The momentum of export earnings continued with over US dollars 1.0 billion for the ninth consecutive month in February 2022.Meanwhile, import expenditure also increased substantially in February 2022, year-on-year, while recording a decline, compared to the previous month. The trade deficit widened, compared to year before. Tourist arrivals showed a notable recovery in February 2022 over the same month in the previous year. Workers’ remittances continued to moderate in February 2022. Foreign investment in the Colombo Stock Exchange (CSE) recorded a net inflow during the month. The weighted average spot exchange rate in the interbank market hovered around Rs. 202 per US dollar during February 2022.

However, the Central Bank allowed a measured adjustment in the exchange rate in the first week of March 2022, in view of the heightened pressures on the exchange rate amidst subdued liquidity in the domestic foreign exchange market, resulting in an overshoot subsequently by market forces beyond the expected level of depreciation in the measured adjustment.

Merchandise Trade Balance and Terms of Trade

Trade Balance: The deficit in the trade account widened to US dollars 781 million in February 2022, compared to the deficit of US dollars 572 million recorded in February 2021. However, on a month-on-month basis, the trade deficit declined in February 2022 from US dollars 859 million recorded in January 2022. Meanwhile, the cumulative deficit in the trade account during January to February 2022 widened to US dollars 1,640 million from US dollars 1,227 million recorded over the same period in 2021. The major contributory factors of the trade deficit are shown in Figure 1.

Terms of Trade: Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 10.7 per cent in February 2022, compared to February 2021, as the increase in import prices surpassed the increase in export prices.

Performance of Merchandise Exports

Overall exports: Earnings from merchandise exports in February 2022 grew by 14.7 per cent over February 2021, recording at US dollars 1,092 million. An increase in earnings was observed in industrial exports and mineral exports, while a decrease was observed in agricultural exports. The cumulative export earnings, which increased by 16.1 per cent during January-February 2022 over the same period of the last year, amounted to US dollars 2,192 million.Industrial exports: Earnings from the export of industrial goods increased in February 2022 by 19.4 per cent, compared to February 2021. This increase was due to a broad-based increase in earnings from most of the industrial products led mainly by garments and petroleum products. Export of garments to all major markets improved.

Earnings from the export of petroleum products increased due to the increase in both prices and volumes of bunker and aviation fuel exports. Further, a sizable increase was recorded in the exports of food, beverages and tobacco (mainly manufactured tobacco, chocolate and liquid coconut milk), base metals and articles (mainly tools and aluminium structures), rubber products (mainly solid tires and surgical rubber gloves), gems, diamonds and jewellery, machinery and mechanical appliances (mainly mechanical appliances parts and electric conductors).However, a marginal decline in earnings was reported in the categories of Personal Protective Equipment (PPE), such as face masks categorised under made up textile articles, and plastic clothing articles categorised under plastics and articles, reflecting the decline in demand for such items.

Agricultural exports: Total earnings from the exports of agricultural goods in February 2022 declined by 2.1 per cent, compared to February 2021, due to the decrease in export earnings from tea, spices and unmanufactured tobacco. The drop in export earnings from tea by 10.4 per cent (y-o-y) was mainly due to lower export volumes (a decline of 9.1 per cent), while average export prices (a decline of 1.4 per cent) also partly contributed to this decline. Earnings from spices declined by 18.3 per cent (y-o-y) in February 2022 due to lower export volumes of cloves, cinnamon and nutmeg.Adverse weather conditions and the shortage of chemical fertiliser were the main reasons for the decline in export volumes of agricultural products in general. However, the export sub categories of sea food (primarily fresh and frozen tunas), coconut (primarily fibres and desiccated coconut), natural rubber, minor agricultural products and vegetables recorded an increase in February 2022, compared to the previous year.

Mineral exports: Earnings from mineral exports increased by 12.7 per cent in February 2022, compared to February 2021, due to higher earnings from quartz, titanium ores and granite.Export indices: The export volume and unit value indices increased by 11.2 per cent (driven by industrial exports) and 3.1 per cent respectively, (y-o-y), in February 2022, indicating higher export volumes contributed more to the increase in export earnings.

Performance of Merchandise Imports

Overall imports: Expenditure on merchandise imports increased by 22.9 per cent to US dollars 1,873 million in February 2022, compared to US dollars 1,524 million recorded in February 2021, while recording a decline, compared to December 2021 and January 2022. An increase in expenditure was observed across all main categories, with intermediate goods imports contributing mainly to the expansion. On a cumulative basis, total import expenditure amounted to US dollars 3,832 million during the period from January to February 2022, recording an increase of 23.0 per cent, compared to US dollars 3,115 million recorded in the corresponding period in 2021.

Consumer goods: Expenditure on the importation of consumer goods increased in February 2022 by 9.5 per cent over the month of February 2021, driven by the increase in expenditure on food and beverages although expenditure on non-food consumer goods recorded a decline. Import expenditure on food and beverages increased by 22.5 per cent (y-o-y), mainly owing to the importation of cereals and milling industry products (primarily rice). Further, an increase in import expenditure was observed in spices (mainly chilies), vegetables (mainly big onions and potatoes), seafood (mainly dried fish), and beverages, while due to low import volumes the import expenditure of oils and fats (mainly coconut oil), sugar and dairy products (mainly milk powder) decreased.