External Sector Performance – July 2022 : CBSL

Trade Balance: The balance in the merchandise trade account recorded a deficit of US dollars 123 million in July 2022, compared to the deficit of US dollars 606 million recorded in July 2021. Meanwhile, the cumulative deficit in the trade account during January-July 2022 narrowed to US dollars 3,637 million from US dollars 4,922 million recorded over the same period in 2021.

Terms of Trade: Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 3.0 per cent in July 2022, compared to July 2021, as the increase in import prices surpassed the increase in export prices.

Performance of Merchandise Exports

Overall exports: Earnings from merchandise exports grew by 5.4 per cent in July 2022, over July 2021, to US dollars 1,164 million. An increase in earnings was observed in industrial exports, while a decline was recorded in agricultural and mineral exports. Cumulative export earnings, which increased by 12.9 per cent during January-July 2022, amounted to US dollars 7,678 million, compared to US dollars 6,803 million recorded in the corresponding period in 2021.

Industrial exports: Earnings from the export of industrial goods increased in July 2022 by 12.4 per cent, compared to July 2021, contributed mainly by higher export earnings from garments; and gems, diamonds and jewellery. Export of garments to all major markets (the United States, the European Union, and the United Kingdom) improved. Exports of other categories which reported an increase in earnings, mainly included machinery and mechanical appliances (mainly, mechanical appliances parts and metallic components for electric accessories), chemical products(mainly, activated carbon), transport equipment (mainly, motorcycles) and, base metals and articles (mainly, aluminium iron and steel; and articles thereof). Meanwhile, export earnings of petroleum products recorded a decline of 37.9 per cent (y-o-y), mainly because of the decline in quantities of bunker and aviation fuel supplied, recording the lowest monthly petroleum exports in 2022. Further, a decline in earnings was reported in rubber products (mainly, rubber gloves) and, animal fodder (mainly, wheat residues and poultry feed).

Agricultural exports: Total earnings from the export of agricultural goods declined by 14.5 per cent in July 2022, compared to July 2021, with a substantial share of the decline contributed by seafood and spices, while export earnings from tea increased only slightly. Earnings from seafood in July 2022 nearly halved, compared to July 2021, mainly due to the decline in volume of tunas exported. The broad-based decline in subcategories of spices resulted in the decline in earnings from spices by 26.2 per cent (y-o-y). Further, coconut related products (primarily, desiccated coconut, fibres and coconut oil), vegetables and natural rubber also contributed to the decline in export earnings.

Mineral exports: Earnings from mineral exports declined by 42.8 per cent in July 2022, compared to July 2021, mainly due to a decline in export earnings from titanium ores categorised under ores, slag, and ash.

Export indices: The export volume index decreased by 8.0 per cent, while the unit value index improved by 14.6 per cent (y-o-y) in July 2022. Thus, the increase in export earnings could be attributed mainly to higher export prices.

Performance of Merchandise Imports
Overall imports: Expenditure on merchandise imports declined substantially by 24.8 per cent to US dollars 1,287 million in July 2022, compared to US dollars 1,710 million in July 2021. A decline in expenditure was observed across all main categories, with the imports of investment goods and nonfood consumer goods contributing the most to this decline. Meanwhile, import expenditure on a cumulative basis from January to July 2022 amounted to US dollars 11,315 million, which is a decline of 3.5 per cent (y-o-y).

Consumer goods: Expenditure on the importation of consumer goods declined substantially by 46.2 per cent (y-o-y) in July 2022, compared to July 2021, contributed mainly by a reduction of 66.8 per cent (yo-y) in non-food consumer goods. The decline in import expenditure on non-food consumer goods was observed in all subcategories, with a notable drop in imports of medical and pharmaceuticals (mainly, vaccines), telecommunication devices (mainly, mobile telephones) and home appliances (mainly, televisions). Meanwhile, expenditure on importation on food and beverages also declined by 7 per cent in July 2022 (y-o-y), primarily due to the decline in imports of oils and fats (mainly, coconut oil), seafood (mainly, dried fish) and vegetables. However, expenditure on cereals and milling industry products (mainly, rice), and sugar increased substantially in July 2022, compared to July 2021.

Intermediate goods: Expenditure on the importation of intermediate goods declined by 9.5 per cent in July 2022, compared to July 2021. Although import expenditure on fuel and fertiliser increased notably along with a relatively small increase in a few other categories, the overall decline in expenditure on intermediate goods was mainly driven by an 82.7 per cent y-o-y decline in the expenditure on base
metals (mainly, iron and steel). Further, many other types of intermediate goods recorded a notable decline, including textile and textile articles (mainly, fabrics), wheat and maize, plastics and articles thereof (mainly, plastics in primary form), food preparations (mainly, fat and oil), and agricultural inputs (mainly, animal fodder). Meanwhile, import expenditure on fuel increased by 34.9 per cent (y-o-y) to US
dollars 345 million, as volumes and average import prices of refined petroleum products increased, while imports of crude oil and coal were non-existent during the month. Import expenditure on fertiliser increased in July 2022, mainly due to high importation of urea.

Investment goods: Import expenditure on investment goods recorded a broad-based decline of 44.3 per cent in July 2022, compared to the same month in 2021. Under machinery and equipment, transmission apparatus, computers, and harvesting machinery recorded a significant decline, among others. Import expenditure on building material decreased, mainly owing to imports of iron and steel (primarily, iron bars and rods), cement, and articles of iron and steel. Meanwhile, lower importation of railway related equipment, agricultural tractors and lorries contributed mainly to the drop in the import expenditure on transport equipment.

Import indices: The import volume index declined by 36.3 per cent (y-o-y), while the import unit value index increased by 18.1 per cent, in July 2022, implying that the decline in import expenditure in July 2022 was mainly driven by the volume effect.

Other Major Developments in the External Current Account
Workers’ remittances: Workers’ remittances increased to US dollars 279 million during July 2022, in comparison to US dollars 274 million in the previous month, while remaining low compared to the corresponding month in the previous year. Meanwhile, total departures for foreign employment were recorded at 22,821 during the month of July 2022. Total departures of foreign employment comprised unskilled (8,232), skilled (7,091) and domestic aid (4,479) categories. Total departures for foreign employment during January-July 2022 were recorded at 163,522, compared to 37,041 in the corresponding period of the previous year, and a total of 117,952 in 2021.

Tourist arrivals: Tourist arrivals rose in July 2022 to 47,293, from 32,856 arrivals recorded in June 2022. Unfavourable conditions, such as fuel shortages, power outages, travel advisories issued by certain countries etc., continue to impact tourist arrivals. The United Kingdom, India, Germany, and France remained the main source countries for tourist arrivals in July 2022. Earnings from tourism in the month of July 2022 are estimated at US dollars 85 million, in comparison to US dollars 59 million in the previous month, and US dollars 6 million in the corresponding month in the previous year.

Financial Flows
Foreign investment in the government securities market recorded a marginal net inflow in July 2022, resulting in a cumulative net inflow of US dollars 7 million to the government securities market during January-July 2022. Meanwhile, foreign inflows to the Colombo Stock Exchange (CSE), including primary and secondary market transactions, recorded a marginal net inflow in July 2022. On a cumulative basis, the CSE, including primary and secondary market transactions, recorded a net inflow of foreign investments amounting to US dollars 95 million during the seven months ending July 2022.
International Reserves
Gross official reserves stood at US dollars 1.8 billion as at end July 2022. This included the swap facility from the People’s Bank of China, equivalent to around US dollars 1.5 billion, which is subject to conditionalities on usability. The Central Bank continued to supply forex liquidity to finance essential imports by utilising inflows to gross official reserves. Consequently, the level of usable reserves continues to remain at significantly low level by end of July 2022. Total foreign assets, which consist of gross official reserves and gross foreign assets of the banking sector, amounted to US dollars 5.9 billion at end July 2022.

Exchange Rate Movements
Exchange rate continued to remain stable through July 2022, following the introduction of daily permissible band in mid-May 2022. Accordingly, from 13 May 2022 to date, the Sri Lanka rupee recorded a marginal depreciation against the US dollar, despite recording a depreciation of 44.5 per cent against the US dollar during the year up to 06 September 2022. Meanwhile, reflecting cross-currency
movements, the Sri Lanka rupee depreciated against the euro, the pound sterling, the Japanese yen, the Australian dollar, and the Indian rupee during the year up to 06 September 2022