Sri Lanka - International trade

One feature of the Sri Lankan economy, both in the past and present, is the high dependency on foreign trade. The country's dependency on trade, measured by the

Trade (expressed in billions of US$): Sri Lanka
	Exports	Imports
1975	.603	.816
1980	1.067	2.037
1985	1.293	1.843
1990	1.983	2.685
1995	3.798	5.185
1998	4.732	5.917
SOURCE: International Monetary Fund. International Financial Statistics Yearbook 1999.

Trade Dependency Ratio (TDR), defined as the ratio of the sum of exports and imports to gross domestic product, stood at 66 in 1999 compared with a TDR of 33 for the period 1970-1977. In 2000 exports stood at US$5.2 billion while imports stood at US$6.1 billion. The changing degree of trade dependency evident in the post-liberalization era has been accompanied by significant changes in the structure of Sri Lankan foreign trade. The dominance of tea, rubber, and coconuts, which accounted for 74 percent of the total exports in 1977, had fallen to 21 percent in 1999. Industrial exports have become the major contributor to export earnings with their share rising from 14 percent to 76 percent during the same period. Of industrial exports, textiles and garments are the leading sub-category, contributing 68 percent to total industrial exports in 1999. The balance consisted of machinery and equipment (6 percent), rubber-based products (5 percent), travel goods and processed diamonds (4 percent each), petroleum products and footwear (2 percent each), crustaceans and mollusks and ceramic products (1 percent each), and other industrial products (7 percent). Despite the changes in the structure of exports, tea continues to be the leading export with a share of 65 percent of total agricultural exports while textiles dominate the industrial exports with a share of 67 percent of the total industrial exports.

Intermediate goods dominate Sri Lanka's imports (51 percent of total imports), followed by investment goods (27 percent), and consumer goods (21 percent). This is in contrast to the composition of imports in the pre-liberalization era, which was dominated by consumer goods (50 percent of total imports in 1977), followed by intermediate goods (36 percent), and investment goods (12 percent). Rice, flour, and sugar dominated consumer goods in the past, accounting for 80 percent of total consumer goods imported. Their significance, however, fell to 21 percent in 1999. This changing structure of imports reflects the new economic environment resulting from the economic reforms introduced in 1977. The improvement in the domestic supply of rice and other food items helped to limit food imports. The expansion in the industrial sector resulted in higher imports of intermediate goods. Developments in infrastructure facilities, construction and the transport sector, combined with increased use of advanced technology, increased the import of investment goods.

The destination of Sri Lankan foreign trade also has changed. The United States has become the single most important trading partner, and has continued to be the largest single buyer of Sri Lanka's exports (accounting for 39 percent of exports in 1999). Garment exports accounted for 74 percent of total exports in 1999. The United Kingdom accounted for 13 percent, while Germany accounted for 5 percent of Sri Lanka's exports. On average, one-third of the Sri Lankan imports come from the industrial countries. Japan is the largest source of imports to Sri Lanka, with 10 percent in 1999. Motor vehicles, spare parts, and woven fabrics are the major items imported from Japan. India is the second largest exporter (with 9 percent), followed by Hong Kong and Singapore (8 percent each), South Korea (6 percent), Taiwan, the United Kingdom, and the United States. Wheat, gold, agricultural equipment, and textiles are among the major items imported from the United Kingdom, while wheat accounted for 31 percent of imports from the United States. Textiles, tools and accessories for the garment industry, and fruits are the other major items imported from the United States.

Sri Lanka's trade with the rest of the world has changed in terms of composition, direction, and volume. However, the country has not been able to solve its fundamental problem, the unfavorable trade balance. As exports continued to grow, so did imports. Despite the persistent unfavorable trade balance, the country has managed to maintain its import levels with foreign assistance, capital flows, and an important and growing source of foreign exchange: remittances by Sri Lankan migrant workers in the Middle East. Prior to 1977 policy reforms, the fortunes of Sri Lankan exports depended primarily on the movements of world prices for the 3 major export commodities. While the export sector has diversified, the dependence on trade has also increased markedly. As the country's trade relations with industrialized countries rises, the Sri Lankan economy is vulnerable not only to changes in price levels of the major exports, but also to fluctuations in the levels of economic activity in industrialized countries.