prices in international markets. Meanwhile, import expenditure on sugar declined by 54.7 percent mainly due to the decrease in the import price of sugar coupled with a lower import volume. Mineral product imports and rice imports also declined during the month. Rice imports, which recorded a significant growth since April 2014, contracted by 75.8 percent in June after the introduction of import duty and other taxes in place of the Special Commodity Levy (SCL) with effect from 6 May 2015 and the
increase in domestic rice production.
On a cumulative basis, expenditure on imports during the first six months of 2015 increased by 5.7 percent, year-on-year, to US dollars 9,501 million mainly led by the import of consumer goods followed by the import of investment goods. During the first six months of 2015, the main import origination countries were India, China, Japan, UAE and Singapore, which accounted for about 60 percent of total imports.
On a cumulative basis, the trade deficit during the first six months of 2015 increased by 15.6 percent to US dollars 4,086 million. However, the deficit in the trade account in June 2015 widened substantially by 51.9 percent to US dollars 689 million, year–on-year, while remittance inflows and earnings from tourism were more than sufficient to finance the deficit.
Earnings from tourism
In July 2015 tourist arrivals recorded impressive growth of 31.2 percent, year-on year, with 175,804 tourists arriving during the month. In the first seven months of the year, tourist arrivals surpassed the one million benchmark reaching a total of 1,005,855, translating into 16.8 percent growth over the corresponding period of 2014. The top five sources of tourist arrivals up to July 2015 were India, China, UK, Germany and France. The number of Chinese and Indian tourist arrivals increased significantly during the first seven months of the year.
However, a notable decline was observed in tourist arrivals from Russia during this period. Earnings from tourism are estimated to have increased by 31.2 percent to US dollars 279.9 million in July 2015 compared to US dollars 213.3 million recorded in July 2014. Consequently, the cumulative earnings from tourism increased by 16.8 percent to US dollars 1,601.2 million during the first seven months of 2015 in comparison to US dollars 1,371.2 million recorded during the same period in 2014.
Workers’ remittances grew by 7.6 percent to US dollars 629.6 million during June 2015, in comparison to US dollars 585.1 million in June 2014, recording the highest monthly inflow in 2015 year to date. On a cumulative basis, workers’ remittances during the first six months of the year grew by 2.2 percent to US dollars 3,432.7 million from US dollars 3,360.0 million in the corresponding period of 2014.
Foreign investments in the government securities market recorded a net outflow of US dollars 424.7 million during the first seven months of 2015 compared to a net inflow of US dollars 231.8 million during the corresponding period of 2014. During the first six months of the year, foreign investments in the Colombo Stock Exchange (CSE) recorded a net inflow of US dollars 44.8 million, including net inflows to the secondary market amounting to US dollars 13.6 million and inflows to the primary market amounting to US dollars 31.2 million.
However, there was a net cumulative outflow of US dollars 9.0 million from the secondary market of the CSE by 18 August 2015. During the first six months of 2015, long-term loans obtained by the government amounted to US dollars 490.8 million compared to US dollars 1,002.2 million received in the corresponding period of 2014.
Overall BOP position
The overall BOP is estimated to have recorded a deficit of US dollars 791.7 million during the first six months of 2015 in comparison to a surplus of US dollars 1,954 million recorded during the corresponding period of 2014.
Sri Lanka’s gross official reserves stood at US dollars 7.5 billion as at end June 2015, equivalent to 4.5 months of imports, which included proceeds from the latest International Sovereign Bond and Sri Lanka Development Bond issuances. Meanwhile, total foreign assets amounted to US dollars 9.2 billion, equivalent to 5.6 months of imports. However, gross official reserves are estimated at US dollars 6.9 billion as at end July 2015.
Exchange rate movement
During the year up to 18 August 2015, the rupee depreciated by 2.2 percent against the US dollar. However, based on cross currency exchange rate movements, the Sri Lankan rupee appreciated against the euro by 7.4 percent, the Australian dollar by 8.9 percent, the Japanese yen by 2.0 percent and the Indian rupee by 0.8 percent, while depreciating against the pound sterling by 2.3 percent during this period.
(Source: CentralBank of Sri Lanka)