Fighting COVID impact

Friday, 23 October 2020 00:00 - - {{hitsCtrl.values.hits}}

Salaries are essential for most people, but Sri Lanka’s wage growth, which accelerated in July, has slipped in August and continues to remain under headline inflation, weighing on the purchasing power of the people. This is yet another indicator that most people will be struggling to make ends meet as COVID-19 continues to tighten its grip on the economy.

The growth in Sri Lanka’s wages, as measured by the nominal wage rate index of the informal private sector, covering all three key economic sectors—agriculture, industrial and services—decelerated to 2.8% in August from a year ago, after gaining by 3.1% in July.

Looking back the two months of June and July were almost magical in that many people were optimistic that Sri Lanka had rounded the bend on the pandemic. July’s wage growth is an acceleration from the 2.2% growth in June, as wages in both the burgeoning agricultural sector and the recovering services sector pushed up the earnings of the individuals engaged in these sectors.

In August, the industrial sector contributed mostly to the wages, as the industrial sector wages grew by as much as 3.3% from the year earlier levels. Analysts said this represented the factory recovery kicked off from mid-May and the continued acceleration of the manufacturing activities, however there are worries that this will now be short lived.

The wage rate index for agriculture and services grew by 2.6% and 2.4%, respectively, in August from the same months in 2019. But it is unlikely these positive numbers will continue past September. Many private companies are concerned that the fledgling recovery they witnessed in the middle of the year is now over and with it may come a second round of belt tightening that many people will find difficult to cope with.

With the Government’s fiscal support tapped out there is little hope from that direction. The Central Bank this week decided to keep policy rates unchanged to allow market lending rates to decline, hopefully assisting both the Government and the private sector. Unfortunately many companies are already leveraged and without a decline in COVID-19 cases a pickup in private sector credit growth is unlikely.

The Government has already become a significant borrower and there is every likelihood this will continue, especially since the Government will have to borrow to fund a massive Budget deficit. Borrowing from foreign sources will be limited given its debt repayment challenges but even with more State spending the economy will continue to struggle.

The bleak news has many worried. If cases continue to rise Sri Lanka may have to make an unpalatable decision between its economy and public health. Balancing both will require more proactive involvement from the Government and flexible policy making. The passage of the 20th Amendment, which is all but certain will not really reduce these responsibilities.

With the 20th Amendment out of the way focus will shift to the Budget for next year and it is imperative that the Government not lose the chance to put its fiscal affairs in order. That is possibly the only thing that will assist Sri Lanka to face the next year with better preparedness if the pandemic does not let up.