COVID-19 outbreak: How to defuse the economic time bomb

The COVID-19 is drastically reshaping the world and its social order while creating new challenges. We are in a gloomy period. 

In December last year, one patient was reported from China’s Hubai province, and in a very short period of time, a large number of deaths were reported. From China’s Hubai, it has spread to other regions within a short time. According to the World Health Organization, the total number of cases reported in China exceeded 82,000 and the total number of deaths was 4,633. The Chinese government shut down the provinces to prevent the spread of the disease, especially the Yuan province, which has been completely closed and prevented the entry and exit. But, after serious battle against the virus the disease is under control in China. 

But the disease is spreading rapidly in Europe and other parts of the world unprecedentedly. In particular, Italy, United Kingdom, Korea, Germany and Spain are on the rise. So far, more than 200,000 cases have been reported in Italy. The death toll has risen to 26,977 up to now. 

According to the World Health Organization (WHO) data, there are currently 210 countries with the disease and the latest figures showed that the total number of infected people in the world is more than three million. Of these, 923,448 are cured, 56,292 are in critical condition, and there are still 1,931,306 active patients worldwide. The total death toll is about 211,663. Significantly, the number of infected persons in Sri Lanka has so far increased to over 600 and counting. It is worth noting that the health authorities as well as the efforts of the security apparatus to eradicate this infection are commendable.

According to the history of epidemics in the world, the Spanish flu of 1918 had infected more than 500 million of the world’s population, and about 50 million of them had died. It is reported that more than 300,000 people have died due to these conditions in Sri Lanka. Reports suggested that Spanish Flu was one of the worst disasters in world history. 

Between 1954 and 1958, a new influenza H2N2 infection killed 1.1 million people worldwide. Once again, in 1968, one million people worldwide died of influenza A H3N3, a Hong Kong fever, and most of the victims were over the age of 65. In 2009, an influenza flu virus called H1N1 infected nearly 600,000 people worldwide. More than 18,036 people have died. 80% of those were under the age of 65, while 80-90% were over 65 years of age. In the recent past, the world has not seen such a serious infection.

Impacts on the world economy

According to Bloomberg magazine, the loss to the world economy of COVID-19 is $ 2.7 trillion. This figure is equal to the GDP of Great Britain. Most of the countries in the world depend on the supply of China. Most of the world’s raw materials are supplied by the Chinese. Raw materials production has been hampered in China and the global supply chain has been disrupted. And the large-scale global economies of the countries in the world are contributing to the collapse. It must be emphasised that the economies of the world today are in grave danger.

According to Bloomberg’s economic estimates, the world economic growth is estimated to be 1.2% in the first quarter of 2020, but it is currently uncertain. It can be assumed that the world economic growth rate will be negative in the first quarter of 2020. It should be noted that China’s economic network may not be so optimistic if it is not revive with great strategic plan in the next few months. 

Tourism industry

Tourism is a major foreign exchange earner in many countries in the world, especially in the case of COVID-19 infected countries. In particular, Italy’s tourism revenue is 238 billion. It is 13.3% of GDP. This situation has been adversely affected in tourism-rich countries such as France, Germany, Spain and South Korea. According to the United Nations World Tourism Organization, world tourism is projected to increase by 3 to 4% by 2020, but it is predicted to drop to 1 to 3% due to this scenario. It is forecast to collapse by between $ 30 and $ 50 billion, according to the agency. The situation is severely impacting the Asian and Pacific region, with an estimated reduction of 9 to 12%. This is likely to affect China’s tourism industry for years to come.

The global aviation industry has also been heavily impacted by the global tourism downtrend. World airlines are estimated to lose $ 63 to 113 billion in the future. Many airlines in the world have cancelled a large number of flights.

The impact on Sri Lanka’s economy

At the time of writing, over 600 coronavirus infections have been reported in Sri Lanka. Accordingly, the number of infected persons may increase in the future. There appear to be several strategies to prevent this infection. Small island states such as Sri Lanka are more likely to spread the infection than people who are infected. Disease control cannot be achieved by closing the airport. A well-informed program for disease control should be strengthened. Shutting down schools and public places and preventing people from gathering is a good step towards disease control.

The economic damage caused by this infection could be huge as the Sri Lankan economy is already badly damaged. The World Bank forecast Sri Lanka’s economic growth rate to be 3.3% by 2020, which is expected to decline further. But in comparison to other countries in the world, the impact may be less. As with the rest of the world, the raw materials for industrial production are imported by China, as are the imports for industrial products in Sri Lanka. More than 60% of the medical supplies are imported from China. Therefore, finding another option should be done in the future.

A large number of Chinese workers are employed in the construction industry in Sri Lanka, especially on large scale projects. Sources indicate that the figure is over 5,000. Work on these projects has been temporarily halted, as some Chinese workers remain in their countries due to a travel ban in China since December. The financial loss due to several months of restart of these projects has not been calculated.

In 2019, Sri Lanka has earned over $ 5 billion in foreign exchange earnings from tourism and 5% of GDP. However, the terror attacks on Easter Sunday in 2019 have had a major impact on tourism, and the tourism industry has collapsed for several months. But since August 2019, the tourism industry has been rebuilding. 

However, since COVID-19 outbreak, tourist arrivals have declined 17.7% since February 2020. The risk of a complete collapse of the tourism industry is high. Therefore, the Government should implement an appropriate program to safeguard Sri Lanka’s tourism industry. 

Meanwhile, market studies show that the demand for tea in the world market has affected the tea industry.

Sri Lanka’s apparel exports are mainly to European countries. Due to the emergency in Europe, the demand for garments is likely to decrease. As such, the garment industry in Sri Lanka will face many difficulties in the future. Therefore, the Government should intervene to protect the garment industry. 

Small and medium-sized enterprises as well as small-scale businesses locally and large-scale groups living in small businesses daily live in urban and rural areas. They will face severe difficulties as the country becomes paralysed for days to come. Therefore, as a responsible Government, they should be kindly focused on the problems they face.

As a government, a national strategic plan must be worked out urgently in order to overcome the impending economic crisis. A strategic plan should be drawn up with a focus on the most vulnerable sectors of the economy. The Central Bank of Sri Lanka will have to play a major role in strengthening the banking and financial sector. Focus should be placed on securing the rupee (local currency), foreign reserves, and stabilising bank interest rates.

It should be emphasised that at this juncture, the political parties, irrespective of their political differences, must work together to protect the people and the country.

(The writer is an economist and a Member of Sri Lanka Council for Agricultural Research Policy. He is a former director of the Merchant Bank of Sri Lanka and Finance PLC.)