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Trade deficit worsens

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1Trade deficit worsens Empty Trade deficit worsens Sun Jun 24, 2012 4:33 am


Global Moderator

The trade deficit expanded by as much as 32.3 percent to US$ 3,319 million in the first four months of this year compared to the same period last year; with imports increasing 11.9 percent and exports decreasing by 3.1 percent. The continuing widening trade deficit is a serious problem for the balance of payments this year too. The trade deficit is at the root of the economic instability we are witnessing, the slowing down of the economic growth momentum and a threat to economic growth in the long run.

Although there have been several signs of consumer goods import expenditure responding to recent policy measures, the growth in intermediate and investment goods imports have widened the trade deficit. In the first four months, consumer imports fell by 5.5 percent to provide some relief to the trade balance and there were definite signs that consumer demand was falling in response to the policy measures of the government. However, imports of intermediate and investment goods increased to result in the trade deficit increasing by 33.1 percent in the first four months. There was a deceleration in intermediate imports that increased by only 8.4 percent. Reduced prices of cotton were an important reason for this. However, expenditure on oil imports continued to increase. Intermediate imports were the highest component of import expenditure and accounted for an expenditure of US$ 3,849 million.

Import expenditure

In the first four months investment goods imports increased by 40.5 percent and are showing no signs of decrease yet. Even if there is a continuing decrease in consumer imports, such a decrease is unlikely to reduce the deficit by much, as other imports have not shown a declining trend. Besides that, a new trend of declining exports is causing serious concern not only with respect to the trade balance and balance of payments, but the economic growth momentum, employment and income of workers.

The trade balance is continuing to widen despite consumer imports declining by 3.1 percent in the first four months of this year. In fact, total imports have increased by 12 percent owing to intermediate and investment goods imports increasing. Therefore, increasing intermediate and investment goods imports continue to make a serious dent in the trade balance. Since imports were much higher than exports, the trade deficit increased by as much as 32.3 percent and resulted in a trade deficit of US$ 3.3 billion in the first four months.

If this trend continues, the trade deficit could exceed US$ 10 billion. This would certainly strain the balance of payments, as it is too large to be bridged by service earnings, worker remittances, tourist earnings and capital inflows. Consequently, there would be a drain on reserves or increased foreign borrowing to meet the trade deficit. This is the crux of the problem. Furthermore, the strain of the trade balance is especially serious as there are large repayments of foreign loans and interest payments this year.

Exports decrease

What is particularly disconcerting in the balance of trade is that there is a trend of decreasing industrial exports, especially of garments. In March, industrial exports declined by 10.2 percent and in April it declined by 8.7 percent, compared to the respective months of last year. Total exports declined by 3.1 percent in the first four months of this year compared to the same period last year. Indications are that both industrial and agricultural exports would face adverse conditions and are not likely to recover.

The most disconcerting feature of the trade statistics of recent months has been this decreasing trend in exports. Both industrial and agricultural export earnings have declined in the first four months. The decreasing trend in export performance is likely to have adverse impacts on the country’s industrial development, employment and economic growth.

The continuing decline in exports is troublesome. In April, exports declined by 9.1 percent indicating that the export decline may continue to increase during the course of the year. In the first four months, exports fell by 3.1 percent. This export decline is, no doubt, owing to the extensive international economic downturn. The Chinese and the Indian economies are facing significant downturns. The instability of European economies is the most salient global development for Sri Lanka in the short run. European countries and the US accounted for 54 percent of our exports last year. The markets of these countries are significant for our industrial exports and the decrease in exports to Europe and America is being felt in the export statistics this year. The slowdown in their economic growth has reduced their purchasing power and caused industrial exports to fall by 3.1 percent in the first four months of the year. The revival of these economies and markets are vital for export growth. There are no signs of their stabilisation and growth immediately.

Agricultural exports, especially tea exports have also fared badly and resulted in a decline in agricultural exports as well. Tea exports to the Middle East and Russia too have been adversely affected. In the first four months, tea exports decreased by 11.8 percent contributing most to the decline in agricultural exports by 11.7 percent compared to the previous year’s first four months. One can only hope that the turmoil and instability in the Middle East would pass away soon and that the tea market would once again be robust.

Economic impact

The rate of economic growth for this year has been reduced to 6.75 by the IMF. The signs are that the economy would dip much less this year as the export dip and the internal credit restrictions and the drought conditions take their toll. It is not the economic growth statistic that matters but the actual growth in key sectors, especially industry and agriculture. Although agriculture contributes only 12 percent of GDP, a large proportion of the population is dependent on the performance of the economy. The current drought conditions are likely to heap much hardship on the peasant population in the dry zone areas. The reduced output of paddy and food crops would increase domestic prices and may also require increased imports of food. This would add a further burden on the trade balance.

The downturn in industrial exports is likely to reduce employment in industry. The reduced incomes of workers could be a serious social burden apart from being an impediment to the country’s economic performance. It is important to realise that the trade deficit has implications for the economy that goes beyond the balance of payments difficulties. It has serious impacts on the growth of the economy, employment and incomes.

The Central Bank expects the trade deficit to be offset by worker remittances, tourist earnings and other service receipts and foreign direct investment. This is possible only if the deficit could be contained at about US$9 billion. If the current trend of exports declining and import expenditure increasing continues, then the deficit would exceed US$ 10 billion that would be difficult to be bridged by these inflows. There is, however, a prospect that import expenditure would decrease owing to oil prices declining in the second half of the year. If the price drop we are currently witnessing, and hopefully even falling further, then this would give much relief to the trade deficit. This appears to be the most likely way in which the trade deficit would be brought down and the balance of payments could be in overall surplus.

It is vital to recognize that the trade imbalance has wider implications than its impact on the balance of payments. While the weakness in the balance of payments itself affects economic stability as we are witnessing today, the trade balance has serious implications for the economy’s growth, industrial development, employment generation and long-term investment and growth. A small economy such as ours has to be trade dependent. Therefore, the development of competitive exports is vital for economic development in the long run.

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