External sector improves in January

Sri Lanka’s external sector demonstrated an improvement in January 2018 with higher inflows to the financial account in spite of the widening of the trade deficit. While earnings from merchandise exports increased, expenditure on imports also increased significantly outweighing the performance in export earnings during the month.Nevertheless, reversing the moderating trend observed during the last year, tourist earnings recorded a notable growth during January 2018.

Workers’ remittances, which marked a set-back in 2017, also recorded a considerable growth on a year-on-year basis in January 2018.Meanwhile, the financial account of the Balance of Payments (BOP) continued to experience higher inflows in January 2018, with foreign investments in the government securities market and the Colombo Stock Exchange (CSE).

At the end of January 2018, gross official reserves of the country amounted to US dollars 7.7 billion, equivalent to 4.3 months of imports.The deficit in the trade balance expanded in January 2018 surpassing US dollars 1 billion for the second consecutive month due to significant level of imports offsetting the increase in export earnings. Earnings from exports continued to record double-digit growth (year-on-year) reaching US dollars 965 million in January 2018, partly driven by the impact of the low base as export earnings contracted by 3.8 per cent in January 2017. Export earnings from food, beverages and tobacco,petroleum products, rubber products and tea contributed largely to the growth in exports.

In addition, export earnings from textiles and garments increased moderately during the month due to the increase in earnings from garment exports to the EU and the USA by 4.9 per cent and 1.7 per cent, respectively.However, earnings from coconut exports declined significantly in January 2018 along with the decline in volumes of coconut kernel products such as desiccated coconut, coconut oil and copra as a result of the low domestic production of coconut due to drought conditions.

Import expenditure surpassed the US dollars 2 billion mark in January 2018 for the second consecutive month mainly due to high import bills incurred on fuel.The average import price of crude oil increased to US dollars 72.04 per barrel in January 2018 from US dollar 57.39 per barrel in January 2017.In addition, following the reduction in taxes on electric motor vehicles in the Budget 2018, import expenditure on personal vehicles increased owing to high imports of electric motor vehicles.Foreign investments in the government securities market witnessed a net inflow for the eleventh consecutive month in January 2018 in comparison to the net outflow recorded in January 2017.

Reflecting the developments in the domestic foreign exchange market, the Sri Lankan rupee depreciated by 0.6 per cent against the US dollar in January 2018 and by 2 per cent so far during the year up to 5 April 2018.Furthermore, reflecting cross currency movements, the rupee also depreciated against other major currencies during this period