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SL can emerge stronger than neighbours: Hans Timmer

02 Feb 2022

  • World Bank Chief Economist for South Asia highlights two focus sectors 
  • Digital technology expected to assist in recovery journey
BY Shenal Fernando Speaking at Sri Lanka Growth Strategy 2022 hosted by NextGenSL and the World Bank on 31 January, World Bank Chief Economist – South Asia Region Hans Timmer stated that due to the structural changes that took place in the economy due to the Covid-19 pandemic, Sri Lanka has the opportunity to come out of the Covid-19 crisis stronger in comparison to its South Asian neighbours. Explaining further, he stated that Sri Lanka should focus on two areas; the opportunities in the informal sector and the opportunities in the new service economy. According to Timmer, the informal sector was hit disproportionately harder by the Covid-19 crisis, which is atypical when compared to a normal economic crisis. Normally, the informal sector functions in the shadows and in services sectors, which are not sensitive to economic developments. “However, the Covid crisis hit the services sector, and in the informal sector, it wasn’t possible to socially distance, and the people working in the informal sector were vulnerable because they didn’t have any buffers and no social insurance. The informal sector was vulnerable because they were not well integrated into the market and had little to no access to credit, and due to low productivity,” stated Timmer. He further explained the economic system of the country, in that Timmer described Sri Lanka as a dual economy where a group of well-protected and well-connected insiders dominate the formal sector, whereas the informal sector is made up of a large group of outsiders with limited access to credit markets. This has, Timmer claimed, prevented Sri Lanka from growing faster. However, he claimed that the Covid-19 crisis can change this system in Sri Lanka due to the rise of digital technology which has provided informal workers and firms greater access to markets and financing. He supported this claim by pointing to the success oDesk (now known as Upwork) has enjoyed in Sri Lanka by providing a digital platform for small firms to offer their services to the international markets. In addition, he also noted PickMe as an example which has started providing a service where female drivers can offer their services for female customers. He further recognised that there have been a lot of developments in Fintech providing smaller companies access to capital. Therefore, he opined that there is a huge opportunity right now in Sri Lanka to unleash the potential of the informal sector which was never explored until now and believes that it will be a game-changer for the country and the region. Commenting on the second opportunity available to Sri Lanka, i.e. the new service economy opportunities, Timmer stated that globally, the role of services in the economy is dramatically changing. Previously, particularly in middle-income countries, the manufacturing industry was the key element in economic development, because it is manufacturing that aids exportation, and the products produced could be used in other sectors to increase productivity. “However, now it appears that the services industry has taken up that role and services are increasingly internationally tradable and they play a key role in pushing productivity of other sectors through information technology, digital platforms, and all other new services available,” noted Timmer. According to him, this new service economy represents a significant opportunity for Sri Lanka because Sri Lanka already has a competitive advantage in services. The services industry of Sri Lanka, as a share of gross domestic product (GDP), is already larger than any other countries in the region. He further highlighted that Sri Lanka already has the highest share of service workers in the manufacturing industry and that female labour participation in the services industry is quite high and has increased to around 50% of the total labour force in the service industry. That level of female labour participation is twice as high compared to other parts in the South Asian region, claimed Timmer. He further opined that if Sri Lanka successfully capitalises on these two opportunities, the resulting new sources of growth, whether in the informal sector or in new services, will ultimately lead to expansion of the tax base. Moving on, Timmer also commented on Sri Lanka’s policy response to the pandemic, noting: “Policy response for Covid is very different from a normal economic downturn; first of all, this was and this is a supply shock, not a demand shock – that means pure stimulus doesn’t help. It starts with closing of part of the economy and disruption in global supply chains, but then it continues because some firms don’t survive, demand has shifted, and the economy has to adjust to that. The cost of production is up under the measures of the pandemic and as a result, you see in Sri Lanka, and across the world, inflationary pressures. Another illustration that this crisis was different, is the fact that the constriction of consumption was even larger than contraction in production and that is very atypical because normally consumption will be squeezed out over time.” Commenting on Sri Lanka’s policy of increased social welfare expenditure and increase in credit supply in response to Covid-19, Timmer stated that Covid-19 was a crisis where navigating the policy response wasn’t easy because purely relying on stimulus measures wasn’t possible. Instead, relief efforts aimed at helping households that had lost their income or to help companies survive the crisis period were required. According to him, initially, such policy measures were implemented in an environment where the global monetary policy was very loose so it was easy to organise these support measures. However, according to Timmer, when taking Sri Lanka into consideration, the sustenance of such measures was very difficult due to the country’s decade-long twin deficits. Furthermore, globally, monetary policy started tightening and commodity prices started going up; hence, Timmer opined that consequently, this policy resulted in a balance of payment (BOP) problem for Sri Lanka.  However, he further asserted that Sri Lanka’s BOP problems and fiscal challenges did not originate overnight and that it took many decades to arrive at this position. Therefore, he noted that similarly, they cannot be resolved overnight and hence, it is important that short-term interventions are firmly grounded in a long-term strategy. On a concluding note, Timmer stated: “It is important to recognise that this is not a short-lived demand crisis and adjustments are not painless. If I had to give some guiding principles, I would say to focus on long-term sustainability, focus on equity, and focus on adjusting to new demands and not just on supporting old production.”


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