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An economy restricted

28 May 2021

  • Amidst travel restrictions and import restrictions, how should the economy be managed and what is its outlook?

By Sumudu Chamara   According to both the Central Bank of Sri Lanka (CBSL) and the World Bank (WB), the country’s economy shrunk by 3.6% in 2020 due to the Covid-19 pandemic’s impact. However, the WB Sri Lanka Development Update: Economic and Poverty Impact of Covid-19 report, which was released early April this year, predicted that the economy would recover this year to grow by 3.4%, an almost 180-degree turn from the performance of 2020, mainly due to foreign investments and tourism, among other economic activities. The CBSL was even more optimistic, stating that the country’s economy would record a 6% growth on the back of improved local manufacturing and services. However, these forecasts came before the third wave hit the country following the Sinhala and Tamil New Year, and therefore, the basis on which these predictions were made may not be valid now. During the first wave in 2020, the Sri Lankan Government imposed an islandwide curfew which lasted almost two months. However, as the second and third waves broke out in October last year and April this year, respectively, the Government stated that the country’s economic activities had to continue regardless of the pandemic. However, in the face of increasing caseloads and rising daily death tolls during the third wave, the Government changed its stance and imposed a two-week lockdown/travel restrictions, with occasional brief windows of relaxation. Amidst the first outbreak of the pandemic, the Government also imposed restrictions on imports, and these restrictions have mostly been maintained despite some relaxation for more than a year. The local industries have been divided on this policy, with many arguing that it negatively impacts the economy and others arguing that it helps strengthen local manufacturing. To look into how the pandemic, in particular the restrictions on movement and imports, has affected Sri Lanka so far and will affect it for the rest of the year, and what the policymakers can do differently to spur an economic revival, The Morning spoke to several leading stakeholders.   Covid-19-hit economy and import restrictions Speaking of the impact the pandemic has had on Sri Lanka’s economy, especially those concerning the prevailing import restrictions, leading business cycle economist Dr. Kenneth De Zilwa, who serves in an advisory capacity at the CBSL Monetary Policy Consultative Committee (MPCC) and Financial System Stability Committee (FSSC) and holds a number of other positions including Managing Director of Econsult Asia (Pvt.) Ltd. and a Director of the Institute of Policy Studies (IPS), said that misrepresentation of facts must be corrected, adding that there is no import ban but an “import rationalisation rollout plan” with all intermediate and capital imports being currently permitted, despite Sri Lanka’s external debt challenges. He noted that it is important to look at the merchandise trade deficit when talking about disruptions, for the lack of domestic savings prevents us from rapid industrialisation and creating an external debt sustainability environment. He added that therefore, only by looking at solutions for this chronic merchandise trade gap can Sri Lanka move forward, as this is the cause of the country’s economic problems along with excessive external borrowings. “Is it not an issue when we have a $ 10 billion cash flow gap to fund? Surely, the answer has to be yes. If this negative cash flow gap has to be corrected, don’t you think we will need to change our consumption habits and explore domestic production solutions, if we are serious about debt sustainability? For now, we use hard-earned foreign savings or borrow from external sources in order to finance these consumer import items, which have the potential to be localised. Localising these items results in domestic savings being retained and creating less stress on external borrowings.” He further noted that Sri Lanka annually purchases a number of consumer imports, including vehicles worth $ 1,200 million, pharmaceuticals worth $ 400 million, dairy products worth $ 300 million, fruits and vegetables worth $ 300 million, spends $ 300 million on wheat and maize, $ 200 million on fish, $ 200 million on vehicle spares parts, $ 200 million on sugar, $ 180 million on furniture, $ 150 million on electronic items, and $ 120 million on onions. “If these consumer imports are produced locally, it provides an opportunity for local entrepreneurs and businesses to expand their balance sheets and capture 50% of this list of items (excluding vehicles) and it would save the country $ 1,175 million and would rewrite the country’s ‘profit story’, thereby enabling them to expand their businesses beyond the borders of Sri Lanka. These are opportunities, not limitations, and I hope that Sri Lankans would see it in this light. Globally too, economic history has shown us how the now developed West (the US and Germany,) and East Asia (South Korea and Malaysia,) adopted similar import rationalising methods and tariffs to secure their business models to reach the heights they have today. There is an element of short-term consumption alteration and trade-off needed in order to achieve long-term rapid industrial growth and external financial stability.” Economist and Samagi Jana Balawegaya (SJB) parliamentarian Dr. Harsha de Silva, however, expressed doubts about the country’s economic management. He stated that the country’s economic management, especially in light of the pandemic, is questionable, and that the country will see the repercussions of unwise economic decisions in the coming few months. He also said that the only way Sri Lanka would be able to move ahead is by engaging more with the world economically. “According to the Government, the economy contracted only in one quarter last year, which was the second quarter, and both the third and fourth quarters were positive. The economy contracted only by around 3.5%, and what the Government is saying is that even with the second wave of the pandemic, the economy was not impacted, and that it was impacted only by the first wave.” Speaking of the businesses affected by the pandemic, especially the third wave, Dr. de Silva said that the degree to which businesses would be affected would vary depending on the nature of the business. He, however, said that Sri Lanka still has to wait and see what sort of plans the Government would come up with to address the situation. “If you look at businesses, a lot of businesses are running at a much lower capacity than they would otherwise. But on the other hand, some service companies such as tech companies have not been impacted at all. But if you look at conglomerates, we can see that some of them are showing large profits; some banks are showing massive profits, which means that at the expense of the economy, some companies have been making money. But if you look at tourism-related businesses, we are almost at nothing once again. We will get to see the impact of this situation in the second quarter.” When asked his opinion on the import ban imposed on a number of goods, Dr. de Silva said that some bans are unwise and rather inexplicable, and that the Government’s decision to ban chemical fertilisers is certainly going to show up in the growth figures at some point in time. He also said that since smallholders in the tea industry have seen the repercussions of the ban, the country will start seeing its impacts in the rest of the agriculture sector too in the coming few weeks and months. He was of the opinion that since import and/or export businesses, especially import businesses such as for vehicles, have been completely stopped, that too will potentially cause a negative growth for the second quarter of this year. When asked about the lingering import restrictions, economist and Sri Lanka Podujana Peramuna (SLPP) parliamentarian Prof. Ranjith Bandara said that since the pandemic is not a normal situation, no country in the world will be or has been able to operate (business activities) freely such as in a Covid-19-free situation. “During and post the Covid-19 situation, these are the possible measures any government would implement,” he added, stressing that Sri Lanka imposed import restrictions at the right time. He added that despite the import ban, Sri Lanka has resources to be utilised for essential projects such as the vaccination programme or the importation of some of the essentials including medical supplies, and that importing luxury items and vehicles is not a priority at this juncture. Prof. Bandara is of the opinion that Sri Lanka, or any country for that matter, has not been able to predict the economic impact of the pandemic thus far, and that without trying to rush to conclusions or make assumptions, Sri Lanka should try its best to manage the economic impact with the available resources. “The impact of the pandemic on a global scale is yet to be understood, and no one knows the extent to which it has caused an impact on the global economy. There are various predictions and estimates; but realistically speaking, I do not think any of us would be able to present an accurate number. In the same way, the impact the pandemic has had on Sri Lanka’s economy is yet to be estimated. Even though there are some rough estimates based on the impact on the tourism sector, small and medium industries, and commercial and export agriculture, we are really not in a position to accurately estimate the magnitude of the impact and what would be the total impact on the economy at the end of the pandemic.” He noted that irrespective of the predictions, the pandemic has impacted local, regional, and global economies negatively, and it might take a little time to recover and/or estimate the true extent of the impact the pandemic has caused. According to Prof. Bandara, the import ban, despite being viewed as a negative development, has had a positive impact on the local economy. He noted that it has created an environment for the people to focus more on manufacturing what can be manufactured locally. “In that sense, it opened up a lot of employment opportunities, and the country has had an opportunity to utilise its underutilised resources,” he said, adding that the people need to also see the positive side of such measures.   Foreign reserves, debt Amidst the growing tensions about the state of the economy, Sri Lanka recently took a number of steps to obtain financial assistance from several countries, especially China, to maintain the value of the Sri Lankan rupee and boost foreign reserves. Sri Lanka has entered into currency swap deals and loan agreements for this purpose this year. When queried about the situation regarding Sri Lanka’s foreign reserves and import cover, Dr. Kenneth De Zilwa said that these are short-term challenges Sri Lanka as a country has to deal with, and that this is currently being dealt with without much weeping or wallowing, for one has to manage the legacy balance sheet issues they inherit. “The ratio of reserves to import cover is precisely what Sri Lanka is addressing and must continue to do so by dealing with the denominator, i.e. rationalisation of merchandise imports. These adjustments are painful and can cause frustration, but is the only way to come out of this long-term quagmire. Sri Lanka has seen worse situations in terms of reserves to import coverage as seen in 1970 (1.7 months cover), 1980 (2.2 months cover), 2000, and more recently in 2008 when the import cover dropped to 3.5 and 3.2 months of reserves, respectively. Despite these brief periods, Sri Lanka has pulled through and shown its spirited fightback and has overcome these challenges.” He noted that therefore, he remains extremely optimistic that Sri Lanka will fight its way out of the prevailing situation once again, given the short-term financing arrangements and cash flows that are in place. On Tuesday (25), Bangladesh cleared a $ 200 million currency swap facility for Sri Lanka. Some Bangladesh-based media outlets said that the Board of the Bangladesh Bank had decided to lend $ 200-250 million from Bangladesh’s reserves to Sri Lanka for three months. Dr. Harsha de Silva, speaking of Sri Lanka’s foreign reserves and debts that need to be repaid, noted that it is embarrassing that Sri Lanka has had to borrow money from Bangladesh. “It just shows how poorly we are managing our economy, whereas countries like Bangladesh are managing their economies well given the pandemic. They have not imposed strict restrictions like we have, and they are trading with the world.” According to Dr. de Silva, Sri Lanka is currently facing a significant challenge when it comes to debt repayments. “We have roughly about $ 6.5 billion that needs to be paid back, and the Government says it is going to manage it with mid to short-term swaps, which are okay just to get by. But that does not mean that these are sustainable solutions. The Government says that it received $ 1.5 billion from China as a swap. But I heard the Governor of the Central Bank himself saying that they never got any dollar swaps, and that they only got a 10 billion yuan swap. Yuan is not going to help us deal with the challenges such as making payments and repaying debts.” He noted that these are short-term mechanisms, and that the country’s economic situation is extremely concerning.   Economic management When asked whether Sri Lanka’s economy can still bear the economic impacts caused by the pandemic, Dr. Kenneth De Zilwa said that there is an ill-conceived and baseless fear that Sri Lanka will “collapse”, and that he doubts it very much, with the country having weathered the storm in 2020 and performed relatively better in comparison to some of Sri Lanka’s Asian peers (negative GDP [gross domestic product] growth rates in 2020: India – 8%, Maldives – 32%, Malaysia – 5.6%, Singapore – 5.4%, Thailand – 6.1%, Philippines – 9.6%). “If there was any collapse, it would have happened in 2020, as the pandemic is unparalleled and of mammoth proportions. The challenges too were monumental, as most revenue sources such as tourism and merchandise exports were negatively affected. Economic transactions were limited with many sectors being closed for long periods with the exception of agriculture. Despite all these negative undertones, we have met our external debt obligations by paying off $ 4.2 billion. This too was done with the lack of access to financial markets due to the rating downgrade by the US credit rating agencies and also the significant contraction in global trading systems. Therefore, from where I am standing now, the worst is behind Sri Lanka and the period ahead is nothing but full of opportunity for people and businesses of this country, as we now welcome the dawn of a new business cycle and an awakened Asia which is growing faster than the rest of the world.” Speaking of the aforementioned WB statistics, Dr. De Zilwa said: “That is correct; Sri Lanka’s economy did contract by 3.3% in 2020. This was at a time when the entire world economy was closed to travel, trade, and global business, and the world faced its worst economic crisis since World War II. There was little Sri Lanka could do but to remain focused and hopeful. During this period, we saw Sri Lanka reposition its economic model for the new world ahead. And that has now materialised with the world economy projected to grow in 2021 by 5.6% and 4% in 2022 (as per OECD [Organisation for Economic Co-operation and Development] March 2021 report). If you closely analyse the data, you will find that Asia is well positioned to become the engine of growth for the world over the foreseeable future. So, Sri Lanka stands to benefit from this positive jet stream and its homegrown macroeconomic framework. The GDP growth rate for 2021 per se, i.e. top-line revenue, for Sri Lanka will depend on the Covid-19 control mechanisms that are in place and the contingency plans. So, we may likely see two scenarios with modifications to the final number which could be from 4.2% to 5.5%. The lower base of 2020 too will help this cause. But this is a statistical analysis and what is important is the macroeconomic framework that is in place. This framework would see significant improvement in the overall development outcomes with higher levels of gross fixed capital formation and higher domestic savings brought about by strong manufacturing and industrial sector reawakening.” In response to a question on whether Sri Lanka’s economic management has been good as far as the pandemic is concerned, Prof. Bandara said that there is no system that Sri Lanka can think of as a perfect management system, and that every system may have certain loopholes. “Sri Lanka has been able to manage the pandemic in such a way that it posed minimal negative impacts on the people and the economy, and every single element of society should understand their responsibilities.” Speaking of the country’s current economic management, Dr. Harsha de Silva said that Sri Lankans are being completely misled, and that the country’s economic model going forward is not going to give the expected results. He further said that since Sri Lanka is a small open economy, it is not going to be able to build a wall around this situation and save foreign exchange. Adding that some of the economic models Sri Lanka is following are based on archaic, failed ideologies, he noted that the only way Sri Lanka can move ahead is by engaging with the world and by building ties within this country, in the region, and beyond. “We should start engaging in internal and global production networks, and we have got to become a part of the production network of the world. The moment we start bringing import restrictions and putting tariffs, that gives a clear message to the investors that that Sri Lanka is not willing to partner with the world, and the results of this unwise move will be felt in the coming few years. In my view, we are completely and absolutely down the wrong path.” With the country currently under lockdown, and facing possibilities of a further extension of the lockdown, a majority of businesses that have to operate physically have come to a halt. Whilst the restrictions and their impacts on the economy are understandable, the country needs money to manage the most basic operations including the Covid-19 situation; this emphasises that despite the pandemic, the country has to keep the economy alive, he added.   Foreseeable future When asked whether there is anything Sri Lanka can do differently as far as its current economic management is concerned, Dr. Kenneth De Zilwa said that there are always new developments in the global economy from a production economy point of view and a central banking standpoint. “We have seen the importance of commodity volatility and also the business cycle ‘boom and bust’ management models adopted by other Asian countries. This is an area that Sri Lanka has to remain focused on and bring about risk management solutions to deal with its production economic model if we are serious about being competitive and winning market share. We have continued to miss out on global price movements, particularly on crude oil and other industrial commodities. Similarly, the Central Bank has to remain open to new policy tools (similar to the People’s Bank of China and the US Federal Reserve), and new methods of funding to create monetary space for the private and public sector balance sheets to expand, within the unfolding business cycle.” He then expressed his views about whether Sri Lanka is in a position to manage the current situation, or the situation that is likely to be created in the coming few months, with the available resources, particularly monetary resources. He noted that even though various parties can make presumptions about the situation and say that the pandemic will continue and that there is no strategy to overcome it, countries such as Vietnam, China, South Korea, Thailand, and even the US, have recovered to a large extent. “Vaccines have been found, and the vaccination programme continues. Therefore, some of these presumptions about the economic impact would not work in the real world.” He also expressed hope concerning Sri Lanka’s ability to overcome the economic impacts of the pandemic, and said that even though Sri Lanka is a small nation, or a small economy, the country has been able to address most of the negative impacts of the pandemic so far. He noted that there are many countries in the world that have not been able to introduce at least a single vaccine to their countries, whereas Sri Lanka is aiming to vaccinate at least 70% of the population. He opined that Sri Lanka will be the first country to have vaccinated such a big portion of its population in the South Asian region. Amidst import restrictions and travel restrictions, the economy of Sri Lanka is at a crossroads, and the decisions made by policymakers will decide its direction and future health. Is it on the right track, does it know where it’s going, and most importantly, where will it end up?


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