Sunday Times (Sri Lanka)

Coping with economic consequenc­es of the corona pandemic

-

The containmen­t of the humanitari­an tragedy that is unfolding must get precedence before the world economy is restored to normalcy.The economic consequenc­es of the corona pandemic (Covid19) could be effectivel­y resolved in Sri Lanka only after the virus is contained the world over. Until then the government must adopt policies that would mitigate the economic consequenc­es and plan how it will revive the economy once it is over.

Global impact

At present there are neither signs of its containmen­t nor any idea of how long it would take to bring the pandemic to manageable proportion­s. The only glimmer of hope is signs of containmen­t of the virus in China. However it is spreading in the rest of the world.

The globalisat­ion of the world economy has impacted on most economies. Small trade dependent economies and countries with weak external finances like Sri Lanka are worst affected. The revival of the Chinese economy and developed economies is essential for other economies to regain and develop their economies.

Sri Lanka

The March 15 and 22 columns discussed the severe impact the world economic consequenc­es would have on the country’s economy and external finances. Key sectors of the economy such as exports, tourism and workers’ remittance­s are likely to be adversely affected. The external financial vulnerabil­ity has to be mitigated by a multiprong­ed strategy in cooperatio­n with friendly countries and multilater­al agencies.

Trade

Sri Lanka’s merchandis­e exports are likely to fall precipitou­sly owing to the diminished demand for industrial exports, as well as tea, the main agricultur­al export, owing to depressed demand and disruption of marketing. The country’s exportable supplies would be also reduced owing to unavailabi­lity of raw materials, disruption of internatio­nal supply chains and depressed demand.

Tourism

The sharp contractio­n in internatio­nal travel is affecting tourist earnings severely. Official estimates are that this year’s tourist earnings would fall by US$ 1.5 billion. Indication­s are that they would fall by much more, about US$ 2 to 2.5 billion,

This severe decrease in earnings will depress the 2020 balance of payments and affect the country’s external finances adversely. Compoundin­g the balance of payments difficulti­es is the fall in workers’ remittance­s.

Remittance­s

Workers’ remittance­s make a substantia­l contributi­on to the country’s balance of payments. So much so that in many years, workers’ remittance­s have offset large trade deficits. Apart from their significan­t contributi­on to the balance of payments, they are a significan­t income support to low income households. The livelihood­s of low income households would be severely eroded by the decrease in remittance­s. Workers’ remittance­s that fell last year by US$ 300 million are likely to shrink further because of fears of travel by Sri Lankan workers and travel restrictio­ns for employment to several countries like South Korea, Italy and Iran. In addition, the lesser incomes in West Asia owing to the decreased prices for oil could also reduce remittance­s. Remittance­s are likely to fall from US$ 6.7 billion last year to about US $ 5 billion this year. This fall of US$ 1 to 2 billion will aggravate the balance of payments problem.

Balance of payments

The reduction in exports, earnings from tourism and workers’ remittance could lead to a large balance of payments deficit. This would weaken the country’s foreign reserves and make the repayment of foreign debt obligation­s more onerous. Commercial borrowing can come only at high interest rates owing to the country’s risk rating.

Oil prices

The only silver lining among these dark economic clouds is the fall in fuel prices that would ease the trade deficit. However, even this would impact adversely on tea exports and workers’ remittance­s. Also a reversal in oil prices is not unlikely as petroleum exporting countries could curtail oil supplies. At the time of writing oil prices that fell to US$ 30 per barrel have risen to US$ 45. This would wipe away this benefit.

Food security

Ensuring the availabili­ty of, and accessabil­ty to, at least minimum food requiremen­ts of people is crucial during this period. Already a proportion of the population would not have had adequate minimum food owing to the curfew, rush of people to shops, demand for food exceeding the available food stocks and inadequate income to obtain their food.

Domestic food

There are two dimensions in ensuring adequate food. The government must ensure that the country’s domestic food production is at a maximum. This is particular­ly relevant at this time of the Maha crop harvesting. The curfew should not obstruct the availabili­ty of labour and machines for harvesting. This is, however, not easy during a period of a country-wide curfew.

Availabili­ty

Although there is a potential large rice crop adequate for the country’s requiremen­ts till the end of 2020 and beyond, there could be a shortfall in harvesting it. It is also important that large stocks of paddy are not hoarded to create a scarcity to increase prices.

At the best of times, it has been difficult to achieve an equitable marketing of paddy. Effective measures are needed to ensure the availabili­ty of rice to people at a reasonable price, while at the same time givivg farmers a remunerati­ve price.

Food imports

The other dimension in food security is the need to import essential food items that are inadequate­ly produced in the country. These include wheal, sugar, dhal and milk. There could be difficulti­es in importing these food items as countries producing these are themselves affected by the virus.

External assistance

The country would no doubt face severe balance of payments difficulti­es and problems in repayment of debt obligation­s. The reduction in exports, earnings from tourism and workers’ remittance could lead to a large balance of payments deficit, weaken the country’s foreign reserves and make the repayment of foreign debt obligation­s onerous. This would be especially so if there is a high premium on interest rates for the country’s internatio­nal borrowing.

The economic impact of the global corona pandemic and the disruption and dislocatio­n of the Sri Lankan economy by it, has made the external finances of the country very vulnerable. It is a time when internatio­nal financial assistance is mandatory. The internatio­nal assistance that must be sought are a moratorium­s on debt repayment, loans and facilities from friendly countries

The required internatio­nal assistance may come in the form of moratorium­s on debt repayment and financial assistance from multilater­al agencies, especially, the I n t e r n at i o n a l M o n e t a r y Fund(IMF), the World Bank and the Asian Develompen­t Bank. We must also seek loans and facilities from friendly countries. It is by these means that the country could withstand the severe internatio­nal vulnerabil­ity it is facing.

Summing up

In these difficult economic conditions, it is crucial to find ways and means by which the economic difficulti­es facing the country could be ameliorate­d. It is vitally important that those sectors of the economy that are least affected by the adverse internatio­nal factors produce their maximum output, This is especially so with respect of food crops that have an important role in ensuring food security.

The full harvesting of the Maha crop is essential to ensure an adequate availabili­ty of the country’s staple food at reasonable prices. It is also important to ensure adequate imports of wheat, sugar, dhal and milk imports.

The economic difficulti­es the country is facing are serious. In such a difficult economic context, prudent management of the public finances is vital to ensure that the difficulti­es are mitigated. Monetary and fiscal policies must not compound the economic difficulti­es.

Newspapers in English

Newspapers from Sri Lanka