Terms of trade turn favourable in October after many months

Terms of trade, the ratio of export prices and import prices turned in Sri Lanka’s favour in October after remaining in the unfavourable territory for many months reflecting that finally the merchandise exports are fetching higher prices in line with the boom seen for nearly a year in the global commodities prices. 

Mirror Business has continuously showed during the last couple of months that Sri Lanka’s merchandise exports haven’t been able to make the most out of the global commodities prices, which have been surging this year, caused by pandemic-related supply chain troubles and the consumer demand which stood stronger throughout the pandemic. 

According to the latest data, Sri Lanka’s merchandise export volume index rose by 9.5 percent in October from a year ago while the unit value index rose by 28.3 percent, reflecting a robust price growth of exports followed by increase in their volumes during the month over the same month last year. 

Sri Lanka’s merchandise exports hit US$ 1.2 billion in October 2021, the highest since March 2019 and the highest for any month marking the sixth such consecutive month of over a billion dollar exports this year. 

Meanwhile, the merchandise imports volume index decreased by 1.6 percent while the unit value indices rose by robust 26.4 percent in October over the same month last year, reflecting both the slowdown in imports in response to the forex crunch and the import bans in place, while at the same time how higher prices weighed on the import bill despite low volumes. 

As a result, the “terms of trade, i.e., the ratio of the price of exports to the price of imports improved by 1.5 percent in October 2021, compared to October 2020, as the increase in export prices surpassed the increase in import prices,” the Central Bank said. 

The terms of trade is also interpreted as the amount of import goods, which can be purchased by a unit of export goods, and a higher favourable ratio indicates that a dollar worth of exports can purchase a minimum or dollar worth of imports or higher. 

While mercantilists put the blame on the unfavourable terms off trade for the currency and Balance of Payment troubles of a country, economists holding neoliberal ideas view that such problems are due to excess money going after imports and goods causing currency troubles and inflation, as prevalent in Sri Lanka at present. 

Sri Lanka has plenty of mercantilists who often side with the policymakers to influence policies to make it easier for them to engage in ‘rent seeking’. They thrived enormously during the last couple of years due to inward looking regressive mix of policies set forth by the current administration under the pretence of rebuilding a domestic industrial and entrepreneurial base.

In addition, the lower corporate tax rate awarded to them no sooner the new administration came into power in 2019 gave them a windfall in profits.