External Sector Performance - November 2011:

Expansion in external trade recorded

The structural shift in the economy driven by broad based economic growth including that of former conflict affected areas have contributed to the continuous expansion in external trade, as well as identified sustainable foreign exchange inflows to support and nurture continuous economic activity.

In November 2011, earnings from exports grew by 11.6 percent to US dollars 879 million, while expenditure on imports increased by 78 percent to US dollars 1,981 million compared to that of November 2010. Imports were mainly driven by increased demand for investment goods by the government infrastructure projects (a considerable part of which was funded by foreign loans to government) and higher intermediate and investment goods imports by the private sector.

The exports of machinery and equipment, petroleum products, rubber based products, diamond and jewellery, food, beverages and tobacco and textile and garments continued to record healthy growth levels, while the agricultural exports recorded a marginal increase in November 2011, compared with the corresponding month of 2010. Industrial exports grew by 35 percent in November 2011 in which textiles and garments rose by 28.5 percent and machinery and equipment increased substantially by 97.3 percent in November 2011 compared to the corresponding month of 2010. The sharp increase in machinery and equipment exports is due to the export of two small ships to Singapore and Tanzania.

Among agriculture exports, tea and coconut, including kernel products, increased year-on-year by 7.1 percent and 46.9 percent, respectively, in November 2011. The earnings from rubber exports declined in November 2011 due to decline in export volumes as demand from domestic industries for rubber continued to remain elevated.

Expenditure on imports in November 2011 was mainly driven by increases in imports of intermediate and investment goods. The intermediate goods imports increased year-on-year by 81.1 percent, led by petroleum, textiles and clothing and fertiliser imports. The import expenditure on petroleum increased mainly due to higher average import price of crude oil of US dollars 113 per barrel in November 2011 compared to US dollars 84.85 per barrel for the corresponding month of 2010.

Fertiliser imports grew in terms of both prices and volumes, by 326 percent and 99.9 percent, year-on-year, respectively, and the sharp increase of volume was mainly due to expansion of fertiliser subsidy to cover all crops. Expenditure on imports of investment goods increased substantially by 91.9 percent while the non-food consumable imports increased by 48.2 percent, year-on-year, in November 2011.

In cumulative terms, for the first eleven months of 2011, earnings from exports increased by 22.2 percent to US dollars 9,581 million while the expenditure on imports, driven by substantial increase in investment goods and the sharp increase in price and volume of petroleum imports, increased by 53.2 percent to US dollars 18,417 million, compared with the corresponding period of 2010. In addition, gold and motor vehicle imports contributed to the overall increase in import expenditure. The gold imports increased more than six fold to US $ 553 million while the expenditure on imports of motor vehicle almost doubled to US $ 913 million during the first eleven months of 2011, compared with the same period of 2010.

The trade deficit for the first eleven months of 2011 stood at US dollars 8,835 million, a significant portion of which was on account of imports of infrastructure related projects of the government that have been funded mainly by foreign loans.

In that context, the total inflows to the government, including the proceeds of the International Sovereign Bond issue, amounted to US dollars 4,027 million, during the first eleven months of 2011.

During 2011, earnings from tourism grew at a healthy rate of 44.2 percent to US dollars 830 million in 2011 compared to 2010. The tourist arrivals in 2011 increased by 30.8 percent to 855,975 compared to that of 2010. The cumulative inflows on account of workers' remittances grew at 23.8 percent to US dollars 4,639 million for the first eleven months of 2011.

The expansion in exports of services and increased workers' remittances helped contain the impact of the trade deficit, thereby sharply reducing the deficit of the current account to approximately US dollars 3,999 million for the first eleven months of 2011. Inflows on account of short-term foreign financing obtained by commercial banks and funds to be secured from abroad as Tier II capital of banks are expected to further strengthen inflows to the country, as noted by the fact that banks have already contracted US dollars 490 million as short-term facilities extending up to one year. Meanwhile, several banks have also already negotiated Tier II capital which could potentially reach about US dollars 1 billion this year. By end November 2011, gross official reserves, excluding Asian Clearing Union (ACU) balances, amounted to US dollars 6,201 million.

By end November 2011, total external reserves, which includes gross official reserves and foreign assets of commercial banks amounted to US dollars 7,541 million.

In terms of months of imports, gross official reserves and total external reserves by end November 2011 were equivalent to 3.8 months and 4.6 months, respectively. The performance of external sector for the period in consideration is further illustrated in the Table 1.