Sri Lanka's export earnings in the month of July fell 17.4 percent year-on-year to US$ 794.4 million, while expenditure on imports also fell 24.9 percent YoY to US$ 1.3 billion. The trade gap also narrowed 33.8 percent YoY to US$ 534.6 million, the lowest level recorded in 17 months.

Export earning on agricultural products fell 11.8 percent YoY to US$ 192.3 million, with tea exports falling 12.6 percent to US$ 112.8 million. Export earnings from rubber products fell 14.4 percent YoY to US$ 69.1 million.

Earnings from textile and garments also fell 14.4 percent YoY to US$ 328.2 million.

Sri Lanka's export earnings were seen increasingly getting contracted due to the lack of demand originating from the recession hit Europe and the unrest in the Middle East. Though the country has been trying to develop new markets for its export goods, the attempts have not been materialized yet.

Following one and a half years of loose monetary policy focused on economic growth, Sri Lanka had to tighten its belt amidst excessive credit growth on consumer goods, specially motor cars and depleting foreign reserves, as a result of a depreciating rupee.

The Central Bank employed a number of strategies including a credit ceiling on commercial banks to curb credit, while switching from a rupee peg against the US dollar to a flexible exchange rate.

This led the contraction of imports to the country and in July, import expenditure on consumer goods fell 20.9 percent YoY to US$ 237.4 million. According to the Central Bank, expenditure on imports of motor vehicles has declined by 62.4 percent YoY in July.

 Meanwhile, import expenditure on intermediate goods fell 27.4 percent YoY to 780.8 million. The moneys spent on petroleum products also fell 53 percent YoY to US$ 449 million. The import expenditure on textile and textile articles rose 7.1 percent YoY to US$ 195.6 million.

A slowdown of the economic activities of t he country was reflected in the imports of investment goods, as the category which includes imports of machinery and equipment, transport equipment and building material fell 20.6 percent YoY to US$ 308.4 million.

Workers' remittances from abroad rose 14.4 percent YoY to US$ 475 million, while foreign direct investment stood at US$ 451.7. Portfolio investments to the Colombo Stock Exchange have also increased to US$ 205.1 million on a net basis in the first seven months of the year.

Net foreign inflows into government's Treasury bills and bonds stood at US$ 1.73 billion in the first seven months of the year, while long-term inflows to the government amounted to US$ 2.17 billion during the first seven months of 2012.

Deviating from the original target of 8 percent set for 2012, the Central Bank said that the country's economy would grow 7.2 percent. However, in a recent interview with Reuters, Treasury Secretary Dr. P.B. Jayasundara revised down the target further to 6.7 from 7.2 percent owing to the prevailing drought situation in the country.