July 25, Colombo: Responding to strict policy measures implemented in the first quarter of 2012 to curb import expenses, Sri Lanka's trade deficit decelerated in May to record the lowest increase in 18 months, the Central Bank said Wednesday in its External Sector Performance review for the month of May 2012.

Import expenditure continued to decline in May 2012 and amounted to US$ 1.575 billion increasing only by 2.1 percent year-on-year.

However, the earnings from exports also declined by 15.1 percent year-on-year to US$ 710 million in May due to lower international market prices for several major export items, the Central Bank review said.

In the first five months of this year import expenses grew 7.8 percent to US$ 8.208 billion while the exports earnings declined by 5.4 percent to US$ 4.024 billion compared to the same period in previous year creating a trade deficit of 24.7 percent.

Earnings from agriculture fell 11.8 percent from January to May this year from a year ago and earnings from textiles and garments declined by 4.9 percent to record US$ 1.601 billion.

With increasing global demand, the earnings from rubber products grew by 5.3 percent to US$ 354 million.

Personal motor vehicle import expenses, the biggest contributor to the expenditure on imports, declined by 31.1 percent in May 2012 to US$ 57 million while the expenses on petroleum products rose 20.3 percent to US$ 2.168 billion.

Workers' remittances continued to grow at a robust rate of over 20 percent, year-on-year, to US$ 507 million in May 2012, while cumulative inflows during the first five months of 2012 increased by 17.7 percent to US$ 2.475 billion, the Central Bank noted.

Foreign direct investment inflows to major projects during the first five months of 2012 were estimated at US$ 437 million.

"There have been substantial foreign currency inflows to the capital and financial account of the balance of payments during the first half of 2012," the review highlighted.

Country's gross official reserves and foreign assets of commercial banks amounted to US$ 7.695 billion by end May 2012.

The Central Bank expects the gross official reserves to increase substantially by end July 2012 with the receipt of the ninth and final tranche of US$ 415 million from the International Monetary Fund (IMF) under the Stand-by Arrangement (SBA) facility and the proceeds of the fifth international sovereign bond of US$ 1 billion.