Sri Lanka’s external sector witnessed remarkable growth in October 2024, bolstered by strong export performance and increased foreign inflows. These factors contributed to higher foreign reserves, a narrowing trade deficit, and a continued appreciation of the Sri Lankan rupee. The Central Bank of Sri Lanka (CBSL) detailed these developments in its latest external sector report.
Export Performance: A Key Driver of Growth
In October 2024, export earnings surged by an impressive 24% year-on-year (YoY), surpassing $1.1 billion. This robust growth played a significant role in reducing the trade deficit for the month to $544 million, compared to $683 million in October 2023. For the first ten months of 2024, however, the cumulative trade deficit widened to $4.74 billion, up from $4.02 billion during the same period in 2023.
The growth in exports was driven by strong performances in the industrial and agricultural sectors. Key contributors included:
- Industrial Exports: Garments and petroleum products led the charge, offsetting declines in categories such as gems, diamonds, and machinery.
- Agricultural Exports: Increased tea volumes and prices, along with higher exports of spices and coconut-based products, boosted earnings. However, mineral exports experienced a decline during the period.
Import Trends: A Mixed Picture
Expenditure on imports rose by 5.7% YoY in October 2024 to $1.7 billion. The increase was mainly driven by higher spending on consumer and investment goods, while intermediate goods imports declined slightly.
- Consumer Goods: Imports grew by 10.8% YoY to $291.9 million, with notable increases in food items (particularly edible oils) and non-food items like home appliances.
- Intermediate Goods: Spending fell by 0.6% YoY to $1.08 billion, primarily due to reduced fuel imports. Lower prices and volumes of crude oil and refined petroleum contributed to this decline.
- Investment Goods: Imports jumped by 27.5% YoY to $330.4 million, driven by increased purchases of machinery and equipment, including cranes and electric generators.
Improved Trade Metrics
The terms of trade improved by 1.8% in October 2024 compared to the previous year. This improvement was due to a larger decline in import prices than export prices. Additionally:
- The export volume index rose by 31.7%, while the unit value index fell by 5.3%, indicating that higher export volumes were the main driver of increased earnings.
- The import volume index grew by 13.6%, while the unit value index declined by 6.9%, suggesting that higher import volumes were behind the rise in expenditure.
Services Sector: Steady Contributions
The services sector recorded inflows of $320 million in October 2024, slightly higher than the $308 million in October 2023. Sea transport services and IT/BPO-related services were the primary contributors. However, outflows also rose significantly to $284 million, up from $171 million in the same period the previous year. Major outflows were linked to overseas travel and sea transport services.
Foreign Investments and Financial Account
The financial account of the Balance of Payments (BOP) continued to strengthen in October 2024:
- Government Securities: The government securities market recorded a net inflow of $39 million, the first positive monthly inflow of the year. Despite this, the cumulative outflow from January to October 2024 stood at $218 million.
- Colombo Stock Exchange (CSE): Foreign investments in the CSE, including both primary and secondary market transactions, recorded a net inflow of $3 million in October, contributing to a cumulative net inflow of $46 million for the first ten months of 2024.
Rising Foreign Reserves
Gross Official Reserves (GOR) increased significantly, reaching $6.5 billion by the end of October 2024, up from $6 billion in September. This rise was driven by several factors:
- Net foreign exchange purchases by the Central Bank amounted to $190 million during the month.
- Funds were received from the World Bank and the Asian Development Bank.
- The GOR includes a swap facility with the People’s Bank of China, subject to certain conditions.
The GOR at the end of October provided an import coverage of 4.2 months, reflecting strengthened external stability.
Currency Appreciation
The Sri Lankan rupee maintained its appreciating trend, recording an 11.3% gain against the US dollar during the year up to November 29, 2024. It also appreciated against other major currencies, including the euro, pound sterling, Chinese yuan, Japanese yen, Indian rupee, and Australian dollar.
The real effective exchange rate (REER), a measure of external competitiveness, rose from 70.2 at the end of December 2023 to 74.5 by October 2024. While this appreciation reflects stronger currency performance, it also indicates reduced external competitiveness.
Outlook for the External Sector
The external sector’s performance in October 2024 highlights Sri Lanka’s progress in addressing trade imbalances and improving foreign reserve levels. Key drivers of this growth include robust export earnings, increased foreign inflows, and careful management of imports. These trends are expected to support the country’s economic stability in the coming months, although challenges such as maintaining export competitiveness and managing external debt remain.
Conclusion
Sri Lanka’s external sector has demonstrated resilience and growth in October 2024, with exports playing a crucial role in narrowing the trade deficit and boosting foreign reserves. As the country continues to attract foreign investments and strengthen its financial position, the outlook remains positive for sustained economic recovery. Strategic focus on further enhancing export competitiveness and optimizing imports will be key to maintaining this momentum.
