As the vaccination drive kicks in, there seems to be a notable reduction in the daily number of Covid cases being recorded, which must surely come as a relief to the Government in general and health authorities in particular.
What 
is, however, cause for concern is that the number of recorded deaths is now closing in on 500, averaging 90-plus deaths per month since last October and showing no signs of easing, leading to the question, are authorities gradually applying the brakes to its testing efforts while the vaccination programme continues to expand amidst accusations of disorder and chaos in selecting recipients?
Sooner rather than later, however, the reducing case load post vaccination will inevitably see the spotlight change from Covid control to economic recovery. The Government seems a tad slow off the blocks in that regard, with no sign of an overarching economic stimulus plan as yet. So far, its economic impact mitigatory measures have been limited to a few selected sectors that have borne the brunt of the lockdown followed by stringent health guidelines. So far, it has been a case of ad hoc assistance akin to providing milk to the crying baby. No crying, no milk.
It is also of paramount importance that the Government does not lose sight of the Covid mitigatory measures already in place on the back of the vaccination drive, purely due to the fact that any let up in that effort, by taking the foot off the pedal, could prove regressive. Therefore, it is of utmost importance that until such time that the vast majority of the population is vaccinated, the status quo on heath restrictions should prevail, as any let up could result in a relapse of the pandemic, as already witnessed in many parts of the world. Given the present precarious economic situation, it is the last thing that Sri Lanka can afford.
As things stand, the top priority for the Treasury is to cough up funds to repay debts amounting to around $ 4.5 billion due this year in a scenario where the country’s foreign reserves have dwindled to under $ 5 billion, making both the financial markets as well as rating agencies quite jittery.
It is being speculated that some of these concerns have rubbed off on the performance of the Colombo Stock Exchange (CSE), which has seen a major reversal in fortunes since the beginning of February, with the current bear run likely to continue for some time, until at least the anticipated Chinese funds are secured to bolster foreign reserves to a relatively more comfortable position.
The Government has gone on record that it prefers Chinese funding as opposed to an International Monetary Fund (IMF) bailout, which, for all intents and purposes, is off the table for now. The Bretton Woods twin is usually viewed as the lender of last resort and the Government has done well to keep it that way by exploring other available options even though it appears that the choice is limited to just one at present. Given the well-known, exploitative nature of that lender, as opposed to what may seem as the cumbersome operative framework of an IMF facility, the Government will have to think long and hard as to which way it should turn. However, as of Friday (5), the Government seemed to have made its choice, announcing that China had agreed to a $ 500 loan and a 2 billion yuan currency swap agreement with Sri Lanka that is to be inked in the next couple of weeks.
Also, on Friday, the Central Bank announced that it is maintaining current lending rates in order to further consolidate its credit expansion policy. It is hoped that the Central Bank’s emphasis on maintaining a low interest regime will result in lending institutions expanding credit coverage to sectors that seem to be performing well as well as to lend a helping hand to those sectors seeking a lifeline. On the other end of the spectrum are those that depend on interest income for a living, who have veritably been thrown from the frying pan into the fire.
An indication that the credit policy may be bearing fruit lies in the export data that was released last week for the month of February, which shows export revenue crossing the $ 1 billion mark for the first time since the second wave of the Covid pandemic hit last October. Furthermore, export revenue during the month has shown a marginal increase compared to the $ 988 million earned in February last year, indicating that recovery is underway.
Another prime indicator that the economy is on the mend is the fact that despite the significant tax cuts announced in 2019, namely the reductions in corporate tax from 28% to 24% and manufacturing taxes from 28% to 18%, both corporate and manufacturing tax revenue had increased in 2020 as opposed to the previous year despite the Covid drawbacks. However, it is likely that the import ban announced in 2020 had a direct impact on increasing local manufacturing, leading to higher production and thereby a higher volume of taxation, but its sustainability may depend on the continuity of import restrictions, which seems unlikely in the long term.
The other big revenue earner that is slowly but steadily opening up post Covid is the tourism sector. However, it needs to be kept in mind that whatever the economic compulsions may be, the health restrictions currently in place should not be eased until such time there is assurance that not only industry stakeholders but also the greater majority of the population is vaccinated. Opening too fast too soon could reverse the gains already made, in a matter of days. Therefore, it is important that the tourism authorities do not get carried away with the $ 56 million marketing budget that has been allocated for a global marketing campaign over a five-year period, by strategically pacing it out.
In the post-Covid world, it is essential that tourism authorities focus more on quality rather than quantity, and first attract high spenders followed later by budget end backpackers. In order to achieve this, the state tourism entity may have to recalibrate its marketing efforts by first reaching out to what it already considers mature markets such as countries in Western Europe as opposed to its focus on emerging markets that comprise East European countries that are economically less well off. If the authorities stick to the script, its target of $ 1.5 billion in tourism receipts could be achieved in a Covid-safe environment this year.
Be that as it may, the Government must not discount or lose cognisance of the fact that the outcome of the United Nations Human Rights Council (UNHRC) sessions currently underway will have a formidable impact on economic activity in the mid to long term. The euphoria of winning the battle may be short-lived, given that the war may be lost should access to export markets, most notably via the Generalised Scheme of Preferences (GSP) concessions, be hindered in any way as witnessed in the past. Therefore, it is of paramount importance that the Government’s representatives at the table keep in mind the extent of what is at stake, given that loss of markets ultimately means loss of jobs and thereby a direct hit on already struggling local economies, apart from the larger stake at play.
Even though Sri Lanka is likely to see an estimated average GDP growth of 4-5% over the next few years, its debt-to-GDP ratio that is now at 100% and likely to rise further in the next few years, will require clinical navigation of the stormy waters that lie ahead. Whether the Government would be up to the task, only time will tell.
is, however, cause for concern is that the number of recorded deaths is now closing in on 500, averaging 90-plus deaths per month since last October and showing no signs of easing, leading to the question, are authorities gradually applying the brakes to its testing efforts while the vaccination programme continues to expand amidst accusations of disorder and chaos in selecting recipients?
Sooner rather than later, however, the reducing case load post vaccination will inevitably see the spotlight change from Covid control to economic recovery. The Government seems a tad slow off the blocks in that regard, with no sign of an overarching economic stimulus plan as yet. So far, its economic impact mitigatory measures have been limited to a few selected sectors that have borne the brunt of the lockdown followed by stringent health guidelines. So far, it has been a case of ad hoc assistance akin to providing milk to the crying baby. No crying, no milk.
It is also of paramount importance that the Government does not lose sight of the Covid mitigatory measures already in place on the back of the vaccination drive, purely due to the fact that any let up in that effort, by taking the foot off the pedal, could prove regressive. Therefore, it is of utmost importance that until such time that the vast majority of the population is vaccinated, the status quo on heath restrictions should prevail, as any let up could result in a relapse of the pandemic, as already witnessed in many parts of the world. Given the present precarious economic situation, it is the last thing that Sri Lanka can afford.
As things stand, the top priority for the Treasury is to cough up funds to repay debts amounting to around $ 4.5 billion due this year in a scenario where the country’s foreign reserves have dwindled to under $ 5 billion, making both the financial markets as well as rating agencies quite jittery.
It is being speculated that some of these concerns have rubbed off on the performance of the Colombo Stock Exchange (CSE), which has seen a major reversal in fortunes since the beginning of February, with the current bear run likely to continue for some time, until at least the anticipated Chinese funds are secured to bolster foreign reserves to a relatively more comfortable position.
The Government has gone on record that it prefers Chinese funding as opposed to an International Monetary Fund (IMF) bailout, which, for all intents and purposes, is off the table for now. The Bretton Woods twin is usually viewed as the lender of last resort and the Government has done well to keep it that way by exploring other available options even though it appears that the choice is limited to just one at present. Given the well-known, exploitative nature of that lender, as opposed to what may seem as the cumbersome operative framework of an IMF facility, the Government will have to think long and hard as to which way it should turn. However, as of Friday (5), the Government seemed to have made its choice, announcing that China had agreed to a $ 500 loan and a 2 billion yuan currency swap agreement with Sri Lanka that is to be inked in the next couple of weeks.
Also, on Friday, the Central Bank announced that it is maintaining current lending rates in order to further consolidate its credit expansion policy. It is hoped that the Central Bank’s emphasis on maintaining a low interest regime will result in lending institutions expanding credit coverage to sectors that seem to be performing well as well as to lend a helping hand to those sectors seeking a lifeline. On the other end of the spectrum are those that depend on interest income for a living, who have veritably been thrown from the frying pan into the fire.
An indication that the credit policy may be bearing fruit lies in the export data that was released last week for the month of February, which shows export revenue crossing the $ 1 billion mark for the first time since the second wave of the Covid pandemic hit last October. Furthermore, export revenue during the month has shown a marginal increase compared to the $ 988 million earned in February last year, indicating that recovery is underway.
Another prime indicator that the economy is on the mend is the fact that despite the significant tax cuts announced in 2019, namely the reductions in corporate tax from 28% to 24% and manufacturing taxes from 28% to 18%, both corporate and manufacturing tax revenue had increased in 2020 as opposed to the previous year despite the Covid drawbacks. However, it is likely that the import ban announced in 2020 had a direct impact on increasing local manufacturing, leading to higher production and thereby a higher volume of taxation, but its sustainability may depend on the continuity of import restrictions, which seems unlikely in the long term.
The other big revenue earner that is slowly but steadily opening up post Covid is the tourism sector. However, it needs to be kept in mind that whatever the economic compulsions may be, the health restrictions currently in place should not be eased until such time there is assurance that not only industry stakeholders but also the greater majority of the population is vaccinated. Opening too fast too soon could reverse the gains already made, in a matter of days. Therefore, it is important that the tourism authorities do not get carried away with the $ 56 million marketing budget that has been allocated for a global marketing campaign over a five-year period, by strategically pacing it out.
In the post-Covid world, it is essential that tourism authorities focus more on quality rather than quantity, and first attract high spenders followed later by budget end backpackers. In order to achieve this, the state tourism entity may have to recalibrate its marketing efforts by first reaching out to what it already considers mature markets such as countries in Western Europe as opposed to its focus on emerging markets that comprise East European countries that are economically less well off. If the authorities stick to the script, its target of $ 1.5 billion in tourism receipts could be achieved in a Covid-safe environment this year.
Be that as it may, the Government must not discount or lose cognisance of the fact that the outcome of the United Nations Human Rights Council (UNHRC) sessions currently underway will have a formidable impact on economic activity in the mid to long term. The euphoria of winning the battle may be short-lived, given that the war may be lost should access to export markets, most notably via the Generalised Scheme of Preferences (GSP) concessions, be hindered in any way as witnessed in the past. Therefore, it is of paramount importance that the Government’s representatives at the table keep in mind the extent of what is at stake, given that loss of markets ultimately means loss of jobs and thereby a direct hit on already struggling local economies, apart from the larger stake at play.
Even though Sri Lanka is likely to see an estimated average GDP growth of 4-5% over the next few years, its debt-to-GDP ratio that is now at 100% and likely to rise further in the next few years, will require clinical navigation of the stormy waters that lie ahead. Whether the Government would be up to the task, only time will tell.