GLOBAL FALLOUT

Shiran Fernando reviews the external trade performance in the wake of COVID-19

Sri Lanka was able to reduce its trade deficit by about 10 percent in the first half of 2020 compared to the previous year despite a 26 percent year on year decline in exports over the same period.

The drop in exports of nearly US$ 1.6 billion was offset by a 1.9 billion dollar fall in imports, resulting in the trade deficit narrowing during the first six months of the year.

This is a notable achievement against the backdrop of COVID-19 and its impact on Sri Lanka’s export trade. It is worth exploring how this was achieved and other external trends, and what they could mean for the remainder of 2020.

EXPORT RECOVERY Exports have performed much better than expected following the slump in April – by July, export earnings had recovered to above US$ 1 billion, which is higher than what was recorded at the same time last year.

This recovery has been supported by external demand for personal protective equipment (PPE) such as face masks and other protective gear. The apparel industry’s swift change in production in the face of a global pandemic is commendable; and this is duly reflected in apparel exports recorded in June and July.

However, according to the Export Development Board (EDB), apparel exports were down 25 percent in the first seven months of 2020 compared to the corresponding period of the prior year.


Beyond apparel, Sri Lanka has benefitted from demand for certain agricultural exports. Tea, rubber and coconut have also contributed to the export recovery since April. In fact, all three commodities recorded higher exports in June and July compared to the same two months in 2019.

On the contrary, some sectors such as gems and jewellery, and seafood exports, are yet to witness such a swift recovery.

V-SHAPED REVIVAL The rapid recovery in exports is partially explained by certain export orders (particularly apparel) that were due to be completed in March and April but despatched subsequently following the reopening of the economy.

Another reason is that there was a demand for PPE related products, which Sri Lanka was able to fulfil. Industries such as tea managed uninterrupted production in Sri Lanka unlike India and Kenya. Therefore, Sri Lanka was able to fetch higher prices.

In the case of some export destinations, Sri Lanka was able to export more tea to major markets due to the health benefits associated with the beverage.

However, in the second half of 2020, the prospect of a V-shaped recovery will hinge on some of these trends remaining in favour of Sri Lanka. With the pandemic continuing to spread in many regions and no timeline set for a vaccine as yet, the demand for PPE will continue.

Similar to how Sri Lanka has developed a reputation in the apparel industry, it could also carve out a niche for producing higher value products in the PPE segment. The major determinant for Sri Lanka would be the demand from export markets.

For Sri Lanka, it is simply down to how well the US and European markets perform.

MUTED IMPORTS While averaging 1.8 billion dollars in 2019, imports ranged between US$ 1 billion and 1.1 billion by the end of the first half of this year.

This represents a sharp decline in imports with the main drivers being lower demand and import restrictions. With a lack of both investment and consumption demand, amid falling incomes and job losses across industries, importer demand has waned.

One could argue that import restrictions have played a greater role in curbing imports. Since March, a monthly gazette has restricted imports by placing certain products either on a temporary suspension list but with credit terms of 90 or 180 days, or a list on an import control licence or a banned list.

This has prevented the importation of many intermediate goods for manufacturing. A notable case in point is the motor industry with a complete ban on importing vehicles in place at the time of publication.

POLICY MEASURES Import restrictions have also been imposed with a view to support local industry to compete and be able to produce goods for the domestic market – and eventually be competitive to export to foreign markets.

However, policy shifts require a long-term focus, and import restrictions on their own may not solve other issues such as labour and access to capital to transform these industries into one billion export segments.

The next six to 12 months will prove tricky when it comes to the performance of merchandise exports and the import of goods, as we assess the full local and external fallout from COVID-19.

In the absence of tourism earnings and an expected decline in workers’ remittances, a continued narrowing of the trade deficit would be required.