Colombo, July 12 (AdaDerana) — Import spending declined, while export earnings increased in May 2022, year-on-year, extending the contraction of the trade deficit for the third consecutive month.

Meanwhile, tourist arrivals slowed in May 2022, compared to the previous month. Workers’ remittances increased in May 2022 compared to April 2022. Foreign investment in the government securities market and the Colombo Stock Exchange (CSE) saw marginal net inflows in May 2022.

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Given the liquidity pressures seen in the domestic foreign exchange market, the Central Bank imposed cash margin requirements in May 2022, while the government introduced restrictions on open accounts and consignment payment terms, among others.

These measures were expected to reduce activity in the informal foreign exchange market and narrow the gap between official and gray market exchange rates.

Meanwhile, the weighted average spot exchange rate in the interbank market remained stable at around Rs. 359 per US dollar during the month, helped by measures introduced to manage pressures in the domestic foreign exchange market, as well than market directions.

Merchandise trade balance and terms of trade

Trade balance: The trade deficit recorded a decline for the fifth consecutive month on a monthly basis and for the third consecutive month on an annual basis in May 2022, supported mainly by policy-induced moderation in imports, as well as the notable growth momentum of exports.

The trade deficit narrowed to US$404 million in May 2022 from a deficit of US$716 million recorded in May 2021. On a cumulative basis, the trade deficit narrowed on an annual basis for the first times in May this year.

As a result, the trade deficit from January to May 2022 narrowed to US$3,535 million from US$3,663 million recorded during the same period in 2021. The main factors contributing to this lower trade deficit cumulative are shown in Figure 1.

Terms of trade: The terms of trade, i.e. the ratio of the price of exports to the price of imports, notably deteriorated by 18.5% in May 2022 compared to May 2021, with the increase in import prices having exceeded that of export prices.

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