Everything else.. The Impact of COVID-19 on the Sri Lankan Economy

The Impact of COVID-19 on the Sri Lankan Economy

2020 Apr 20

 

COVID-19 – an ongoing menace to the world, has infected over 2.5 million of the planet’s population with a mortality rate of 6.8%, leading to the loss of 171,300 lives as of 21st April 2020. The efforts of global leaders and medical experts to minimise the spread of the virus can be seen with the implementation of movement control, increased expenditure on healthcare and travel bans. With the origin of the disease being from the city of Wuhan in China, the now labelled “pandemic” has seen a shift of its epicentre to countries like Italy and the United State of America. Even though a country’s main priority is the wellbeing of its population amidst this crisis, it is essential to address the economic impact of COVID-19 as well. Experts have labelled this the worst economic shock in recent history, ironically unprecedented, and not brought about by any existing shortcomings in their country’s economic performance.

 

The impact of the global turmoil on Sri Lanka

Economies have grown exponentially in the past century with vast interdependence, greater international trade and increased migration. As a result, chaos in economies such as China and the USA will have a great impact across all parts of the world. The on-going pandemic is currently estimated to cost the global economy US$ 2-4 trillion.

Unfortunately, research conducted by the Overseas Development Institute has identified Sri Lanka as one of the most vulnerable middle-income countries as a result of the economic setback of China. Strong ties Sri Lanka has with economic powerhouses like the USA and the European Union will add on to the domestic effects brought about by the island’s efforts to flatten the COVID-19 curve. Sri Lanka was expected to see economic growth of 4.5-5% following the 2019 Easter Attacks but is now estimated to grow by only 2.2% provided that the viral outbreak is contained by June 2020.

The sectors identified to suffer the most during this time are apparel, manufacturing, agriculture, tourism, the retail and consumer sector, with small and medium scale enterprises being the worst affected. In addition to this, the people of Sri Lanka are expected to face a wave of salary reductions and unemployment by companies attempting to make ends meet.

 

The country’s manufacturing sector

Sri Lanka’s manufacturing industry will be taking a massive blow mainly due to the halt of production as a result of the lack of manpower due to the curfews imposed in all districts and the temporary hold in the import of raw material from China. However, with the import ban on non-essential items, Sri Lanka’s Export Development Board has undertaken efforts to lift the ban on export inputs, to ensure the supply of raw materials for export goods is not disrupted by local regulations and is dictated solely by the foreign suppliers. The apparel sector plays the biggest role in the country’s manufacturing and exports. With the acquisition of a significant amount of raw materials from China and large textile demands being in the European and US markets, experts foresee a loss of up to US$ 1.5 million in this sector from March to September 2020.

As a short term coping mechanism, leaders in the apparel industry are looking to use their production lines to satisfy the large demand for Personal Protection Equipment (PPE) such as hazmat suits, masks and gloves in the country. This also paves potential for the maximum use of the island’s otherwise stationery rubber industry for raw materials at a time like this. Private sector initiatives such as these have been given special consent from the government to operate during the island’s lockdown. The sale of PPE with minimum profit not only provides a national service but also resumes employment for factory workers who earn their daily wage. Once supply exceeds local demand, this adaptation of the apparel industry is expecting to expand its sales to the World Health Organisation, who have expressed a growing need for cheap, but high-quality PPE, generating foreign income.

 

Food and Agriculture – Potential of an “Essential Service”?

The realisation of the current importance of the island’s agricultural sector by the government has been highlighted by the import ban on non-essential items to promote the cultivation of vegetables in unused land. In spite of the government’s allowance for food and agricultural services to continue amidst the curfew, the overall retail process of fresh food has been stalled, leading to wastage of perishable farmed goods. Produce storage and logistic difficulties during the temporary curfew lifts are contributing factors to supply going stale before they reach the consumers. Digital platforms and the issuance of curfew permits to the necessary vendors for the sale of their produce are efforts taken to curb the impact, but nonetheless have not been as effective as customers purchasing off the shelf in stores.

However, leading individuals from the EDB have stated that a significant amount of spices such as cinnamon, pepper and cardamom are exported to enhance the supply of foreign brands. In response to the country’s economic crisis, the EDB has suggested that these export companies use this period to franchise a local brand of these products, which is more than capable of competing in the global market, creating an improved source of foreign revenue – a definite helping hand in Sri Lanka’s post-COVID-19 economic recovery.

 

Tourism in the island

With the Sri Lankan tourism industry still recovering from the Easter Attacks in 2019, the last thing it needed was the complete shutdown of all inbound passenger flights to the island. The first three months have already seen a decrease of 30% in the number of tourists as compared to 2019, and a literal standstill on the travel of non-essential passengers after April will show a decline in revenue of up to US$307 million according to the Asian Development Bank. The Government of Sri Lanka has taken measures to reduce the impact, such as a six-month debt suspension to establishments in the tourism sector.

Adding more good news, the very low number of confirmed cases of COVID-19 in the island has impressed the European Union, who has consequently decided to provide a grant to Sri Lanka’s tourism industry in appreciation of their efforts, in the amount of EUR 3.5 million, with the main focus being to aid the sector’s small and medium scale operators. Part of this financial support will be received immediately, with the rest in time to come.

 

Pay cuts and unemployment – The inevitable with a silver lining

Yet another attack on Sri Lanka’s economy by COVID-19 is the high rate of unemployment likely to be brought about by the curfews, the decline in global demand for the country’s exports and delays in raw material acquisition from countries like China. With regulations as per the labour department, employees from large companies are safe from deductions in salaries, whereas workers from several Small and Medium Enterprises (SMEs), which are unable to generate income as a result of COVID-19, are more vulnerable to pay cuts and down-sizing. The external debt payments and depreciation of the Sri Lankan Rupee would also add to the woes of these SMEs. This may result in a significant increase of the unemployment rate.

Once control is gained over the pandemic in the island and life returns to normal, it has been deduced that a portion of Sri Lanka’s workforce will continue to see a lower pay for a significant period of time as a result of an island-wide attempt to revive the economy.

On the bright side, the global pandemic has brought a window of opportunity to the employment sector of developing Asian countries, like Sri Lanka. With labour cost increasing in China, many international companies are relocating their factories to countries with cheaper manpower. For example, in the last five years, the world has seen an increase in the number of factories in Vietnam. Economists have predicted it to be the next biggest ‘global factory’ after China, in a mere 20 years’ time. The shift of factories out of China has been said to accelerate with the origin and spread of COVID-19. With its strategic geographic location, cheap labour and improved GDP as of 2019, Sri Lanka is proving to be an attractive alternative, with booming manufacturing potential, ensuring a decrease in the island’s unemployment rate and creating a source of foreign cash-flow into its economy.

 

Government strategies to adapt to the tumbling economy

In addition to some sector-specific coping mechanisms mentioned above, the Government of Sri Lanka has also developed general strategies for short, medium and long term economic growth to help the island’s economy bounce back.

In the short-medium term, an allocation of LKR 50 billion has been set aside by the government through the Central Bank of Sri Lanka to help companies increase liquidity through funding schemes and ease cost pressure via the reduction/removal of taxes to provide immediate economic aid. Taking into account the stall in wages for low-income households, the government has also introduced debt moratoriums, relief on personal loans and credit card payments and has knocked down the prices of essential goods. Another medium-term aim of the government should be to resume infrastructure development as soon as possible.

Construction works create employment for the manual labour force and helps uphold investor sentiment even amidst the crisis. Long term measures suggested to companies by the government include upskilling of workers, investing in technologies that improve process efficiency and revaluating business models to improve sales by venturing into new markets.

With the welfare of Sri Lankans given the highest priority in this crisis, the biggest expenditure of the Sri Lankan government has to be given to medical management within the country. Pioneers in Sri Lanka’s corporate sector have predicted an 18-month economic aftermath, calling the need for a 3 year strategic plan by the government to offset the effects that may be experienced during this period. The success in the execution of such a plan greatly depends on the state machinery as well as the private sector. Hence, the plan should not reflect benefits to a single party, but should be used for the overall development of Sri Lanka in the months ahead. Taking into account the rigorous efforts by both public and private sectors, it is certain that Sri Lanka is on the right path to economic prosperity, having proved its regenerative capability after the civil war in 2009, as well as the terrorist attacks in 2019.

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