Fighting COVID-19: Economic implications for Sri Lanka

CEYLON TODAY | Published: 2:00 AM Apr 5 2020
Focus Fighting  COVID-19: Economic  implications for Sri Lanka

By Ranmini Gunasekara

The usual bustle of the capital city has now been replaced by an eerie silence as the new coronavirus (COVID-19) takes its toll on the country. Islandwide police curfew has been introduced to reduce the spread and to flatten the epidemic curve. Whilst Sri Lanka's comparatively low number of COVID-19 positive cases suggest the success of these measures, they still come at a heavy cost  to the local economy.

In an online discussion organised by the Advocata Institute on the 'Economic impact of COVID-19 on Sri Lanka, Chair of the Academic Programme of the Advocata Institute, Dr. Sarath Rajapatirana, Executive Director of Verite Research, Dr. Nishan de Mel and Associate Professor of the National University of Singapore, Prof. Razeen Sally, elaborated on these concerns.

Weak economic situation

"When COVID-19 struck us we were actually in a relatively weak economic situation. Our growth rate had fallen to 2.6 per cent, which is very low compared to our growth rates in the last three decades. Earnings from tourism has fallen particularly after the Easter Sunday attacks. The immediate future for tourism did not look good. When we look at the economic impact of COVID-19, there is a direct effect and an indirect effect. 

One is that people are not going to work because everybody is in self-isolation, with police curfew strictly imposed in the most populated areas Colombo, Kalutara and Gampaha. So there's a reduction in output with people self isolating or quarantining themselves." said Dr. Rajapathirana.

He added that measures proposed by the President were only short-term measures.  
"The proposed measures are appropriate for the short- term situation, especially, on the consumption side. So our short-term game is good. 

But when it comes to the long-term, I see that the Government might overplay this situation, by not having a price mechanism but rather giving directions, quantity restrictions etc. Measures to help the poor has to be administered by the public service, which is not known for its speed or efficiency."

Dr. Rajapathirana said excessive import restrictions could also reduce competitiveness in the economy.
Meanwhile, also speaking at the discussion, Dr. de Mel added that import restrictions were inevitable as Sri Lanka's balance of payments is facing enormous pressure.

"With our inability to export our own production coming down and there is reason now to worry about what we may call luxury. For example, restricting the imports of motor vehicles where Sri Lanka expends a lot of foreign currency. All the same, I don't think the Government should be defining what the essential imports are and suffering the consequences of accidentally restricting an essential item. Rather they should have an essential list, selectively target a few non-essential items."

According to Prof. Sally, the global economic impact of COVID-19 will far outreach the impact of 2008 global financial crisis.

"We're still in the early stages of experiencing this, but it will be considerably worse than the 2018 financial crisis. From our experience of past pandemics, the huge short-term economic costs have been followed by lasting structural changes in societies and economies,  lasting for decades and centuries. I suspect we might see something similar from this pandemic. The negative aspect is that this pandemic is spreading much faster because of globalisation, travel and trade. 

The good news is that we have much more knowledge to tackle this in the present. In terms of economic effects, the data coming through, do point to the worst slump since the Second World War. Estimated Chinese GDP contracted in the first quarter between 10 to 20 per cent and we'll see similar falls in the West."

Poorest - hardest hit

He further added that similar to previous pandemics, the poorest in society would be the hardest hit.
"In the short- term macro economic sense what we are seeing is our already high debt burdens around the developing world now becoming unsustainable, given what's happening. So we are on the cusp of very significant debt defaults, debt relief and debt restructuring."

Meanwhile, Dr. de Mel added that the management of COVID-19 is fundamentally an economic strategy, since mitigation involves restricting human activity, which will then affect the economy.

"I will explain this through an analogy. We have to decide whether we are in a test match or in a twenty-twenty match. In a twenty-twenty match, you are willing to go after the runs, you don't mind losing wickets. In a test match, you understand that you must go after the runs, but you should also protect your wickets. Now every week of lockdown, you are losing a wicket, because we know that we can't live in curfew for a long time and you must know when you want to actually lose your wicket. 

For instance at the early stages, you might not be willing to lose a wicket. But there is a management strategy for this and that strategy comes from recognising the relationship between your mitigation level and how the disease is going to progress, so the fundamental economic calculation, or epidemiological calculation is 'will our health system be able to cope as the disease spreads and how do we keep the peak spread of the disease at a level that the health system can cope?"

Dr. de Mel further said it's crucial for Sri Lanka to decide whether they will follow a mitigation strategy or a suppression strategy.

"Mitigation has various levels, you talk about mitigation in the sense of how many people an infected person will infect.  So, if one infected person infects one or less that's almost a suppression strategy rather than mitigation. I think we can't have a suppression strategy in Sri Lanka, for two reasons, if we're running a suppression strategy we should be prepared to run it until we have a vaccine. 

We need to run it with the kind of curfew or even further suppression measures that the Government is currently contemplating. But, that may be unsustainable and the economic casualties can pile up quite fast in a way that can't be managed. And the duration of this will be quite long. So then, we ask can't we have a mitigation strategy, that allows a certain level of economic activity to take place but the spread rate is more than one. 

When you do the Math, it seems Sri Lanka might be able to cope with a spread rate of 1.5 in which case the peak case numbers will come to 153 days into the future. Even if you have a very high spread rate like Italy did of 3.5, the peak won't come until 66 days into the future. So, this is a long match. If you manage a spread rate of 2, then the peak will come in 143 days and this might still be manageable. 

So I think Sri Lanka first has to make a strategic decision whether it is really trying to achieve suppression, in that case are we ready to be in curfew for nine months or more, till a vaccine is out and deployable in the country. If not, what is the mitigation strategy we are running and whether we can keep calibrating it to be able to cope with the health care system."

He further added that mitigation measures could also be used in a way that aids the economy, by creating jobs in the sectors that help mitigations measures.

Create jobs

"For example, we can create jobs in building new hospital infrastructure. We can create jobs in building hospitals and in assisting the doctors and assisting the health care systems. These things are obviously good in terms of getting income to people. We can create jobs in quarantine services. 

For example, Singapore has requisitioned their top hotels to be quarantine centres and people are less resistant to quarantine if you are going to spend it in a five star hotel and Singapore contracted on baseline rates that they will pay their hotels and invited people to come and quarantine. Singapore, currently has 400 odd active cases, and 4000 in quarantine. But their economy is actually helped by quarantine as well. 

Because people who are quarantining are using the tourism sector that is underused, and they have not gone to the level of economic lockdown that Sri Lanka has and is considered a success story. It's keeping the economy running and has intelligent good measures to control the rate of spread.

He further added that Sri Lanka could learn from these examples and create jobs in the food and apparel industries.

"We tell people not to wear masks today because we want to keep enough for health care workers, but Taiwan has reduced the spread by becoming a mask-wearing society. Similarly, we can also become a mask-wearing society. Masks might not prevent you from catching the virus entirely, but it can certainly prevent spreading. We can create jobs in producing delivering food. 

A lot of instability is being created in the current methodology, because it's one day on and a few hours off. There should be a plan for the Government and a stable policy, without just changing their minds suddenly. They should allow the people and industries who help to manage the virus to flourish and succeed, so they can address the virus concerns as well as its economic implications. We need to get out of this mindset of the military providing quarantine services and ensure that the community and society provides quarantine services."

CEYLON TODAY | Published: 2:00 AM Apr 5 2020

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