The disease that has pervaded economies
- How will we deal with the knock-on effects of Covid-19?
By Dr. M.P.N. Janadari
Covid-19 is spreading with alarming speed, infecting millions of people and deteriorating their ability to survive as healthy individuals. As of now, over 196 million cases have been reported so far, with close to 4.2 million deaths. Even though the recovery count was recorded at 177 million, most patients are being affected repeatedly during the recurring waves.
Many economies around the globe have been affected negatively, worsening their ability to contribute to the country’s productivity. The damage that occurred was primarily driven by a fall in demand, followed by lower ability of the consumers to buy goods and services available in the global economy. With the travel restrictions governments have imposed to restrict the spread of the virus, many value-adding activities unfortunately came to an end.
While there is no way to exactly gauge the economic damage of this global pandemic, there is widespread agreement among economists that it will have severe negative impacts on the global economy. It is evident that the pandemic has created the largest economic shock for all the nations around the globe. While it is vital to keep the health factor at the top of our priority, it is also essential to think about whether the travel restrictions should be implemented further, or reintroduced. In such a situation, businesses might find it hard to ensure their survival because of the high level of risk aversion, which increases borrowing costs.
As a result, many nations have faced, and will have to face, many bankruptcies and defaults pertaining to organisations, which will ultimately lead nations to experience severe financial crises. World statistics indicate that a 5.2% contraction can be seen in global GDP in 2020. The global stock market has also been negatively affected due to this situation. Oil prices and oil demand can be identified as another important indicator of the adverse impact on the global economy, since many nations are being fuelled to strengthen their competitive advantage over others.
Furthermore, according to the facts revealed by the International Labour Organisation (ILO), a 6.7% loss of labour hours could be seen, especially in the second quarter of 2020. In China, the country with the largest population, and which recorded the first case of Covid-19, about 5 million people lost their jobs, damaging the standard of living.
Moreover, our neighbour India experienced widespread unemployment, with tens of millions of migrant workers unemployed. The global impact has also created many adverse effects on the regional level, and then on the country level. As a developing nation, everybody hoped that the landscape of Sri Lanka would be revamped with a new political direction. However, Covid-19 has created many more challenges for Sri Lanka as well.
Some experts predicted that the threat could not be tolerated for a country like Sri Lanka with its existing resource base. It was stated that in the Sri Lankan context, the pandemic has profoundly impacted almost all sectors, especially the economy, with the potential for further impact extremely high. In recent years, many crises shock Sri Lanka to its foundation, especially terrorism-related incidents, with the most recent being the Easter Sunday attacks.
After enduring all these, the Covid-19 pandemic emerged as an unexpected, worldwide crisis. The unparalleled threat it poses to both public health and national economies, as mentioned, is exacerbated for Sri Lanka. The travel restrictions created so many barriers for people in business, especially within the local context.
On top of that, most businesses that rely on international trade were negatively affected. Most of them implemented voluntary retirement schemes to minimise the heavy labour cost, creating a high level of unemployment in the country. All of these challenges have been a hindrance to the performance and productivity of economies. As a result, governments and policymakers face huge challenges in the form of liquidity crises, employment layoffs, disturbances to international trade, and bans on travel and tourism.
When we look at the recent statistical figures, with this existing situation, the Sri Lankan economy has contracted by 3.6% in 2020. The most adverse problem is that the job cutbacks and earning losses created significant disruption to private consumption and investment. In addition, the figures show that in 2018, government revenue was recorded as Rs. 1.9 trillion, which represents 13.3% of the country’s GDP. However, there was a significant loss of approximately 2% of GDP regarding government revenue.
The effects of the pandemic were also visible in the unemployment rate as well. Compared to the previous year’s rate of 4.8%, the unemployment rate shot up to 5.5% in 2020. It has been mentioned that, during 2020, there was meagre core inflation in the country, where the headline inflation remained in the range of 4-6%.
It was apparent that the Sri Lankan economy contracted during the last couple of months primarily because of the pandemic, and many different sectors in Sri Lanka have also been affected negatively.
As a nation, enhancing resilience in the face of unprecedented uncertainty is imperative. However, it was noted that there was a considerable level of resilience in Sri Lanka’s external sector. It was revealed that, even though the merchandise exports showed a significant decrease in 2020, it recovered very fast during the pandemic by the end of the same year.
Some records indicate that a considerable number of order cancellations occurred, severely affecting industries. Because of this, it was predicted that a huge amount of revenue loss would occur. In addition, mainly because of the closure of many countries, especially during the first and second waves, the imports of raw material for the apparel sector declined.
The country is still suffering primarily because of the lack of availability of consumer durables and electronics. The worst situation is that the price level of the existing related goods has been increasing at a mounting speed. However, the retail activities for certain items other than food still have a stoppage.
For the most part, Sri Lanka imports mainly from China. Yet, it has some other significant market players, as Malaysia and Thailand also rely too on China. Thus, when it comes to importing certain raw materials and especially for durable and non-durable retail goods, the situation has been affected negatively.
The fiscal sector has also been affected by the pandemic, even though the Government wanted to stimulate a stagnant economy. According to the Central Bank report’s statistical figures, there was a significant decrease in the Government revenue as a percentage of GDP, from 12.6% in 2019 to 9.1% in 2020. This happened due to the sharp decline in tax revenue collection in the country. When it comes to expenditure, the net lending and total expenditure were recorded as 20.3% of GDP in 2020, compared to 22.2% in 2019.
Banking and Financial Sector
The financial sector is considered a factor that strengthens the whole economy in any country. Not only in Sri Lanka, but also in every other nation, the financial sector has been negatively affected. When it comes to the policy reductions in the country, it was stated that the SDFR and SLFR have been reduced by up to 6% and 7%, respectively, during the pandemic, which was identified as the second reduction reported. There was a high level of contribution visible from the banking sector. Most people tend to accept more loan facilities due to many different reasons.
As a multifaceted and dynamic industry that is subject to many inevitable changes, the tourism industry serves as one of the leading factors contributing to socioeconomic development. There is a considerable decline that could be seen when it comes to the total earnings of the tourism sector. Foreign tourism, and even local tourism, has been affected negatively because of the pandemic, due to health risks and the restrictions imposed by the Government.
In the last couple of months, there was a significant decline in arrivals due to lockdowns and cross-border restrictions imposed in various countries. When we consider the most recent issues within the country, starting from the Easter attack on 21 April 2019 to the Covid-19 pandemic, the tourism sector has proven vulnerable to external threats. An 18.0% drop could be seen when it comes to the arrivals of tourists to the country.
Even though the Government undertook so many proactive measures to lessen the negative impacts of Covid-19, it also quickly scaled up all containment measures. One of the primary income sources for the country was through energising the tourism sector.
However, the Government unfortunately had to suspend tourism arrivals. Regardless of the relief that can be experienced with the physical policy of the country, many resources were allocated to this sector from the GDP, which is approximately 0.7%, significantly to strengthen the health sector, while postponing tax payments.
In addition, herein, it is also essential to focus on the risks and challenges in Sri Lanka. Still, a considerable delay can be seen when it comes to the vaccination process. Most small and medium-scale businesses were pushed to bankruptcy due to illiquidity. Macroeconomic stability was affected negatively as well, due to additional strain on public finances. The country cannot settle down its debt, indicating that there is a fiscal risk that the country should focus on.
However, the favourable aspect is that as a very small but strategically located country, sustainable development should be facilitated further by possessing an export-oriented and private-investment-led growth model. Such a favourable atmosphere should be supported by some important measures for the knowledge economy.
A few of those support measures are encouraging a platform that nurtures and facilitates public-private partnership, investing more to develop the tourism sector’s infrastructure, and enhancing the capacity of local industries to go hand in hand with technology, while introducing them to the global value chain.
This is a critical situation. Keeping the health factor on top of the list, we have to think about economic productivity. A weak economy cannot look after its more minor elements. Thus, strengthening the economy is critical, as it is the backbone of any nation. Even though Covid-19 has created many challenges, there are still many opportunities as well.
We should be capable enough of grabbing such opportunities strategically, while striving to minimise the threats. Many entrepreneurs are coming up, and it is the Government’s responsibility to show them the correct path. In the future, many job opportunities will be created through this. We will be able to solve all the matters that we are facing in time – let’s keep that hope up, as a nation.
(The writer is the Head of the Department of Human Resource Management and Senior Lecturer at Faculty of Commerce and Management Studies at the University of Kelaniya)