Cop­ing with eco­nomic con­se­quences of the corona pan­demic

Sunday Times (Sri Lanka) - - COMMENT -

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

© PressReader. All rights reserved.