Nisha Arunatilake
On Easter Sunday last year, Sri Lanka was shocked by a series of bomb attacks. The security concerns that followed kept people home and curtailed economic activities.
Less than a year later, the country is again under curfew for a different reason. A new disease, COVID-19, which first emerged in the city of Wuhan in China, in December 2019, is fast spreading across the world. With no known treatment or vaccine for the disease, the only means of containing its spread is large-scale social distancing, isolating patients, and quarantining those who have been exposed to the virus.
By March 2020, health systems across the world were struggling to cope up with the rapidly increasing number of COVID-19 cases. The Sri Lankan government, too, put several measures in place to contain the spread of the disease, starting from 12 March 2020. Schools closed early for April holidays and employees were asked to work from home. This was followed by an all-island curfew from mid-March. In addition, the country's main airports were closed for arrivals from 22 March, to prevent imported COVID-19 cases which is the main source of outbreaks in Sri Lanka.
Unlike the Easter Sunday attacks, COVID-19 is not only affecting Sri Lanka. Its effect is felt by almost all countries across the world. The economic impact of this on Sri Lanka will not only be influenced by what is happening in the country, but also by how the disease is affecting global values chains, markets, and the movement of goods and people across the world.
With the COVID-19 pandemic still unfolding, it is too early to estimate the economic impact of the crisis. This blog compares the economic impact of the Easter Sunday attacks to illustrate the likely impact of COVID-19 on Sri Lanka's economy.
Manufacturing Sector
The pandemic began affecting Sri Lanka's manufacturing sector, even before the number of COVID-19 patients started increasing in the country. The Purchasing Managers' Index (PMI), which takes values between 0 and 100, indicates whether the manufacturing sector is expanding or slowing down, as viewed by business managers. A value above 50 indicate an expansion, while a value below 50 indicates a contraction. The manufacturing sector activities, which were on an expansionary phase in January (with a PMI value of 54.5) started slowing down in February, with weakening demand, reduced supply of essential raw materials, as well as longer time taken to receive raw materials from countries such as China, which were affected by the COVID-19 from January onwards. The government’s COVID-19 containment efforts also included closing factories which bring together large numbers of workers. The recent closure of export industrial zones is an example.
The Easter Sunday attacks last April saw the manufacturing sector slowing down sharply (Figure 1). The PMI moved from a healthy 66.9 points in March to 41.0 in April in 2019. However, the contraction of the sector was short lived. By May, the sector was already picking up.
Even if the COVID-19 situation in Sri Lanka is brought under control, local industries will continue to be affected by raw material shortfalls and reduced demand. As more and more countries lockdown and keep citizens at home, aggregate demand will fall, as customers reduce non-essential purchases due to future uncertainties. Further, the cut down in factory work will result in reduced work hours and layoffs, bringing down incomes. This will also affect the purchasing power of customers, thereby further reducing demand. Small and medium scale firms which have limited reserves will be severely affected by the downturn.
Figure 1
Source: Constructed using Central Bank Data
Services Sector
With Sri Lanka under curfew and a ban on international arrivals, the impact of COVID-19 on the services sector is likely to be long and severe. The Services PMI, like the manufacturing PMI, tracks market sentiment as expressed by managers, from month to month, based on sales, employment, inventories, and prices. Like the manufacturing sector, Sri Lanka experienced a slowdown in the services sector early on, with the Services PMI falling by almost seven points from January to February 2020.
Sri Lanka’s Services PMI dropped to an all-time low of 44.7 in May 2019, following the Easter Sunday attacks, mainly due to the contraction in accommodation, food and beverage, and other personal services sectors. But the services PMI started recovering by June 2019. However, with the ongoing curfew, wholesale and retail trade, as well as transportation of goods and people, will be severely limited. With the future uncertain and limited consumer spending, other financial and real estate activities will also slow down. With no visitors coming into the country, the tourism industry will be one of the most severely affected. Comparatively, the bomb attacks mostly affected the big hotels and the impact was short lived. It has been the practice of the tourism industry to lure local tourists when there is a slowdown of international visitors. But, with most of the country on curfew and restrictions placed on leisure travel, the industry is not likely to benefit from increased demand from the local market either. The tourism industry was already experiencing a slowdown from the beginning of this year with reduced Chinese tourists arriving in the country. With arrivals completely banned, the number of foreigners coming to the country is near zero. In addition, the hotel industry will also not benefit from local tourists due to the ban on internal travel.
Agriculture Sector
Restrictions relating to COVID-19 are mainly in place in the Western and the Northern provinces. The government is facilitating agricultural activities through a taskforce covering all districts in the country. The agriculture sector will mainly experience a fall in demand. Due to a drastic slowdown in the hotel sector and in the food and beverages sector, the local demand for agricultural goods will reduce significantly. At the same time, the export agriculture sector will see a dramatic decline in demand, due to lockdowns in operations across the globe and severe restrictions imposed on international transport of goods and services. In addition to reduced demand, restrictions in trade could result in shortages of inputs, such as fertiliser, and reduced availability of workers.
Labour Market Impact
With economic prospects looking bleak, the demand for labour in the next few months is likely to be poor. The returns from business activities will also likely to decline. Workers who are not in permanent employment such as daily workers, casual workers, and those who are self-employed in the informal sector are the most affected. The incomes of non-permanent workers are expected to decline due to layoffs and reduced work hours. Workers who are not covered by social protection, such as the self-employed and casual and gig-workers, will also be affected by adverse economic shocks. According to the 2018 Labour Force Survey, of the 8 million workers in the country, 4.7 million (or 59%) were informal workers. Of this, the most affected would be the 2.5 million non-agricultural, low skilled workers engaged in elementary occupations, craft and related trade work, and plant and machine operators and assemblers.
Policy Responses
As long as the health threat to Sri Lanka continues, the economy will not be able to recover. Very correctly, the government is giving priority to containing the disease. Even if the disease is contained within the country, as long as COVID-19 is present in the rest of the world, the threat to Sri Lanka from a recurrence of the disease will be large. Hence, existing measures to reduce the disease from being imported to the country should continue as long as COVID-19 threat is present in the rest of the world.
Unlike the Easter Sunday attacks, COVID-19 affects both the demand and supply side of the economy. Hence policy responses should look into both supporting jobs and incomes, as well as providing a stimulus to restart the economy. Any stimulus package should benefit those in the informal sector as well as formal sector workers and registered companies.
The government has introduced a number of relief measures to help the citizens and businesses. The main benefit the poorest would receive is a cash advance given to Samurdhi card holders, food at concessionary prices from Sathosa co-operative outlets, and the grace period for paying utility bills. In addition, citizens would get a grace period for payment on taxes and leases, delayed deductions on loan payments, and reduced interest payments on credit cards. Small and medium scale businesses of most affected industries will receive a debt moratorium of six months. To benefit from the relief measures other than the ones aimed at the poorest, companies or individuals should either receive regular salaries or have access to formal financial markets. But, a large share of the 2.5 million non-agricultural casual and wage workers will not be able to benefit from these measures. To protect jobs and incomes of these workers, the incentives given to companies should be linked to retaining non-permanent worker jobs. Despite a slowdown in economic activities in most sectors, the COVID-19 containment measures have created some demand for workers, such as in distribution of essential food and other items and the manufacturing of protective gear for health workers. Measures should be put in place for providing employment opportunities for wage workers in these activities.
With COVID-19 still uncontrolled, the curfew and other measures taken to contain the spread of the disease is likely to continue in the near future. Government has already introduced several measures to provide relief to people and businesses to minimise the economic and social costs of a country-wide lockdown. However, the near poor non-permanent workers who are not covered by Samurdhi, and unorganised industrial sectors such as the wholesale and retail sector and gig workers are likely to be left out by the current relief efforts. Linking concessions given to businesses to job protection and job creation will help those who are left behind as well as the economy through pushing aggregate demand.