The resurgence of Covid: a threat to economic recovery | Sunday Observer

The resurgence of Covid: a threat to economic recovery

14 May, 2021

After a disastrous period in 2020 due to catastrophic Covid-19, Sri Lanka’s economic recovery appeared well on track until the resurgence of the infamous third wave, named by some people as Aluth Awurudu Pokura or the New Year cluster. The third wave that is likely to be far more devastating than the previous occasions seems to be posing a serious risk and threat to the anticipated recovery.

Economy and threats from Covid

The ongoing sharp spike in Covid-19 cases appearing countrywide is proving to be a grave threat to the growth prospects of Sri Lanka in the near future. The challenges seem harsher if the third wave is not brought under control immediately with everything the country got. The longer the third wave persists; the more severe the adverse repercussions on the economy.

On the one hand, the stringent restrictions imposed by the authorities will slow down the normal day-to-day economic activities; on the other, the expenditure through State coffers on Covid-19 issues by way of providing health facilities such as hospitalisations, quarantine centres, and testing services to more people will go up enormously. Whilst the Government is already struggling hard to make the ends meet, the new expenditure surely is going to be an unbearable burden.

It is no secret that the economies of even rich countries have had a brutal impact. For many of them, it was even worse than Sri Lanka. For example, the United States recorded a growth of (Minus) -3.4%, Canada -5.5%, the United Kingdom -10%, France -9% with almost all other high-income countries recording similar setbacks. Among all these minus percentages Sri Lanka, according to the Central Bank, has recorded only a minus growth of -3.6% which can be identified as tolerable given the country’s existing economic status.

Hit harder with the third wave

However, the prediction of the Central Bank (Probably compiled before the emergence of the third wave) for 2021/22 will have to be adjusted heavily considering the unanticipated current situation. In fact, the 4th quarter growth has increased to +1.3% in 2020 as per the Central Bank records, before the third wave surfaced.

The global pandemic resurgence can impose a negative impact on the anticipated global economic recovery due to the failure of managing the spread of the virus in full, as of today. In certain countries such as Brazil, India, Sri Lanka, and some more experienced sporadic reappearance of the pandemic, often without a warning. Although most of the European countries and the United States show a considerable decline in daily positive cases, the unpredictable behaviour of the virus still poses a threat.

Risks are escalating due to the continuous reappearance of new mutations. One of the biggest current hindrances is that most existing anti-virus vaccines were developed at the initial stages without considering the new variants and the reaction to new variants is not yet grasped in full by the developers.

Due to the uncertainty of the behaviour of economies, the forecasts of the World Bank, IMF, and other relevant institutions have to be revised as global trade would be unfavourably affected to an indefinite period as lock downs, travel restrictions, and logistics issues continue.

With the experience of the first emergence and the second wave of the pandemic and the challenges paused thereof, policy interventions by the Government may be required from a short-term perspective immediately to combat the imminent threat of the cash flow. Undivided attention must be given to contain drastic health situations and to the economic dimensions of the second wave.

Vaccinations, the best solution

As President Gotabaya Rajapaksa rightly declared, vaccination is currently the most effective and perhaps the only remedy to control the pandemic. This notion was upheld by many international and local medical experts. Therefore, it is a race between the spread of the virus and the pace of Covid-19 vaccination. Hence, the topmost priority of the government is to invest in the health sector for relieving any shortage of vaccines and other related medicine including medical oxygen. Sri Lanka will not be able to withstand the magnitude of the shock that is currently experienced by Indians if the situation deteriorates further.

Covid-19 will likely be the key issue that will affect the Sri Lankan economy for at least the next few years. Not only taking a step to recapture the time lapse, but also to recover the colossal amount of funds spent as Covid-19 related expenditure on the health sector and for public welfare is a major challenge to the Government.

As such, policies should be revived to restructure immediate growth issues and to create short and long-term capacities of economic contributors. Economic sectors such as foreign employment, apparel, tourism, export-oriented agro-products, manufacturing, and construction require immediate attention as they are the major contributors and already almost all of them have felt the pinch of the pandemic disaster. These sectors unquestionably need monetary policy stimulus.

The Colombo Port City project which came under fire from time to time, primarily from the opposition politicians, is a vehicle to drive the modern services sector that can heavily and positively impact the Sri Lankan economy. The mega-development is a large-scale integrated modern city district, the first of its kind in Sri Lanka that presumably gives a big boost to the Sri Lankan economy.

Although contradictory data is being surfaced on economic benefits, no doubt the project ultimately will offer considerable benefits to the country. Even the political opponents who habitually criticise everything the Government attempts to carry out are also supporting the project although they oppose certain contents of the Colombo Port City Economic Commission Bill. The Draft Bill petitions are is being considered by the Supreme Court and scheduled to be debated in the Parliament soon.

According to an assessment by a multinational professional services firm, at the operational stage, the project is estimated to be providing over 190,000 jobs. Also, as per the assessment report, the Sri Lankan Government will receive approximate revenue of US $ 800 million per annum at the operational stage.

Business friendly tax policy

Experts opine that Port City is a services hub and in order to be competitive, Sri Lanka needs to have a business-friendly tax and policy regime. Regrettably, Sri Lanka is placed at 99th position World Bank’s ‘Ease of Doing Business Index’ that is immensely low in the Asian region. Therefore, this position has to be improved as quickly as possible by reducing the immensely disturbing bureaucratic obstacles prevailing in the country.

As per the Export Development Board information, Sri Lanka’s export earnings have surpassed US$ 1 billion exports maintaining the growth momentum during the last six months. Considering the depressing world conditions and the multiple challenges, this is a laudable outcome in the exports sector compared to many other countries in the world.

Compared to the performance of January to March 2020 (Before the Covid-19 issue), the corresponding period 2021 has registered a growth of 2.53%. Most of the major export products show even a slight improvement. However, the new third wave may hamper the momentum of exports if the situation does not improve as production schedules of manufacturers and others will be disturbed in case the virus spreads into production lines and the agricultural sector.

While the attention of the Government at present is focused on dealing with the third wave of Covid-19, the other relevant institutions responsible for economic affairs must be on the alert, more than any time in the history on sustaining the economic conditions. Efforts to attract foreign investments must be relentlessly pursued.

The Presidential policy of keeping the country open only with zonal lock downs on a need basis is the best at present to keep going for a lower-middle-income country like Sri Lanka where there are severe monetary restrictions.

Total close down must be considered only if a real need arises. The same people who blame the Government for not closing the country will change the tune and rebuke if the economic situation deteriorates further and forced to cut down public welfare.