COVID-19 Impact on the Economy
By Dr. M. P. N. Janadari
COVID-19 is spreading with an alarming speed infecting millions of people, deteriorating their ability to survive as healthy individuals. In this second, 194 million cases have been reported so far, with 4.16 million deaths. Even though the recovered count was recorded as 176.6 million, most of them are being affected repeatedly during the existing waves. Many economies around the globe have mainly being 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 less ability of the consumers to buy goods and services available in the global economy.
With the travel restrictions the Governments have imposed to restrict the spread of the virus, many value-adding activities came to an end, unfortunately. While there is no way to tell exactly what the economic damage from COVID-19 will be, 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. It is vital to keep the health factor at the top of our priority. However, it is also essential to think about, should the travel restrictions be implemented further or reintroduced? In such a situation, the businesses might find it hard to ensure their survival because of the high level of risk aversion, which increases the borrowing costs.
As a result, many nations have faced and will have to face many bankruptcies and defaults pertaining to the organisation, which ultimately lead nations to experience severe financial crises. World statistics indicate that 5.2 per cent of contraction can be seen in the global GDP in 2020. The global stock market has also been negatively affected due to this situation. Further, the oil prices and oil demand can be identified as another important aspect that shows the adverse impact on the global economy since many nations are being fuelled to strengthen their competitive advantage over others, especially with its assistance. Furthermore, according to the facts revealed by the ILO, a 6.7 per cent loss of labour hours could be seen, especially in the second quarter of 2020.
In China, the country that records the first case, which owns the largest population, mainly because of the epidemic in Wuhan, about 5 million people lost their jobs damaging the standard of living of people. Moreover, our neighbor country, India, experienced a vast unemployment situation, especially 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 hopes that the landscape of Sri Lanka will turn upside down 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 the existing resource base. It was stated that when it comes to the Sri Lankan context, it is visible that it has profoundly impacted almost all sectors, especially the Sri Lankan economy. The possible impact that can happen from COVID -19 is considered extremely high. In recent years, many crises shock Sri Lanka to its foundation, especially the incidents that occur with terrorism, where the second and most recent incident reported is the Easter attack. After all, the world had to face an unexpected situation with the existing COVID-19 pandemic. It has made an unparalleled threat for both the health aspects of individuals and the smooth functioning of the economies worldwide, as mentioned, and Sri Lanka is no exception. Travel restrictions created so many barriers for people in business, especially within the local context.
On top of that, most business organisations that rely on international trade were negatively affected by this. 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 created to hinder the performance and productivity of the economies.As a result, the Governments and the policymakers of those countries face huge challenging circumstances, especially as if liquidity crisis, employment lay-off, disturbances on 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 per cent, especially in the year 2020. The most adverse problem is that the jobs and the earning losses created significant disruption to private consumption and investments. In addition, the figures show that in the year 2018, the Government revenue was recorded as LKR 1.9Tn, which represents a portion of 13.3 per cent of the country's GDP. However, there was a significant loss of approximately 2 per cent of the GDP regarding Government revenue. The effects of the pandemic were visible when it comes to the unemployment rate as well. Compared to the previous year's rate of 4.8, the unemployment rate was increased up to 5.5 per cent in 2020. It has been mentioned that, during 2020, there was meagre core inflation in the country, where the headline inflation remained in the appropriate range of 4-6 per cent. 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 front of unprecedented uncertainties is imperative. However, it was visible 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 has recovered very fast during the pandemic by the end of the same year. Some records indicate that a considerable number of order cancellations appeared and have severely affected the industries. Because of this, it was predicted that a huge amount of revenue loss could have occurred. 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 worse situation is that the price level of the existing related goods has been increased at a mounting speed. Yet, 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 if 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 negatively been affected.
The fiscal sector has negatively 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 per cent 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 per cent of GDP in 2020 compared to 22.2 in 2019.
Banking and Financial Sector
The financial sector is considered being a factor that strengthens the whole economy in any country. Not only in Sri Lanka but also in every other nation as well, 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 up to 6 per cent and 7 per cent, respectively, during the pandemic, and it has been identified as the second reduction reported. There was a high level of contribution that was visible when it comes to the banking sector. Most people tend to accept more loan facilities due to many different reasons.
As a multifaceted and dynamic industry that is being subjected to many inevitable changes, the tourism industry serves as one of the leading factors contributing to socio-economic development. There is a considerable amount of a decline that could be seen when it comes to the total earnings of the tourism sector. Foreign tourism, even local tourism, is affected negatively because of the pandemic due to health risks and restrictions imposed by the Government.
In the last couple of months, there was a significant decline in arrivals due to lockdowns and the cross-border restrictions imposed in these countries. When we consider the most recent cases happening within the country, starting from the Easter attack on 21st April 2019, even before of this COVID-19, the tourism sector shows how vulnerable it is to external threats. Unfortunately, an 18.0 per cent 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 impact of COVID19, they also quickly scaled- up all the containment measures.
One of the primary income sources for the country was that through energizing the tourism sector. However, unfortunately, the Government had to suspend the tourism arrivals. Regardless of the relief that can experience with the physical policy of the country, many resources were allocated from GDP, which is approximately 0.7 per cent, significantly to strengthen the health sector while postponing the 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 of the Small and Medium-scale business organisations were pushed to experience bankruptcy from illiquidity.
The macroeconomic stability was being affected negatively as well due to additional strain on public finance. 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, the country's sustainable development should be facilitated further by possessing an export-oriented and private-investment-led growth model. Such kind of a favourable atmosphere should be supported by some important conditions of the knowledge economy.
A few of those supports are encouraging the platform that nurtures and facilitates the public-private partnership, investing more and more to develop the tourism sector's infrastructure, enhancing the capacity of the local industries to go hand in hand with the 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, yet there are many opportunities as well.
We should be capable enough of grabbing such opportunities strategically while striving to minimise the threats. Many entrepreneurs are being born, and it is the Government's responsibility to show them the correct path. In the future, many job opportunities will create with this. We will be able to solve all the matters that we are facing in times. Let's keep that hope as a nation.
(Dr. M.P.N.Janadari is the Head of the Department, Faculty of Commerce and Management Studies, University of Kelaniya)