COVID-19: A Sri Lankan perspective

Sri Lanka has become a microcosm of the wider travails facing the region in light of the pandemic.


Uditha Devapriya

3 years ago | 5 min read

It’s tempting to think that COVID-19 is reshaping the global economic landscape, but more accurately it’s bringing to the surface the many contradictions, fault lines, and rifts that had been part and parcel of the (global and local) economy until the virus came.

Columnists and commentators were in denial of the implications of the pandemic when it first hit; estimates in January put the loss in global output at USD 40 billion[1], with one report putting it at USD 350 billion[2], the ADB concurring with the latter estimate even in as late as March[3].

Then the pace picked up. In February, Oxford Economics upped the loss to more than USD 1 trillion[4], while in March Bloomberg raised it to USD 2.7 trillion[5]. PricewaterhouseCoopers revised this to up to USD 4 trillion the following month[6], citing the OECD and the ADB. As of April, the OECD has said that global growth will slow down to as low as 2.4%, slowing down even more to 1.5% if a second outbreak follows[7]. The IMF’s forecast is even bleaker: a global contraction of around, or possibly more than, 3%[8].

What’s the social and economic impact of the virus on Sri Lanka? PricewaterhouseCoopers predicted growth of 2.2% this year, but in light of subsequent developments a more prudent estimate would be a contraction of 0.5% to 1%, which is what the IMF has forecasted[9]. Here it’s the World Bank prediction that’s bleaker, with a contraction of up to 3%[10].

The hardest hit will be the cash strapped and cash dependent sectors. The big companies, including the multinationals, are already bracing for a big hit, implementing an ambivalent package of layoffs, pay cuts, and cost rationalisations. At Softlogic salary cuts of up to 30% are being enforced for all those earning more than LKR 50,000 a month[11], while at Jetwing Hotels cuts of 10% to 50% will be in effect for everyone[12].

Given that large companies in Sri Lanka are dependent either on import-driven growth fuelled by conspicuous consumption or on extraction of raw materials where very little value addition occurs, it’s reasonable to suppose that investments will reduce. What are the effects of all this? Unemployment in Sri Lanka has, as of April 13, risen to 4.8%, the highest since 2011[13].

In that regard, the biggest social and economic impact on Sri Lanka’s economy from COVID-19 will come from the investment vacuum the crisis will result in. That has arrested a trend seen from 2014 to 2017[14], when the consumption to GDP ratio fell from 75.8% to 70.5% and the corresponding ratio for investment rose from 32.3% to 36.7%.

To be sure, increases in VAT and other taxes that discouraged consumption had a say, but the fact that consumption fell despite a series of expansionary budgets and taxes, which promoted spending so much that former Central Bank Deputy Governor W. A. Wijewardena repeatedly warned against them[15], means that investment was somewhat on its way up after a long interregnum. With COVID-19, however, private sector investment will stagnate again.

Two things must be noted: the nature of (industrial) investment and development in the country, and changes in it that will occur, and will have to occur, once the worst effects of the virus are over. The pandemic, far from rupturing the economy, has made clear the fatal rifts at its heart. In the context of declining worker remittances from the Middle East (and elsewhere), and a forever rising import bill, Sri Lanka’s capacity for industrialisation in the manufacturing sector has thus far never been fully made use of.

On the other hand, most proposals for economic recovery after COVID-19 include relaxing if not wholly phasing out import bans, letting consumption fuel growth, and enforcing a mix of State intervention, bailouts to the private sector, and expansionary policies. Even renowned political scientist Dr Dayan Jayatilleka has couched it poetically: “a new, New Deal, Rooseveltian-Keynesian, at national, regional/continental, and global levels[16].”

The problem is that the virus has not only disrupted supply chains, global demand, and financial markets, but also disrupted them concurrently, not consecutively.

Therefore, any attempt at adjusting one variable to the exclusion of the others will not amount to much. If you phase out import bans, the inundation of imports in the market will dampen local production. Same goes for letting consumption drive growth: we spend too much already on imports.

Monetary policies are to no avail if consumer demand won’t pick up – because consumers and workers are afraid of going out to shops and offices – despite interest rate cuts. As of today Sri Lanka is paradoxically both linked to and delinked from the global economy: dependent on imports because of local industry stalling, and cut off from imports, at least to an extent, because of supply chain disruptions worldwide.

Obviously, a well thought out, formulated response would balance pragmatic considerations with more future driven and long term reforms. The need of the hour has always been local production, and with it local innovation. Unfortunately, throughout much of its history, the economy has come to depend on industries with an export bias, including the triumvirate of tea, rubber, and coconut.

Problems such as lack of growth and technological innovation in these sectors have never properly been looked into; they should be now.

For instance, Sri Lanka exports minerals and raw material, but with very little value addition, which is why we continue to export unprocessed, unrefined graphite at USD 600 a ton[17] when we could have exported the processed variety at up to 10 or 20 times that price[18].

Yet another example: replanting in tea dropped by more than 26% from 2008 to 2017, while value added in tea as a percentage of GDP dropped during that period from 1.6% to 0.9%[19].

Reforms must therefore be structural if the country is to respond well to the pandemic. The conventional view has always been that for growth and development to happen, Sri Lanka must foster innovation.

But as Vinod Moonesinghe once wrote[20], “innovation does not take place in a vacuum.” It’s surprising, or perhaps not so, that while Sri Lankans have come up with several innovations – think of Ray Wijewardene’s hand tractor or J. C. V. Chinnappa’s solar-power refrigeration – the country has so far not utilised them, instead seeking refuge in large privatisation schemes that go nowhere.

Reforms thus require not just heavy handed State intervention, which proved to be vital for the rise of the Tiger economies of East Asia after World War II, but also innovation from the bottom up, which is where young innovators from and outside our universities can contribute. Innovation and production, be it scientific or entrepreneurial or both, must become the order of the day.

Uditha Devapriya is a freelance columnist based in Sri Lanka who writes to several local publications on a wide spectrum of issues, including politics, economics, and history.






















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