AN EVALUATION OF RECENT TRENDS IN BALANCE OF TRADE ACCOUNT IN SRI LANKA

Abstract

The Balance of Payment account summarizes all the financial transactions of an economy with the outside world. It is divided in to three components as balance of trade account, balance of total capital account and international reserve account. Within the last fifty years balance of payment account has changed due to different economic and non-economic factors. This paper examines the recent trends in balance of trade, which is a major component of balance of payment account. Here I analyzed major determinants of the Sri Lankan balance of trade and identified the structural changes in balance of trade in pre and Post liberalization era. The present study has been carried out on the basis of secondary data. The data has been collected from reports and publications of Central Bank of Sri Lanka and World Bank. An econometric model was formulated to examine the relationship between balance of trade and its determinants. Results of Multiple regression analysis revealed a strong negative relationship between balance of trade with the rate of exchange, general price level and economic growth rate. The test was conducted at a 95% confidence level. Dummy variable method was used to identify the structural changes in balance of trade within pre and post liberalization era. This test was also conducted at a 95% confidence level. Results revealed the existence of structural changes in balance of trade between these two eras. It implies that there is an impact of liberalization policy reforms on the value of balance of trade. These findings are very important in fiscal and monetary policy operations in Sri Lanka.

Keywords: Balance of Trade, Balance of Payment, International Trade in Sri Lanka

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