Rising imports signal growing economy, may pressure currency

Merchandise imports appear to be getting a lift from the rising consumer spending and a recovering economy, which could be a boon for the economy’s next leg of growth. However, it likely will add fresh pressure on the currency in the future as the trade deficit expanded from both a year ago and a month earlier levels, while the surplus in the Balance Of Payment (BOP) narrowed somewhat to start the year.   

Imports rose by 6.2 percent to US$ 1,511.8 million in January from a year ago levels to kick off the year, a development which the Central Bank attributed partly to the eased restrictions on imports.

January also marked the second month in a row the imports rose after a 4.4 percent growth seen in December last year.
Sri Lanka recorded a BOP surplus of US$ 178 million in January 2024, narrowing from US$ 211 million in the same month in 2023 mainly due to the expanded trade deficit while most of foreign currency repayments were suspended.

Both inflows together generated a robust US$ 830 million in January, preventing likely pressure on the currency and the broader external account.
But fresh pressure could mount on the external sector when the foreign debt repayments resume after an anticipated restructuring expected by the middle of this year as talks are ongoing with the commercial creditors while the agreements in principle were entered into with the official creditors in November last year.

However, the extent of such pressures would depend on how long the repayment period would be extended and the continuity and the strength of the inflows – both currency and new – including from fresh borrowings possible.
Consumer spending drives more than two-thirds of the Sri Lankan economy and the persistent growth in consumer imports offers clear signs of continuous growth in the economy, at a faster level than in the previous two quarters.
While the intermediate goods imports were down 2.5 percent in January, the investment goods imports were driven by the imports of machinery and equipment, building materials, and transport equipment, signalling a recovery in the construction industry.

Sri Lanka set off to a recovery in the third quarter last year, recording a 1.6 percent growth and the officials expect a higher growth in the fourth quarter. Authorities project between 2 to 3 percent growth in the Sri Lankan economy for 2024.