Exports that are Sri Lanka’s major source of income have performed inadequately in 2015. Textiles, garments and tea, which are Sri Lanka’s main exports declined due to lower commodity prices and changes in consumer preferences, especially in the EU and USA. Import expenditure has declined marginally by 2.5 per cent from US$ 19, 417 million in 2014 to US$ 18, 935 million in 2015. This decline in import expenditure was inadequate to cover the decline in export earnings, and affected the trade balance adversely. As a result, the trade deficit widened, though marginally by 1.7 per cent from US$ 8, 287 million in 2014 to US$ 8, 430 million in 2015.
The main factors for the decline in export income are the weak performance in Tea, Rubber Products, Textiles & Garments and Seafood exports. Income from tea declined year-on-year by about 20 per cent while that of rubber products, textiles & garments and seafood exports have declined year on year by 25 per cent, 13 per cent and 31 per cent, respectively. During 2015, main export destinations for Sri Lanka have been USA, UK, Italy, Germany and India that accounted for 51 per cent of our exports.
Apart from the above, the weak performance of most other export categories, too led to reduced export earnings in 2015. Among Industrial Exports, earnings from Gems, Diamonds & jewellery, Machinery & mechanical appliances as well as Chemical products have played important roles in the weakening of export performance. Downward trends were also observed in Coconut and Minor agricultural crops like fruits amongst Agricultural Exports. There has been a huge decline in Mineral & other exports from about US$ 74 million in 2014 to US$ 48 million in 2015, which undoubtedly is a significant factor for the reduced performance in exports.
Overall when compared to January – December 2014, Sri Lankan total exports have reduced by 5.6 per cent in 2015 from US$ 11, 130 million to US$ 10, 505 million. The most depressed export item is Tea for which the reduced demand is due to weak economies in major oil-exporting countries as international oil prices are on a declining trend. Along with the above, demand for Sri Lankan tea also reduced due to political chaos in Middle Eastern countries, especially Syria while the EU ban on our fish exports affected exports severely. Consequently, the export income of US$ 10, 505 million has not been adequate to cover import expenditure amounting to US$ 18, 935 million, creating a trade deficit in 2015 similar to that in 2014.
Though the reduction in oil prices was expected to bring positive economic benefits to the country, the lower demand from oil-exporting countries directly affected our export demand. This is evident from the fact that the trade deficit in 2015 exceeded the deficit in 2014, even amidst international oil prices shrinking.
Although global demand and poor commodity prices are often deemed to be the reasons for Sri Lanka’s declining export performance, one other reason was the inefficient handling of the exchange rate. If the exchange rate had been depreciated at right times last year, it would not have led to an overvalued exchange rate and made us at a disadvantage with competitors, but giving us an opportunity to reap more favourable benefits. However, Sri Lanka’s export competitiveness depends not only on the exchange rate. A more consistent policy framework to drive exports is needed.
Exports are critical for Sri Lanka’s economic growth. Thus increased transparency, simplicity and consistency in the trade regime are vital in promoting exports. At present, Sri Lanka is in quest of new market access through trade agreements with various countries.
Increase in manufactured exports would bring more benefits than increasing agricultural exports, as the former would expand industrial production and trade-related services, thus impacting favourably on the economy. Two major issues Sri Lanka faces with regard to exports are the reduced comparative advantage with competitors as our labour costs are no longer low; and lack of export product diversification restricting us in diversifying export markets.
It is difficult to focus both on product diversification and market diversification at the same time. If Sri Lanka strategizes to diversify products, it would contribute to make a stronghold in present markets rather than seeking new markets given the present global economic conditions. There is hope that the current trend of export performance would turn around when in June, GSP+ facility is restored and when fish exports are restored to Europe. Nevertheless, it is crucial that we diversify our export product base in order to reap benefits of untapped opportunities in the existing markets.