Sri Lanka’s fragile external sector continued to bleed as the most recent data showed a decline in exports and a spike in imports as the country’s oil bill more than doubled in February, deepening the massive hole in the country trade balance during the first two months of this year.
According to provisional data, Sri Lanka’s exports in February declined by 2.7 percent Year-on-Year (YoY) to US $ 868 million after falling 1.1 percent in January, extending the year-to-date decline to 3.2 percent YoY to US $ 1.73 billion, recording the worst performance of Sri Lanka’s export since 2015.
Although it has been five months into 2017, the authorities are yet to make public the external trade data.
The poor trade data for 2017 comes after the country recorded two years of back-to-back declines in exports during 2015 and 2016. In 2015, Sri Lanka’s export earnings fell by 5.6 percent to US $ 10.5 billion followed by a further 2.2 percent decline in earnings in 2016 to US $ 10.3 billion.
The last time Sri Lanka recorded an increase in its export earnings was in 2014 when such earnings grew by 7.1 percent to US $ 11.1 billion.
The then opposition United National Party (UNP), now a coalition partner in the Sirisena-Wickremesinghe administration vehemently criticized the import substitution policy of the then President Mahinda Rajapaksa led UPFA government and vowed to double the exports once they come into power.
Sri Lanka won the majority vote to defeat a proposal at the European Union parliament last week to block the GSP Plus trade concession to Sri Lanka and the authorities are hopeful that the country will regain the facility this month.
But the economists are skeptical that the country stands to benefit from the concessions under the facility because the apparel trade, which enjoys the highest concessions through GSP Plus, is reeling with an acute labour shortage and the capacity enhancement cannot be done in a short period of time.
In February apparel exports declined by 15 percent YoY to US $ 396 million while the exports in the first two months fell by a little over 11.0 percent YoY to US $ 822 million.
Even if granted, Sri Lanka may lose the GSP Plus facility in a couple of years as the country is poised to become and upper middle income nation.
But the country’s economy has been more or less stagnating since 2015 with the latest data indicating the per capita income – the widely used indicator to measure the well being of the people – declining to US $ 3,835 in 2016 due to dollar effect.
Meanwhile, it appears that Sri Lanka is beginning to feel the heat waves of the rising oil prices in the global markets as the February data showed the country’s oil import bill had more than doubled and the import expenditure had increased significantly.
The February’s oil bill rose by as much as 138 percent YoYto US $ 355 million while for the first two months, oil imports almost doubled to US $ 636.8 million.
Due to low water levels in the catchment areas due to the prolonged drought, Sri Lanka largely depends on high cost thermal power, which requires expensive refined petroleum.
The good governance regime also cut taxes and reduced the interest rates to nearly double the vehicle fleet in the country within just a matter of two and half years and they will also guzzle up more gasoline.
The global oil prices still hovers around US $ 52 a barrel but the sector analysts expects the prices to reach around US $ 60 a barrel as the OPEC and Non-OPEC countries are set to extend their production cuts when they meet later this month.
Mainly as a result of higher oil prices, Sri Lanka’s total import bill rose sharply by 12 percent YoY to US $ 1.6 billion in February while during the first two months the total imports rose by 12.6 percent YoY to US $ 3.4 billion.
It was only recently the Central Bank Governor Dr. Indrajit Coomaraswamy said Sri Lankan economy operates with an extremely thin margin and therefore is highly susceptible for economic hardships in case of an oil price hike or similar kind of shock.
“So, what I am saying is, we are not in a crisis situation now but without that China (Hambantota port) money, we will have a very very thin margin. And if something happens, if there is an oil price hike or some kind of shock hit us, then we will get pushed in to a crisis,” Dr. Coomaraswamy said.
Sri Lanka’s trade deficit which absorbs the entire inflows from worker remittances, earnings from tourism and other services rose to US $ 743 million in February from US $ 548 million a year ago.
Meanwhile, for the first two months, the total trade deficit rose substantially to US $ 1.7 billion from US $ 1.2 billion during the corresponding period in 2016.