Business

The economic horror of another lockdown

By Madhusha Thavapalakumar

The seven-week-long lockdown from late March to early May, as a swift measure to control the local spread of the Covid-19 pandemic, rendered thousands of people unemployed, forced the share market to close its operations, paralysed exports, left small-scale business owners to worry about their next meal, and contracted the economic growth to negative rates in the second quarter of 2020.

After the reopening of the country, the economy was on a slow yet gradual recovery path in the last few months, slowly healing its scars from the previous lockdown, and the country was on track to achieve its revised economic targets. A number of economic indicators were almost fully recovered as they were nearing their pre-pandemic levels, while another set of indicators were recording an impressive recovery.

While a peaceful recovery was on its way, last Sunday (4), Sri Lanka reported a community case of Covid-19 after a gap of six months. Subsequent PCR tests done on the patient’s close contacts detected the Divulapitiya cluster, which, according to health authorities, is more dangerous than the Kandakadu cluster.

With the identification of a large cluster, fears over a possible second lockdown began to emerge amongst the business community of Sri Lanka, which could be dreadful at a time of recovery. This week, The Sunday Morning Business took a look at a number of areas of the Sri Lankan economy and what would be the impact of a second lockdown on them.

(At the time of going to print, curfew was imposed only in selected areas in the Gampaha District)

Terrible timing for exporters

Sri Lanka’s export industry is one of the top three foreign exchange earning sources of the country. According to the Export Development Board (EDB), Sri Lanka is one of the region’s most vibrant export hubs, as it is equally competent in the agriculture, manufacturing, and service sectors despite the dire need of a diversification in its export basket.

Exports took a massive hit following the lockdown in March. Manufacturing facilities could not continue their operations and mobility was strictly prohibited with the exemption of essential services.

Initially, there were also issues in procuring raw materials required for export purposes due to the Government’s early measures to impose stringent bans on all imports. However, later on, raw materials required for local sectors for export purposes were exempted from the ban.

Merchandise export earning figures for March reflected this sudden disruption with only $ 646 million being earned for the month. This was nearly a 42% drop from the $ 1,112 million recorded in March 2019.

As a result of the lockdown, merchandise export earnings recorded a historical Year-Over-Year (YoY) decrease by nearly 64% to $ 277.4 million in April 2020 from $ 772.57 million documented in April 2019, reflecting the impact of the closure of Sri Lanka’s export markets as well as domestic curfew restrictions.

The apparel sector recorded a sharp decline of 82% during the month of April, compared to the same month in the previous year. Other selected sectors that have recorded a significant decline during the same period included tea (-21%), coconut products (-35.2%), rubber products (-53%), food and beverages (-44%), spices (-24%), electronics and electronic components (-63%), petroleum products (-63%), seafood (-72%), and base metal products (-49%).

However, in May, exports managed to bounce back to $ 602 million compared to $ 277 million the previous month. It is also notable that the lockdown was lifted on 11 May and domestic operations began to return to normalcy soon after.

Earnings from exports rebounded further in the following month as $ 906.02 million exports were achieved in June, indicating a recovery of both domestic and global supply and demand chains to some extent. In July, Sri Lanka’s exports surpassed the $ 1 billion mark after six months.

The achievement was attributed by the EDB to Sri Lanka’s strategic location, its reliable manufacturing and export base, and proactive and rapid action taken by the Sri Lankan Government to control Covid-19. However, Sri Lanka’s exports during the month of August 2020 recorded a dip of 19.2% to $ 947.7 million, as compared to the value of $ 1,033.3 million recorded during the same month last year, according to the EDB. However, despite the slight dip in August, exports are largely on track to achieve the revised export target of $ 10.75 billion in 2020.

At a time when an impressive recovery is being made in one of the most important sectors of the economy, a second lockdown would be disastrous, National Chamber of Exporters (NCE) Immediate Past President Ramal Jasinghe said.

Speaking to The Sunday Morning Business, he stated that a second lockdown would be very serious as Sri Lanka’s exports are on a recovery path and have already entered into the new market post the first lockdown.

“Lockdown at this stage would be damaging for our country, as we are in the fourth quarter of the year. We have targets to achieve,” Jasinghe added.

He further noted that using the lessons learned from the initial lockdown, Sri Lanka should adopt better policies while taking necessary precautions to effectively control and cure the new cluster.

Retailers are not too worried

Even though Sri Lanka had a seven-week-long lockdown, all districts apart from three districts that were considered as high-risk areas eased curfew restrictions once or twice a week for the general public to purchase essential items. On this day, supermarkets, pharmacies, and other essential service providers opened their services to the general public.

In addition to this, a considerable number of people, particularly those who live in urban areas, managed to get essential items by shopping online. However, this moderate activity in the retail sector was limited only for pharmaceuticals and groceries, while other areas of retail such as electronics, furniture, and clothing remained somewhat sluggish.

However, the Sri Lanka Retailers’ Association (SLRA) believes that if we are to go for a second blanket lockdown, the lessons we learned from the first lockdown would make sure that other areas of the retail sector too would perform as usual during the lockdown.

SLRA Founder Chairman Hussain Sadique told The Sunday Morning Business that if the health authorities decide to go for a lockdown, it would be shorter and better than the previous one.

“Last time, the retail performance was mainly on groceries and pharmaceutical areas, but this time we are expecting performance across all sectors of the retail industry, if we are going into a lockdown, and certainly this lockdown would not be the same as the previous one,” Sadique added.

Speaking further, he noted that Sri Lanka is not in a financially stable position to afford another lockdown, but nevertheless, if we are in a situation to go for another lockdown, we should not hesitate to do that as safety should be the primary concern of the Government.

Noting that living with Covid-19 would be the new normal, he emphasised the importance of following pandemic guidelines to protect ourselves from the virus.

“The Government is prepared in terms of healthcare and safety measures as they were expecting another wave. So hopefully, this cluster too will be controlled,” Sadique added.

MSMEs hoping worse won’t come to worst

Micro, small, and medium-sized enterprises (MSMEs) make up a large part of the Sri Lankan economy, accounting for 80% of all businesses, according to the National Human Resources and Employment Policy. MSMEs are in all sectors of the economy and provide employment for skilled, semi-skilled, unskilled, and differently skilled people. MSMEs are an essential source of employment opportunities and are estimated to contribute about 35% of employment. In the service sector, SMEs accounts for more than 90% of business establishments. It is estimated that MSMEs contribute 52% to the GDP and are considered as the backbone of the economy.

According to a report done by the United Nations (UN), titled “Impact of Covid-19 to the MSME Sector in Sri Lanka”, with the local outbreak of the virus in March, most of the economic activities were badly affected, causing the MSMEs to undergo severe hardships. The daily wage earners were the most affected.

Although the agricultural sector was permitted to carry out their activities even during the lockdown, other sectors were mostly paralysed during the period. For example, in terms of the apparel sector, most of the SMEs in the sector depend on fabrics and accessories supplied from China and the disruption of the supply chain affected them severely.

The micro-level garment manufacturers also obtain their raw material from wholesale agents who import the items in bulk, mainly from China and India, and the breakdown of their supply chain added with the restrictions imposed by the curfew made them almost inactive.

In addition, the majority of the MSMEs faced working capital problems as they did not receive payments for goods supplied. The price escalation of raw materials due to limited availability also affected their operations.

Nevertheless, with a number of financial assistance initiatives from the Government, MSMEs began to show signs of recovery in the past couple of weeks, while a few of them managed to even reach the pre-pandemic levels. At a time like this, consequences of imposing another lockdown would be hard to even imagine, according to the Colombo Chamber of Commerce (CCC).

“Going for another lockdown is completely dependent on the decision of the health authorities, but this would be a bad time to go into a second lockdown as businesses are slowly recovering,” CCC President Saranga Wijeyarathne noted.

He added that businesses have been showing impressive signs of recovery in the past four to six weeks and in September, some of the businesses managed to achieve a turnover, better than that of before the initial lockdown.

According to him, against this backdrop, another lockdown would certainly act as an impediment to this recovery process and will possibly make the process sluggish, delaying it by months or even years.

In addition to this, another severe impact of a possible lockdown would be settling bank loans and payments. Wijeyarathne stated that most of the financial assistance given to the businesses by the Government are expired while the rest is reaching its expiration in the near future.

“This means that businesses have to start paying their loans. If businesses remain open, they can afford to pay these loans again somehow. But if there is a lockdown coming in, it would be hard for them to settle these loans,” he stated.

Speaking further, he stated that India too went for a blanket lockdown initially, deadlocking all of its economic activities, but after a certain point, the Indian Government decided to open its economy partially as it is impractical for a country to close economic activities completely.

“Opening the economy has its own positive and negative impacts. The pPositive impact is that the economy is somewhat performing. In terms of health, opening the economy could not be the best thing to do. But Sri Lanka is a much smaller country and more educated than them. So the authorities have to compulsorily make the general public adhere to health guidelines,” he added.

Wijeyarathne believes that if health guidelines are followed accordingly, there would not be a need to go for another lockdown as going for one would cost significantly to the economy.

Meanwhile, the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) too expressed similar views, speaking to The Sunday Morning Business. FCCISL President Shirley Jayawardena stated that there would not be a need to go for another lockdown as the health authorities are capable of controlling the new Covid-19 cluster like they did with the Navy cluster.

“We hope that there will not be a stage to go for another lockdown. But if we are to go for one, we should not hesitate to do so. All we can do is to learn to live with it with adequate precautions,” she stated.

A knockout punch for tourism

It might not be wrong to say that tourism is the most affected sector from the ongoing pandemic. Sri Lanka, a tropical tourism destination that depends on tourism earnings for a large portion of its foreign exchange earnings, is yet to see international tourism on the island.

According to the aforementioned UN report, there are about 3,926 establishments catering to tourism and they directly employ a total of 169,903 people while indirectly employing about 219,484 people. The entire group is severely affected by the pandemic.

The income from the tourism industry recorded $ 3.59 billion in 2019 compared to $ 4.38 billion (4.9% to GDP) in 2018, a drop of $ 0.79 billion mainly due to the Easter Sunday attacks.

Nevertheless, Sri Lanka targeted to have a greater year ahead in terms of tourism and a further recovery in tourist arrivals. The country set a target of four million tourist arrivals for 2020. However, amidst crippled international tourism, particularly in the Asian region due to the coronavirus outbreak and its global spread, in early March this year, Sri Lanka revised this target to 2.3 million.

Nevertheless, days after this, Sri Lanka identified the first national case of Covid-19 on 10 March and this led to the closure of the Bandaranaike International Airport (BIA), effectively bringing the tourism to zero levels a week later.

The BIA was initially scheduled to reopen on 1 August this year and this was moved to mid-August following a surge in local Covid-19 cases. The date was once again pushed back to September after identifying several Covid-19 clusters within the country. The Government is yet to announce a date on when the airport will be open to international travellers.

Nevertheless, following the lifting of the lockdown in May, hotels and tourist establishments were getting business from local travellers. Even though the number of local travellers does not match the international tourists, local tourism was some sort of a relief for the owners of these hotels to keep their businesses up and running with a glimmer of hope.

Against this backdrop, if Sri Lanka is going for another lockdown, it would bring local tourism too to zero, worsening the financial troubles of hotel owners, said The Hotels Association of Sri Lanka (THASL) President Sanath Ukwatte.

“Already the industry is in a dangerous situation right now and it is hardly surviving. Even the local tourism accounts for about 20% of the overall tourism we were getting before the pandemic,” Ukwatte added.

He emphasised the need to create a balance between opening the country for tourism while effectively mitigating the Covid-19 situation within the country.

Lockdown or not, CSE could carry on

The Colombo Stock Exchange (CSE) crashed on Monday (5), a day after the discovery of the Minuwangoda Covid cluster, with the ASPI (All-Share Price Index) recording the biggest-ever drop of 5,587.18 points falling by 462.99 points on Monday, which led to the suspension of trading twice that day. However, it recovered significantly from Wednesday (7) onwards, with local bargain hunters coming to its rescue. Foreigners sold over Rs. 1 billion worth of shares on Wednesday and will almost certainly remain on the sell side until the local Covid situation settles down, and possibly even after. However, the CSE may remain in the green this week due to local investor participation.

The market was closed for trading in the last two weeks of March, after the S&P SL20 Index, which includes the 20 largest companies by total market capitalisation listed on the CSE, dropped by 5% several times, triggering 30-minute halts in regular trading during the week that began on 16 March, a couple of days after the first case of Covid-19 in a Sri Lankan national.

The following week, it remained closed for four days with the Government declaring holidays. It was opened on 20 March, only to close shortly after opening. Since then, the CSE remained closed until 11 May, effectively not recording any flows into or out of the CSE.

Before opening for trading on 11 May, the CSE installed a new system under which the market would automatically close for the day if the S&P SL20 Index dropped by 10% or more. The week from 11 May to 15 May saw a number of trading halts, and Rs. 1.5 billion in foreign inflow was reported during the week while Rs. 5 billion in outflow was reported in the same period. Overall, Rs. 3.5 billion in net foreign outflow was reported during this particular week.

Meanwhile, at the end of the second week after reopening, foreigners bought stocks worth Rs. 1.6 billion, an improvement compared to the first week, while they sold stocks worth Rs. 1.5 billion compared to Rs. 5 billion the previous week.

During the third week after the reopening of the CSE, foreign purchases witnessed a drop compared to the week prior, as it was reported at Rs. 593.1 million, while shares sold by foreigners hiked to Rs. 3.9 billion that same week.

In June, net foreign outflows were Rs. 8.6 billion and this reduced to Rs. 3.3 billion the following month. However, the following month, which is August, the net foreign outflows shot up to Rs. 8.06 billion.

Nevertheless, in September, showing an impressive recovery after the initial lockdown, the CSE was identified as the best performing exchange in the world in the month of September.

Issuing a statement on the achievement, CSE Chairman Dumith Fernando stated that the continued low interest rate environment has led to more financial assets being moved from low-yielding fixed income assets into the share market, and we expect that to continue into the coming months.

However, Fernando told The Sunday Morning Business that if Sri Lanka is to go for another lockdown, the CSE is prepared to operate even during the lockdown, unlike the previous time.

“At that time, the market was not ready to operate without people in their offices. This time, the CSE and stock broker firms are prepared to operate even during a curfew,” he added.

Subsequently, the Securities and Exchange Commission (SEC) too confirmed to us that there would not be a market closure even if there was a lockdown or curfew in Colombo.

Conclusion

Based on the comments we have received for this article, it is apparent that a second lockdown at a time when the economy is showing signs of recovery would damage the recovery process as a large part of the economy may not operate during the lockdown. As the above officials noted, it is imperative to adhere to health guidelines while also keeping the economy up and running, given the fact that our country clearly cannot afford another long national lockdown.