COVID-19 impact 

Sri Lanka, along with the rest of the world, is bracing for the impact of coronavirus. With the identification of two patients in Sri Lanka sending many people into panic mode. Shop and supermarket shelves were emptied out yesterday as people went out and brought pretty much everything that was available but the reality is it is more important to remain calm and focus on the facts. 

Given what is known so far, Sri Lanka has taken measures, within its capacity as a developing country. Facilities are available to get tested and people must follow guidelines of washing hands, staying away from crowded places and protecting the more vulnerable with compromised immune systems as best they can. 

The economic impact of COVID-19 is harder to gauge with economists concerned the fallout could be serious for an economy already battered by slow growth, high debt and suffering from consistent structural challenges. Exporters in particular are worried that the loss in revenue could be as high as $750 million with sectors that are already suffering continuing to be hit once again by the outbreak. 

Perhaps top of the list is tourism. Having been severely hit by the Easter Sunday attacks last year the industry was making a faster than expected recovery and was set to do well in 2020 before the coronavirus took down such hopes. While it is difficult to predict exactly how much in earnings could be lost, it is nonetheless concerning when considering the fiscal challenges faced by the country and the estimated 7% or higher Budget deficit that is expected this year. 

The Government has already stepped in by extending the moratorium that was put in place after the Easter Sunday attacks by one year, under a larger moratorium covering all Small and Medium Enterprises (SMEs). Sweeping tax cuts that were introduced by the Government shortly after the presidential elections is also expected to boost growth and counter some of the impact of coronavirus but given the challenging macroeconomic fundamentals faced by Sri Lanka, it may not necessarily be able to maintain this fiscal support in the long term. 

In addition to tourism, the sectors of apparel and construction could be the next worst hit. Apparel of course is facing a double whammy due to both supply chain disruptions and possible slowdown of growth in key export markets. The International Monetary Fund (IMF) has warned that the world could be facing its first recession since the global financial crisis more than a decade ago, which could hit developed countries such as the US, UK and Europe harder. 

In response the US Federal Reserve last week announced plans to slash rates that could help developing economies such as Sri Lanka raise cheaper debt repayment funds from international financial markets but still does little to offset other challenges such as industries finding new source markets. Top industry officials have already predicted that factories may need to close earlier and stay closed past the Sinhala and Tamil New Year in April due to lack of supplies and orders. At the moment companies have mostly decided to keep people on pay roll but if the disruptions are prolonged then layoffs may become inevitable.   

Construction has already seen some of its projects delayed as Chinese workers remain in their homes country after returning to celebrate the Chinese New Year. Traditionally construction has been a major growth contributor but it is also highly dependent on imports so a slowdown could have mixed results. The silver lining in this instance is that a construction industry slowdown could reduce the trade deficit and reduce impact on reserves. The same could happen if vehicle imports are also curbed.         

Maintaining strong macroeconomic fundamentals in such an environment could be challenging and it is crucial to consider this as Sri Lanka also has to repay $4.8 billion in debt repayments this year. Fortunately for Sri Lanka the next large repayment of $1 billion is only due in September giving the Government some breathing room to get elections behind them before tackling the debt situation. The relative smallness and the insular nature of Sri Lanka’s economy could assist it to weather this storm better but coronavirus has nonetheless managed to take the lustre off the growth turnaround that was expected in 2020.