Increasing exports vital to improve trade balance and external finances
The current improvement in the external finances has been achieved by inward remittances, earnings from tourism and foreign assistance. These have more than offset the trade deficit.
At the end of the first half of this year, there was a balance of payments surplus of US$ 3.7 billion. This was achieved in spite of a balance of trade deficit of about US$ 2.3 billion.
While import expenditure amounted to US$ 8.2 billion, export earnings were only US$ 5.9 billion. Consequently, the trade deficit widened to US$ 2.3 billion in the first six months of this year.
It is vitally important that the country’s external finances are stabilised and improved by a more favourable balance of trade. Increasing exports is of vital importance to strengthen the trade balance and balance of payments.
For decades the country’s export earnings have been less than its import expenditure. Since 1950, the country has had a trade surplus only in four years.
The last trade surplus was as far back as 1977 when a small surplus was achieved due to stringent import controls that created enormous difficulties for the people.
Those import controls also paralysed domestic industries that performed at low capacity utilisation due to scarcity of raw materials and spare parts.
This endemic balance-of-trade deficit was owing to the country’s import-export structure. The country has been and is still dependent on essential imports for livelihoods and exports are few and undiversified. Most manufactured exports are non-essentials whose demand shrinks when incomes decrease.
In fact, one of the reasons for the current imbalance in trade is due to the country’s merchandise exports facing a severe recession in Western countries which are our main markets.
In contrast, imports are mostly of essential items for the country. Imports of food and energy constitute a large proportion of imports and the country cannot afford to not import these. These essential imports are also subject to increasing international prices, as is the case today.
Petroleum, fertiliser and food prices are rising owing to both the Russian-Ukrainian war and adverse climatic conditions. Consequently, while there is a depressed demand for our exports, such as apparel and rubber goods, the cost of importing our essential needs is escalating.
In the past eight months, the trade deficit has expanded owing to import expenditure being much higher than export earnings. The trade deficit is likely to further widen by the end of this year.
In this economic context, a two-pronged strategy is needed. On the one hand, exports have to be expanded and on the other hand, imports have to be reduced by higher domestic production of essential items, especially food.
The quantities exported as well as the diversity of exports have to be expanded. While this is not a short-term strategy, the first steps to the enhancement and diversification of exports have to be taken immediately. While reducing imports is the other strategy, the larger measure of improvement in the trade balance has to be by increased exports.
The current export structure is one of high dependence on a few manufactured exports. Apparel constitutes a major share of our exports. Other significant exports are rubber products, ceramics, and agricultural exports. However, all these export items constitute too small a volume.
There is also a high concentration of our manufactured exports to Western countries. On an average year, exports to the West are about 70 percent of our total exports. The current crisis of a sharp drop in exports is owing to the recessionary conditions in Western countries. In the current global recession, demand in Western markets for items like apparel, rubber goods and ceramics drops sharply.
The underlying lesson of this experience is the need to both diversify export items, as well as markets.
Increased agricultural production could play a significant role in improving the trade balance. Agricultural exports are concentrated on tea. In an average year, export earnings from tea amount to about US$ 1.4 billion. However, in recent years this has fallen owing to the fertiliser fiasco. There is a need to increase tea exports in the long run.
This also applies to our rubber exports which have diminished to a negligible amount.
The rationale for enhancing agricultural exports by a long-term strategy will be discussed in next week’s column. Suffice it to say that increased production of agricultural exports, including spice crops—as Sri Lanka has the reputation of producing the best quality pepper, cinnamon, and cashew—must be exploited.
Although there are limitations in the possibility of import substitution, there are a few areas in which such import substitution could reduce import expenditure. The increased production of food crops will enable lower imports of wheat and other food items.
The increasing production of rice was reversed by the banning of chemical fertiliser and agrochemicals. While there could be a revival to earlier levels of paddy production in the short run, what is needed is an expansion both in area cultivated and in productivity.
Increased rice production will allow domestic substitution for expensive rice imports. This is not to suggest that wheat imports could be drastically curtailed but to indicate that the amount of wheat imports could be reduced to make a slight dent in our food imports.
The persistent trade deficits have been due to the export-import structure. The strategy to reduce the large trade deficits should be two-pronged. It must primarily be based on a long-term strategy to export larger volumes of the country’s products as well as to reduce imports.
The crux of the issue is that the country’s production of both manufactured and agricultural exports must be expanded. The current export surpluses, particularly in agricultural commodities are inadequate. It is only through a sound programme for increasing agricultural production and productivity that the country can see an improvement in its export income.
The long-run perspective on these issues will be discussed next week.