September 23, 2019
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    Trade deficit narrows to USD 617 mn in January Featured

    April 18, 2019

    The trade deficit in January 2019,continued its improving trend observed in recent months. The trade deficit was recorded at US dollars 617 million during the month, compared to a deficit of US dollars 701 million in December 2018, and US dollars 1,049 million in January 2018, the January External Sector Performance report of the Central Bank states.

    This significant reduction in the trade deficit was due to the combined effect of higher earnings from exports and a notable deceleration in import expenditure. Exports grew by 7.5 per cent while imports declined significantly by 17.8 per cent in January 2019 (year-on-year). Tourist arrivals grew by 2.2 per cent (year-on-year) in January 2019, resulting in earnings from tourism of US dollars 458 million during the month. Workers’ remittances in January 2019 amounted to US dollars 545 million, a notable reduction compared to January 2018. In the financial account, net outflows from the government securities market moderated in January 2019, compared to the second half of 2018.

    Meanwhile, the government repaid the International Sovereign Bond (ISB) of US dollars 1 billion that matured in January 2019, as scheduled. The significant pressure on the exchange rate that was witnessed in the latter part of 2018 eased with a notable reversal during January 2019.

    The rupee appreciated by 1.6 per cent in January 2019 from Rs 182.75 per US dollar at end December 2018 to Rs 179.88 by end January 2019. The exchange rate appreciated to Rs 174.65 per US dollar by 17 April 2019, recording an appreciation of 4.6 per cent. With the settlement of the maturing ISB, the country’s gross official reserves declined to US dollars 6.2 billion at end January 2019.

    Consequently, Sri Lanka successfully issued ISBs amounting to US dollars 2.4 billion in March 2019, increasing the gross official reserves to US dollars 7.6 billion by end March 2019, which was equivalent to an estimated 4.3 months of imports.

    The deficit in the trade account contracted significantly in January 2019 compared to January 2018, as a result of increased export earnings and the significant reduction in imports, mainly reflecting the impact of policy measures implemented to discourage vehicle and non-essential consumer goods imports. Terms of trade deteriorated by 1.7 per cent (year-on-year) to 107.8 index points in January 2019, due to the decline in export prices at a higher rate than the decline in import prices. Low agricultural and industrial export prices contributed to the decline in the overall export price index while import prices of intermediate and investment goods contributed to the decline in the import price index. However, terms of trade improved in January 2019 in comparison to the previous month.

    In January 2019, earnings from merchandise exports surpassed US dollars 1 billion for the second consecutive month. Considering the historical pattern of relatively low level of exports being recorded during the month of January, reaching over US dollars 1 billion of export earnings in January 2019 is noteworthy. Accordingly, export earnings increased by 7.5 per cent (year-on-year) to US dollars 1,038 million in January 2019, driven by increased exports from all major sectors.

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