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Restricted G E N E R a L a G R E E M E N T RESTRICTED GENERAL AGREEMENT BOP/320 8 July 1994 ON TARIFFS AND TRADE Limited Distribution (94-1435) Committee on Balance-of-Payments Restrictions Original: English 1994 CONSULTATION WITH SRI LANKA UNDER ARTICLE XVIII: 12(b) Statement by Sri Lanka under Simplified Procedures for Consultations' INTERNATIONAL TRADE Sri Lanka's external trade sector recorded a significant expansion in both exports and imports in 1993. Total export earnings increased by SDR 304 million (17 per cent in 1993 compared with SDR 295 million (20 per cent)2 in 1992, thus maintaining the expert growth momentum achieved in 1992. Industrial exports continued to expand while agricultural exports recorded a recovery from the setback in 1992. The expenditure on imports also recorded a significant rise of SDR 385 million (15 per cent) in 1993. In 1992, the corresponding increase was SDR 250 million (11 per cent). Relatively higher increases were reported in the import of investment and durable consumer goods in 1993. Consequently, the trade deficit expanded by SDR 82 million (11 per cent) to SDR 822 million in 1993 from SDR 740 million in 1992. According to provisional Customs data, the import outlay at SDR 2,692 million (Rs. 181,381 million) and export earnings at SDR 2,048 million (Rs. 137,994 million) resulted in a trade deficit of SDR 644 million (Rs. 43,387 million) in 1993. When the Customs data were adjusted for reporting lags, total imports and exports amounted to SDR 2,872 million (Rs. 193,550 million) and SDR 2,051 million (Rs. 138,175 million), respectively. Accordingly, the adjusted data reflected a trade deficit of SDR 822 million (Rs.55,375 million) in 1993 compared with a deficit of SDR 740 million (Rs.45,700 million) in 1992. The average export prices of all major exports improved in 1993. The overall export price index rose by 10.4 per cent in rupee terms, being the combined effect of a 9.9 per cent increase in agricultural exports, 10.1 per cent increase in industrial exports and 3.1 per cent increase in the prices of mineral products. The overall import price index recorded a rate of growth of 8.3 per cent in rupee terms reflecting the composite effect of increases in the prices by intermediate and investment goods by 7.4 per cent and 14.7 per cent , respectively and a marginal decline in that of consumer goods by 1.1 per cent. These price developments resulted in a 2 per cent improvement in the terms of trade in 1993 compared with 4 per cent in 1992. In spite of unfavourable external factors including depressed commodity prices, continued recession in major industrialized countries and persistent adjustment difficulties in transitional economies, Sri Lanka's export sector performed well in 1993. Total exports increased by 17 per cent from SDR 1,747 million (Rs. 107,855 million) in 1992 to SDR 2,051 million (Rs. 138,175 million) in 1993. 'Material provided by the authorities of Sri Lanka. 2Unless otherwise stated, percentage changes and shares are in terms of SDR values. BOP/320 Page 2 This healthy performance was largely attributed to the continued expansion in industrial exports and a marked recovery in agricultural exports. The major impetus to overall export performance was generated from industrial exports which recorded a 20 per cent growth in comparison with a 9 per cent increase in agricultural exports. Higher earnings from textile and garments and other industrial products were the major contributory factors for the substantial growth in industrial exports. Increased earnings from agricultural exports were mainly generated from tea and minor agricultural exports which more than offset the impact of declined earnings from rubber and coconut exports. The receipt from mineral exports also showed a significant recovery recording a 20 per cent growth in 1993 in contrast to a 2 per cent drop recorded in 1992. Further progress has been made in the transformation of the export structure towards industrial exports in 1993. The share of industrial exports in total exports rose from 71 per cent in 1992 to 73 per cent in 1993, while the share of agricultural exports dropped from 25 per cent to 23 per cent between the two years. The exports of textile and garments continued to maintain its position as the largest export item, contributing 49 per cent of total export earnings. BALANCE OF PAYMENTS OVERALL TRENDS A noteworthy feature of Sri Lanka's Balance of Payments (BOP) in 1993 was the unprecedently high surplus of SDR 375 million in the overall balance which led to a sustained accumulation of external assets. This strenghtening of the BOP was reflected in improvements in both the current and capital accounts. Despite a deterioration in the trade account, the deficit in the current account declined by SDR 29 million in 1993 following significant improvements in the services account and private transfers. Net inflows in the capital account increased by SDR 228 million mainly on account of capital flows to the private sector. These developments could be largely attributed to the further liberalisation of current account transactions and continuation of the country's stabilization program, which increased the confidence of the private sector in the country's commitment to private sector led growth. The buoyant exports sector grew by over 17 per cent in 1993. Meanwhile, expenditure on imports expanded by nearly 16 per cent largely due to increased outlays on capital and intermediate goods imports. Consequently, the trade deficit widened to SDR 825 million in 1993 from SDR 740 million in 1992. In contrast, according to provisional estimates, the services account registered a surplus for the first time since 1981. This surplus of SDR 31 million (Rs.2,043 million) was a significant improvement over the deficit of SDR 23 million (Rs. 1,430 million) recorded in 1992. At the same time, provisional estimates indicate that net receipts from private transfers had also grown from SDR 328 million (Rs.20,253 million) to SDR 402 million (Rs.27,090 million) between the two years. However, official transfers estimated at SDR 115 million continued to decline in comparison to SDR 130 million in the previous year. Accordingly, the current account deficit declined from SDR 306 million (Rs. 18,935 million) in 1992 to SDR 277 million (Rs. 18,604 million) in 1993. The current account deficit as a ratio of GDP also declined from 4.5 per cent to 3.8 per cent between the two years. Movements in the capital account demonstrated the continuing trend in recent years of a marked shift in capital flows from concessional assistance to the government to private foreign capital inflows, both portfolio investment as toll as direct investment. The end result was an overall surplus in the BOP to the tune of SDR 375 million in comparison to an overall surplus of SDR 133 million in the previous year. As a consequence, the country's gross external assets rose from SDR 1,047 million (Rs.66,236 million) at the end of 1992 to SDR 1,543 million (Rs. 105,239 million) by end 1993, sufficient BOP/320 Page 3 to finance 5.6 months of projected imports for 1994. The corresponding import cover at the end of 1992 was 4.4 months). It should be reiterated that these BOP developments were mainly the outcome of responses to the continuation of the liberalisation of the trade and payments system. One of the major steps in the liberalisation process was implemented in March by the removal of the repatriation and surrender requirements on export proceeds, while further relaxing restrictions on service payments. With the removal of the remaining exchange control restrictions on current transactions during the balance part of the year, in effect there were no exchange control restrictions on any trade or services payments such as for travel, educational and medical expenses by the end of 1993. Furthermore, import duties were lowered and the number of items under licence for imports was reduced, with certain items remaining under licence mainly for security, health and environmental reasons. At the same time, with a view to simplifying and rationalising the tariff and tax system on imports and exports, the system was revised, while the incentive structure,for foreign investment was also rationalised towards simplicity and transparency. Against this background, Sri Lanka's external sector shoved impressive performance during the year. In summary, a buoyant export sector, a significant positive turnaround in the services sector, a continuation of the rising trend in private transfers and accelerated inflows of private foreign capital led to a record overall surplus in the BOP and a significant increase in the import capacity of the country's foreign exchange reserves. In fact, these improvements in the BOP were so significant that it became a major destabilising factor in the monetary scene, requiting the Central Bank to adopt a more stringent monetary policy to neutralise its expansionary impact on money supply. Merchandise Account The performance of the external trade sector in 1993 was mixed. The momentum in export growth continued, reflecting a 17 per cent increase from SDR 1,745 million (Rs. 107,855 million) in 1992 to SDR 2,046 million (Rs. 138,174 million) in 1993. In the previous year, the comparable rise was also 17 per cent. A recovery of 9 per cent in agricultural exports from the drought affected previous year and a 20 per cent increase in industrial exports were noteworthy features of the country's export performance in 1993. Meanwhile, the outlay on imports increased by nearly 16 per cent to SDR 2,871 million (Rs.
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