External sector performance – September 2020

Sri Lanka’s external sector recovered further in September 2020, supported by the continued improvement in the trade deficit, a notable increase in workers’ remittances and the resultant stability in the domestic foreign exchange market.

The trade deficit improved in September 2020, compared to a year earlier, with a more than expected rebound in merchandise exports and a reduction in merchandise imports during the month. In September 2020, workers’ remittances, recorded the highest year-on-year growth since end 2011. In the financial account, the government securities market recorded a marginal foreign investment inflow during the month, while the Colombo Stock Exchange (CSE) recorded outflows. Net inflows to the domestic foreign exchange market eased the pressure on the exchange rate and enabled the Central Bank to absorb foreign exchange, on a net basis, to build up gross official reserves. Reflecting these developments, the Sri Lankan rupee appreciated during the month of September 2020.

Trade Balance

A deficit of US dollars 525 million was recorded in the trade account in September 2020, which was significantly lower than the deficit of US dollars 757 million recorded in September 2019. The improvement in the trade deficit during the month was due to lower level of imports and higher level of exports in September 2020, compared to September 2019.

The cumulative deficit in the trade account from January to September 2020 narrowed to US dollars 4,337 million from the deficit of US dollars 5,612 million recorded in the same period in 2019.

Meanwhile, terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 1.1 per cent in September 2020, compared to September 2019, due to export prices declining at a higher pace than the decline in import prices.

Exhibiting the resilience of the export sector in the midst of the current global market conditions and its V-shaped recovery since the initial outbreak of the COVID-19 pandemic, earnings from merchandise exports in September 2020 increased, both on a year-on-year basis as well as on a month-on-month basis. Merchandise exports of US dollars 1,000 million in September 2020 were higher by 4.8 per cent than the exports of US dollars 954 million in September 2019. This was also 5.6 per cent higher than the exports of US dollars 947 million recorded in August 2020. The increase in exports of most agricultural goods and some industrial product categories, which surpassed the decline in other industrial exports and mineral exports, contributed to the overall increase in exports.

Export earnings from agricultural goods increased by 10.4 per cent in September 2020 on a year-on-year basis, led by coconut exports (both kernel and non-kernel), spices (mainly cinnamon), tea, minor agricultural products (mainly betel leaves) and seafood. Increased earnings from tea exports (3.3 per cent) were supported by higher prices (6.3 per cent), as export volumes declined (2.8 per cent).