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Can our economy survive this lockdown?

29 Aug 2021

By Sumudu Chamara  As the Covid-19 pandemic worsened with the beginning of a third wave, the Government was forced to impose a lockdown – officially termed a “quarantine curfew” – to contain the pandemic. One of the main concerns of the Government and many others with the imposition of a lockdown was its impact on Sri Lanka’s economy, which is now precariously placed after being battered by the seemingly never ending pandemic as well as certain policy missteps by the Government. On Friday (27), without any improvement in daily caseloads, the Government had to extend this lockdown by another week. This was followed by a Facebook post from State Minister of Money, Capital Markets and State Enterprise Reforms Ask Ajith Nivard Cabraal on Saturday (28) stating that Sri Lanka cannot afford a lockdown as half the population would not be able to face its fall-out and 4.5 mn in the Small and Medium Enterprises (SME) sector would be driven to despair.  “Macro fundamentals will be seriously compromised. Long-term economic damage will be widespread. Strict health restrictions may be imposed, But..THE COUNTRY MUST BE KEPT OPEN AND FUNCTIONING…,” he added. The impact on the economy from the pandemic is due to two main reasons, i.e. increased healthcare sector expenditure and decreased economic/business activities and revenue sources. Taking into account the importance of keeping the people as well as the economy alive, when the most recent quarantine curfew was imposed, in addition to the essential services, the Government decided to allow a number of other sectors such as apparel and construction industries to operate. At the same time, the Government decided to give an Rs. 2,000 allowance to the people whose livelihoods were disrupted due to the quarantine curfew. However, most economic activities have come to a halt, raising concerns about saving the country’s business sector, especially small businesses and informal sector workers.  According to the Central Bank of Sri Lanka (CBSL), the country’s economy shrunk by 3.6% in 2020 due to the pandemic’s impact. However, the WB Sri Lanka’s “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%. To look into how the pandemic has affected the country’s economic activities, we spoke to several experts in the field. Economic impact Speaking of the impact on the economy, Economist and Advocata Institute Chief Operating Officer (COO) Dhananath Fernando said that the impact on businesses cannot be categorised depending on the size and nature of businesses, as every business, regardless of how big or small, is interconnected with other businesses, and thus the impact on one business has the potential to affect others. Adding that the country’s informal sector is likely to be a primary victim of the economic decline, he added: “If you look at Sri Lanka's economy and our employment structure, about 99% of businesses are micro, small, and medium enterprises. It is only around 0.2% of enterprises that can be categorised as large enterprises, and at the same time, in terms of employment, more than 60% of the businesses are in the informal sector. Even if you leave out the agriculture sector, still, quite a large proportion of our workforce is informal. So, obviously, it is going to affect the informal sector very severely, because those working in the informal sector do not have fixed monthly incomes, and they are mainly daily-wage earners.” “So the impact will be felt across the informal sector – multiple industries engaged in services or production. Since 99% of the industries comprise micro, small, or medium enterprises, when they get affected, larger corporations whose supply chains depend on the micro, small, and medium enterprises will get affected. It would be correct to say that the first blow would be felt by the poor man, and then it will be felt by micro, small, and medium industries across all sectors,” he explained, to highlight why the impact on one industry cannot be disregarded or underestimated. “This impact on industries will definitely have an impact on export companies as well. For example, if we look at the apparel companies, there is a big supply chain under them, which consists of micro, small and medium enterprises,” Fernando said, noting that all industries are interconnected and interrelated. “That is why economists generally recommend not to interfere with markets, because the market is a bigger, broader system. When you try to intervene, it will give completely unintended consequences, which will have a broader and a bigger impact entirely on the entire economy,” he stressed. Economist, business cycle analyst and LankaClear Ltd. Chairman Dr. Kenneth De Zilwa also discussed this issue.  “If the service sector is impacted by 50%, we lose about Rs. 13 billion per day. That is a significant amount of value lost or taken out of the economy. This particular value comes mainly from small and medium sized businesses,” De Zilwa said, adding that the tourism industry, which has been crippled since 2019, continues to face difficulties, as the pandemic’s impact continues to exacerbate.  He added that the progress of a large number of industries, such as the wholesale and retail sector, banking and insurance sector, beauty parlours, and small hotels, have been significantly impeded as a result of the lockdowns and shutdowns. “As of now, if you continue this lockdown, our personal balance sheets are going to be impeded, and we will find our balance sheets contracting. In the interest of the country, in the interest of our own personal growth and progress, it is important that we address this as a collective and ensure that we take the right measures, and not fall prey to these lockdowns,” he said, urging the people to establish a better environment for ourselves and come out of the pandemic situation together.  Meanwhile, business tycoon Dhammika Perera emphasised the importance of balancing the economy against the pandemic situation, a concern also raised by the Government when they announced the most recent quarantine curfew, which involved imposing more relaxed restrictions.  He explained the Government’s revenue and expenses: “Owing to the pandemic faced by the entire world, every government’s revenue has decreased. As a result, governments have to reduce their expenses. Governments of some of the other countries have a mechanism to face such situations, even though Sri Lanka does not. The country’s revenue last year was Rs. 1,300 billion; however, the expense the Government had to bear to pay public sector workers’ salaries and pensions was Rs. 1,100 billion. The country was left with only Rs. 200 billion to manage other expenses.” Perera stressed that the Government has to protect its revenue sources while also preventing the people from dying of Covid-19, and that balancing these two aspects is key. He also noted that the export revenue should be protected, as it strongly affects Sri Lanka’s ability to import essential goods. He spoke of the importance of keeping all essential sectors active during the pandemic and lockdowns, even though the health sector is the most important one at present. “When it comes to the health sector, we see that those working in the sector have risked their lives for the people. But even after that, they continue to take care of patients. However, there are other sectors also that continue to work somehow. Unlike in good times, we cannot survive in bad times if we decide to shut down businesses. In a lockdown period, it is the small industries that are more likely to go bankrupt before other industries; but those industries are the ones that grow to be bigger industries in several years. If we lose them today, that would be an issue that increases poverty.”  Covid-19 and vaccination  The experts who spoke with us extensively described the nature of the pandemic’s impacts on the economy and how other countries have faced it. They pointed out that learning to live with the pandemic is crucial to protect the economy and the people’s lives.  De Zilwa added: “The global pandemic has gripped the world for the past one-and-a-half years, and many governments have realised that lockdowns are not the solution for this particular crisis, as it is here to stay for a longer period of time. Governments are now looking for various solutions, and one of the solutions they have adopted is the global vaccination programme, which has already commenced. That is imperative for the global recovery and for normalcy to come back into the economic system. When it comes to Sri Lanka too, it is not very different, as Sri Lanka’s economy too has suffered over the last five years.  “We cannot have lockdowns as a permanent solution. The permanent solution exists with each one of us, because at a micro level, we have to be responsible for our own balance sheets. To do that, I think the first and foremost thing to do is to ensure that each of us go and get vaccinated. We do this for ourselves and for our families. The second thing is to adopt more personal hygiene standards to ensure that we follow the set guidelines and also take care of ourselves. Personal discipline is mandatory.”  Meanwhile, Fernando also shed some light on the pandemic situation, with a focus on vaccination, and urged the people to get vaccinated.  “We have to get ourselves prepared early and the pandemic seems like it is going to continue for some time. So, as far as health-related measures are concerned, we must take whatever precautionary measures we can take in advance. We have to do it right now, without waiting till the last minute.”  Fernando also said that Sri Lanka needs to go for a comprehensive economic reform, and to be ready to face the pandemic. He said that one thing Sri Lanka can learn from other countries is the importance of not relying on one strategy, such as vaccination and lockdowns.  Facing the future As the experts told us, the best way to face the pandemic is learning to live with it, while also adapting newer, long-term measures to achieve it.  Dhananath Fernando explained the importance of not resorting to short-term strategies and paying attention to long-term strategies aimed at empowering the national economy.  “The Government’s strategy, as they have announced, is giving an allowance. Earlier, it was Rs 5,000, and now they have declared an allowance of Rs 2,000. This increases the government expenditure. The Government could manage this situation by adopting what we call in economics ‘quantitative easing’, or the concept of the Central Bank providing money to the Government.  “Many people do not understand that when you add more money into the system, that money will go out of the system in the form of US Dollars, or in terms of foreign reserves. The extra money that the Government gives is being spent on imports, which happens when we buy imported goods. That is one of the reasons why we see a big foreign exchange crunch.”  He described what Sri Lanka can do to ease the economic burden on the people. “Given the nature of this pandemic, I think it is important that we get ourselves prepared for a long-term strategy. The big question is what the long-term strategy should be. Of course, giving allowances, and other things that are similar to allowances, could be one solution. However, there are multiple problems. One of them is that the Government does not have money to give those allowances on a continuous basis, as it already has a large fiscal deficit, and the income and expenditure gap is widening every year.” Fernando noted the importance of establishing a proper digital mechanism as a long-term solution to monitor the subsidies given by the Government. “For example, if the fuel prices are decreasing, ideally, subsidies related to fuel also have to come down. If the fuel prices are increasing, that subsidy should increase. However, according to the current system, a person who receives Rs. 500,000 in monthly income is getting a lower price, while a person who is receiving Rs. 5,000 or Rs. 50,000 in monthly income is also getting the same lower price. That does not really make sense,” Fernando opined.  “As one long-term option, we have to do some digital infrastructure investment. The prices should reflect the market prices. For example, when the global fuel prices go up, there is no way that the Government could provide fuel at a lower price, because we are not manufacturing it. We definitely have to import. When we import, factors such as the US Dollar rate and global market prices have to be considered. That is why I recommend that the Government should consider this digital cash transfer system.” As a second solution to reduce the impact of the economy on the people, Fernando suggested that an unemployment insurance scheme, to which the employer and employee could contribute, should be established. He explained that the authorities should also pay attention to loss-making institutions, as the country is not in a position to support such intuitions anymore. “In terms of other long-term measures, I think there has to be a massive deregulation.  At the same time, the government expenditure and state-owned enterprises’ restructuring has to take place, because now there is a big discussion among the Parliamentarians about donating their salaries to the Covid-19 fund. I think they earn about Rs. 150,000-200,000 as a mere Parliamentarian or a Minister. Altogether, their one month’s salary could be about Rs. 30-40 million.  “However, I can highlight five state-owned enterprises that are suffering billions of losses a month. If you look at SriLankan Airlines, it suffers around Rs. 60 billion losses per year, and the Ceylon Electricity Board suffers another Rs. 60 billion loss. In this context, I think it is very difficult to sustain this economy with relatively minor donations, even though I appreciate Ministers and Parliamentarians taking that initiative. I just wanted to analyse the real impact; according to some theories, generally, 80% of the problems are basically because of 20% of the potential reasons. In Sri Lanka, if we look at that 20%, state-owned enterprises are a big reason. And without having a solid plan and solutions, or a comprehensive economic reform model which involves digitisation, reforms in state-owned enterprises, and reforming regarding monetary policy and fiscal policy, it would be very difficult for us to come out of this economic crisis.” Reviving a collapsed economy is not easy, and as those who spoke with us underscored, newer strategies, zero waste and losses, and also creating a safer environment by getting vaccinated, are equally crucial. Also, when it comes to the Government’s contribution, adopting newer economic strategies, and dealing with squandering of public funds and limiting short-term strategies are important.  


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