* Import growth slows down, export earnings fall
Sri Lanka is showing some signs of heading out of the balance of payments problem it got into towards the latter half of 2011 after authorities took a gamut of policy measures to address the issue early February this year.
The belated response by the Central Bank and Treasury made the pain caused by the necessary adjustments sharper than was necessary had action been taken earlier, but first quarter external sector performance data released by the Central Bank last evening (May 30) gives hope that these adjustments are working.
The Central Bank sold down reserves to the tune of nearly US$ 3 billion from July 2011 to January 2012 in order to prop up the exchange rate with the trade deficit expanding nearly 100 percent last year with higher than expected credit growth fuelling import demand.
In early February 2012, the Central Bank stopped intervening in the foreign exchange market, has since raised policy interest rates twice while the Treasury raised domestic fuel prices, electricity tariffs and duties on selected imports. Cutting credit growth was crucial to easing the pressure on the balance of payments.
Official reserves which stood at US$ 5,806 million as at end January 2012, dipped to US$ 5,522 million by the end of February. However, the reserves position has since recovered to US$ 5,730 million as at end March. Reserves stood at US$ 8.1 billion as end June 2011 and US$ 5,958 million as at end 2011
During the first quarter of 2012 export earnings declined a marginal 1.4 percent to US$ 2,633.7 million while import expenditure growth slowed down to 17 percent to US$ 5,192.6 million. The trade deficit which expanded nearly 100 percent in 2011, slowed down to 44.8 percent during the first quarter of 2012 to US$ 2,558.9 million.
Worker remittances grew 17.2 percent during the first quarter to US$ 1,492.9 million, earnings from tourism grew 28.6 percent to US$ 268.3 million while government borrowings grew 59.8 percent to US$ 1,162.5 million.
Foreign direct investments (FDI) increased to US$ 220 million during the first quarter of this year from US$ 197 million a year earlier, increasing further to US$ 308 million by the first week of May.
On a net basis, inflows to the stock exchange amounted to US$ 159 million during the quarter.
A debt issue by Bank of Ceylon raised US$ 500 million while long term borrowings generated by other banks amounted to US$ 353 million during the first quarter and a further US$ 414 million in short term borrowings from overseas.
Foreign investment flows into government securities amounted to US$ 406 million during the quarter, up from US$ 79 million a year earlier.
"Overall, there has been an improvement in the BOP in the first quarter of 2012 compared to the last quarter of 2011. The lower trade deficit, the improved surplus in the services and current transfers and the lower deficit in income account, helped narrow the current account deficit to US dollars 978 million in the first quarter of 2012 compared to a deficit of US dollars 1,695 million in the last quarter of 2011," the Central Bank said yesterday releasing the External Sector Performance – March 2012.
"Strengthened inflows into the Capital and Financial Account also helped increase the net surplus of US dollars 1,170 million in the last quarter of 2011 to US dollars 1,395 million in the first quarter of 2012. With these improvements, the overall BOP deficit of US dollars 1,102 million during the fourth quarter of 2011 is estimated to have narrowed down significantly to US dollars 251 million in the first quarter of 2012," it said.
"Responding to the policy measures taken in January and February of 2012, the expenditure on imports grew by just 3.9 per cent to US dollars 1,697 million in March 2012, compared to that of the previous year. At the same time, the earnings from exports declined by 10.2 per cent, year-on-year, to US dollars 836 million in March 2012. The trade deficit for the month of March 2012 stood at US dollars 861 million.
"The growth in expenditure on imports in March 2012 was primarily driven by the imports of investment goods; particularly transport equipment and building materials.
"Imports of intermediate goods declined by 0.5 per cent mainly due to lower expenditure on imports of textiles owing to the substantially lower cotton prices compared to 2011. The expenditure on petroleum imports increased in March 2012, reflecting an increase in the average crude oil import price to US dollars 125.39 per barrel from US dollars 111.31 per barrel in March 2011. Expenditure on imports of refined petroleum products also increased by around 18 per cent as a result of higher prices. However, expenditure on consumer goods imports declined by 4.7 per cent in March 2012, reflecting a decline in expenditure on food imports. Nevertheless, expenditure on imports of dairy products, fruits and beverages increased in March 2012. With respect to imports of non-food consumer goods, personal motor vehicles declined by 1.2 per cent in March 2012 to US dollars 81 million, while the expenditure on medical and pharmaceuticals and clothing and accessories grew by 22.3 per cent and 44.5 per cent, respectively.
"Earnings from industrial exports declined in March 2012 led by lower earnings from exports of textiles and garments and petroleum products. Although textiles and garments continued to be the largest export earner, generating US dollars 319 million in March 2012, earnings declined by 11.7 per cent. Earnings from petroleum exports also declined due to the lower bunkering oil exports amidst the higher prices that prevailed in March 2012. However, the higher earnings from exports of rubber products, gems and jewellery and base metals helped cushion the overall decline in export earnings in March 2012. Agricultural exports declined by 10.1 per cent to US dollars 203 million, reflecting declines in all sub categories while earnings from seafood exports increased in March 2012. Despite higher export volumes, earnings from exports of tea and rubber declined due to dampened prices compared to March 2011. Earnings from minor agricultural exports and spices also declined in March 2012 mainly due to the lower export quantities. Seafood exports grew by 13 per cent in March 2012, reflecting higher earnings from fresh fish, processed fish and crustaceans.
"In cumulative terms, there has been a marginal decline in export earnings in the first quarter of 2012, reflecting a 3 per cent decline in earnings from textiles and garments exports to US dollars 1,028 million, while earnings from tea exports declined by 12.3
per cent to US dollars 332 million. At the same time, the expenditure on imports for the first quarter of 2012 increased by 17 per cent, compared to the faster growth of 39.2 per cent recorded during the first quarter of 2011," the Central Bank said.