External trade performance - August 2009:

Export earnings on upward trend

The trade deficit contracted for the eighth consecutive month in August 2009 by 76.9 percent to US dollars 116 million, recording the third lowest trade deficit during the last five years.

The cumulative trade deficit decreased by 59.6 percent to US dollars 1,627 million during the first eight months of 2009 from US dollars 4,032 million in the corresponding period of 2008, a media release from the Central Bank said.

Workers’ remittances increased by 9.9 percent to US dollars 2,195 million during this period. As a result, workers’ remittances during the first eight months of 2009 were US dollars 568 million (about 35 percent) in excess of the trade deficit.

Earnings from exports, which took on an increasing trend since April 2009, reached US dollars 710 million in August, recording the highest monthly value thus far in 2009.

Although export earnings contracted by 6.7 percent in August 2009 on a year-on-year basis, export earnings has taken on an increasing trend since April 2009.

Industrial exports declined by 6.0 percent due to lower exports of petroleum products, diamonds and jewellery, rubber products and machinery and equipment.

However, growth was recorded in the textiles and garments, food and beverages and other industrial exports subsectors.

Textiles and garments exports rebounded by 8.5 percent, year-on-year, recording US dollars 324 million in August 2009, recording the highest earnings by the sector during the year.

However, agricultural exports, as a whole, which accounted for 23.7 percent of total exports, declined by 7.4 percent in August mainly due to the year-on-year declines in prices of rubber and most other agricultural products.

Although minor agricultural crop exports declined by 25.1 percent in terms of export values (US dollars 25 million), they grew by 34.0 per cent in terms of volume, led by substantial increases in exports of cocoa products, sesame seeds and pepper.

Mineral exports recorded a decline of 30.1 percent, largely due to lower gem exports.

Cumulative earnings from exports during the first eight months of 2009, declined by 17.2 percent to US dollars 4,551 million compared to the corresponding period of 2008.

As a consequence, the Sri Lankan rupee appreciated significantly against both the Euro and the Sterling pound, which peaked at around Rs.140 per euro by end October 2008 and Rs.162 per Sterling pound by end January 2009, respectively.

Despite the sharp appreciation of the Rupee against these currencies, Sri Lankan exporters were able to remain competitive in the EU market.

The Sri Lanka Rupee has now depreciated sharply from the recent peak levels against the Euro and the Sterling pound by around 18.5 percent and 14.0 percent respectively.

According to the European Commission’s estimate, the total value of benefits in terms of lower import duties under the GSP+ scheme for the year 2008 was Euro 78 million which is only 1.4 percent of Sri Lanka’s total exports in the same year.

Therefore, the loss of preferential duty margin by around 6-7 percent arising from a potential withdrawal of the GSP plus facility is not expected to have an adverse impact on Sri Lanka’s exports.

Expenditure on imports declined by 34.6 percent to US dollars 826 million in August 2009, reflecting lower demand across all three major categories of imports. Further, except in the month of March, expenditure on imports in 2009 has been substantially below that of 2008.

The gross official reserves, with and without Asian Clearing Union (ACU) funds, recorded US dollars 4,045.2 million and US dollars 3,890.1 million, respectively, by end August 2009.

This includes short-term net inflows to the Government Treasury bills of US dollars 212.7 million and Treasury bonds of US dollars 797.5 million.

Based on the previous 12 month average imports (US dollars 888 million per month), the gross official reserves, with and without Asian Clearing Union (ACU) funds, were equivalent to 4.6 and 4.4 months of imports, respectively.