Sri Lanka's trade deficit narrows as exports outpace imports
Sri Lanka's merchandise trade deficit continued to shrink in June, as export earnings grew faster than import expenses. The country exported goods worth $1,077 million, while imports totaled $1,447 million, resulting in a trade account deficit of $370 million.
June's export earnings rose by 6.5 percent and imports by 3.0 percent compared to May, leading to a 5.9 percent reduction in the trade deficit from the previous month. In May, the deficit stood at $393 million, down sharply from $558 million in April. Year-over-year, June exports increased by 7.2 percent and imports by 5.7 percent, causing a 1.7 percent rise in the deficit.
Cumulatively, the trade account deficit for the first six months of the year expanded to $2,540 million, an 11 percent increase from the same period last year. This high deficit is characteristic of Sri Lanka, which heavily relies on imported goods, especially for its energy needs and other manufacturing inputs.
The rising import bill and subsequent deficit suggest a recovering economy after the severe challenges of 2022 and 2023, which included runaway inflation, foreign exchange shortages, and significantly increased taxes and interest rates that plunged the country into a deep recession. The higher deficit is not immediately concerning as long as Sri Lanka can generate sufficient inflows through services exports and other current and capital account entries in the Balance of Payment via investments.
For long-term economic health, investments and borrowings collected into the capital account must be strategically utilized to develop export-oriented industries. This has been a recurring challenge for successive governments. The current International Monetary Fund (IMF) program, with its high taxes on all industries, has made this process even more difficult.
In June, export growth was driven by petroleum products, food and beverages, tobacco, rubber products, and tea. Industrial product exports were boosted by increased volumes of bunkering and aviation fuel, while agricultural exports saw significant contributions from spices, particularly pepper and tea.
On the import side, the June bill was largely driven by machinery and equipment, textiles, chemical products, and building materials. Consumer goods imports declined due to lower volumes of wheat flour, edible oils, and pharmaceuticals, indicating that consumption levels have yet to return to pre-crisis norms. This trend was echoed by several consumer companies throughout the week.
Sri Lanka imported $365.4 million worth of fuel in June, up 26 percent from a year ago, though the cumulative fuel bill for the first six months remained 6.2 percent lower at $2,209.2 million. Fuel continues to be Sri Lanka's largest import commodity, given the country's lack of domestic oil production.