But there could also be opportunities
The COVID-19 pandemic is a double whammy. It has decimated communities, killed nearly a quarter of a million people and infected millions more while continuing to do so at an exponential rate. It has overloaded health facilities in the richest societies in the world, killed more people in America within two months than the total American death toll of the Vietnam war. More people had died in Lombardy, an Italian region in a single day by the virus than by allied air raids during the World War II.
Even the populous countries in South Asia and elsewhere which have so far avoided the full brunt of the epidemic are still at the razor’s edge. Even those who escaped the first wave may fall to a second wave as epidemiologists warn that the virus might stay around at least 18 months.
For Sri Lanka, that has so far managed to control the spread of the virus, the economic fallout of COVID-19 is far more devastating than its fatality rate. The country is potentially at the verge of sovereign default- though the Central Bank insists it would maintain zero debt record. The Economist has, predictably enough, ranked the country among the emerging economies worst hit by the COVID-19.
The Sri Lankan economy was in bad shape even before it was hit by the virus. The coming into the age of the combined effect of the economic stagnation of the five years of Yahapalanaya government and maturity of loans, mostly sovereign bonds, taken by successive governments to pay for day-to-day expenses, happened simultaneously. There is US$ 72 billion of public debt, equivalent to 82% of the GDP - of which 35 billion are external loans. The government also has to pay US$ 4.8 billion as external debt servicing for this year, the largest debt repayment in the country’s history.
Despite the looming debt crisis, the new government of President Gotabaya Rajapaksa went ahead with an election promise to slash VAT, cooperate and individual income tax. The tax cuts were estimated to reduce government revenue by 1.5% of the GDP. (Some of the abolished taxes were quietly re-introduced later).
The virus pandemic has now pushed the economy over the cliff. The central bank has revised the economic growth for this year from an earlier 4% to 1.5%. The IMF has projected that the Sri Lankan economy would contract by 0.5% - the World Bank says it would shrink by 3%.
The primary foreign exchange-earners, garments, overseas remittances and tourism are severely affected. Merchandiser export for March has plunged by 42%. World Bank estimates Sri Lanka’s foreign remittance to decline by 19% this year. The total foreign remittance of the last year was US$ 6.7 billion, which was enough to cover 85% of the trade deficit of that year. Low oil price would provide some cushion against the loss of export revenue. (Fuel imports amounted to 28% of total imports last year).
There is US$ 72 bn of public debt, equivalent to 82% of the GDP - of which 35 bn are external loans. Govt also has to pay US$ 4.8 bn as external debt servicing for this year, the largest debt repayment in the country’s history
However, the overall economic impact would be acute. Sri Lanka’s meagre export sector is facing an existential challenge. In the absence of tourist arrivals, hotels would be compelled to default bank loans. Proactive government intervention and a fiscal stimulus package would alleviate the short term economic pain. However, the government’s financial means are extremely limited. The foreign reserves stand at US$ 7.5 billion, equivalent for barely four and a half months of imports. The government might be forced to dig into it to pay off loans.
The President has appointed an economic task force, led by his brother Basil Rajapaksa. It is comprised of the deputy governor of Central Bank, a host of retired military officials, the heads of state-owned enterprises and secretaries of several line ministries including Finance, Economic and Policy Development, Roads and Highways, Public Administration. There are few private sector representations, mostly those of the Viyathmaga affiliates. Going by the composition of the folks in the committee, their mission is to address the immediate economic needs such as food distribution and keeping oil pumps running, much less the planning for a long term economic revival.
It would help if the president appoints a task force that would facilitate the reorientation of Sri Lanka’s manufacturing sector amidst the COVID-19 pandemic. That can help the garment industry and other relevant sectors to speedily move onto the production of Personal Protection Equipment (PPE). Another task force can help formulate and implement a forward plan for the tourism sector which might have to promote some kind of quarantine tourism.
Fast-tracking of long-delayed infrastructure development projects such as Hambantota export processing zone, the Japanese-funded new terminal of the Colombo International Airport, proposed light rail project would stimulate
economic growth.
Still, wooing new FDI amidst a global economic slowdown would be a tall order. However, an economy that is reoriented to the post – COVID-19 reality would be better placed to attract new investments. The COVID-19 pandemic would change the world economy beyond many might have expected. The free market order and complex inter-dependency of the states would be reoriented to suit the post – COVID-19 reality. There will be challenges, but also opportunities. The government should assess Sri Lanka’s strengths and limitations in this new reality and seek to exploit emerging opportunities.
Still, forecasts of an evolving global situation could be tricky, especially when there are major powers who can significantly influence the trajectory of events. But, proactive economic planning would help a country to have the upper hand rather than being overwhelmed by the situation.
However, the problem with most developing world states, including Sri Lanka is that their leaders have historically lacked both a vision and perseverance to survey their environment and plan for long term economic success. Few countries that prevailed, such as developmental states in East Asia, and Chicago boys of Augusto Pinochet’s Chile built formidable economies.
COVID-19 might be offering similar choices for countries.
For one thing, Sri Lanka has not yet fully grasped the gravity of it. The economic challenges of COVID-19 can not be overcome through a primitive sense of self-reliance. Every other family growing pumpkin in the home garden and eating it would do very little as a solution. After all, the division of labour has a strong economic logic.
Still, the economic challenges of COVID-19 also offer opportunities to reinvent the local economies. One such area is the digital economy. Limits of the local e-commerce industry have been laid bare as they struggled to fill even the limited number of orders for home delivery. Whereas in China, e-commerce accounted for over one third of total retail sales last year. Another area is the digital government. Countries such as Estonia has shown remarkable success in digitalization of government agencies. Rather than reinventing the wheel, Sri Lanka can learn from their experience and emulate their success. e-learning is another. It could even become a great equalizer in education in the long run.
Agriculture is another area. It has so far been spared from the full brunt of the COVID-19 fallout. However, the large part of the agriculture sector in Sri Lanka is quasi-subsistant and operates with limited technological know how. High yielding seeds, better cash crops and packaging would be the future.
Sri Lanka lacks the wherewithal for large scale economic stimulus to jump start the economy, if it finds means to do so, it is still better.
Until then, directing limited state resource and promoting private investment into sectors such as the above can go a long way in reorienting the local economy to prevail in the future.
Follow @Ranga Jayasuriya on twitter
