Covid-19 Policy Responses: A summary note to policymakers

By Advocata Institute

At the time of writing there are more than 1,300,000 cases worldwide and more than 74,000 deaths. Humanity faces a global crisis on a scale never seen before.  Health sector, security and emergency services personnel deserve praise and gratitude for their dedication.  

We offer the following for policymakers as input to make the difficult decisions in front of us as Sri Lanka deals with the COVID-19 pandemic.

To deal with the short-term problems, use existing mechanisms 

The government’s centralized and controlled approach to the delivery and distribution of goods has meant consumers, traders and producers have been squeezed at every node of the supply chain. In order to allow some parts of the economy to run at minimal risk, and reduce incentives for people to break curfew, the government should consider expanding the definition of essential services. 

Developing a non-reversible and consistent policy on curfews for supply chain actors, including delivery personnel, will ease pressure on consumers and producers who at the moment can’t get their products into the hands of consumers.  

A roadmap for reopening the economy

It is useful to think of the policy responses for the pandemic in phases. In the first phase the objective is to slow the spread of the virus by using a strategy of self-quarantine for much of the population by the way of curfew.  Yet the curfews cannot last forever, and they come at a significant human and economic cost.

As the short term emergency situation begins to settle,  policymakers should work with epidemiologists, security personnel, private sector and other stakeholders to develop a roadmap for re-opening. This will enable people and businesses to plan their activities effectively so as to mitigate the cost to their daily lives and business operations.  

An action plan for expanding testing 

The “trace – test – treat” method has shown to be effective in countries such as South Korea and others which have faced up relatively well to this public health crisis. The government’s decision on 31st March to expand testing to check for community transmission is a step in the right direction.

It is vital policymakers develop a clear and focused action plan to utilize the country’s existing testing capacity in government,  universities, research institutes as well as the private sector. The government can tap into private sector access to international supply chains and engage with potential donors to acquire and expand the testing capacity in the country.  

Re-examine the policy on wearing masks

Preventing a rise in cases will depend on individuals limited outings only to the essentials, practicing strict physical distancing and wearing masks. While the official stance of the WHO is that if you are not a medical worker and you are not ill, you do not need to wear a mask, it is also clear that this recommendation is driven by a global shortage of masks. Most recently, the United States of America shifted their stance, with their Center for Disease Control recommending general mask usage to lower rates of transmission. 

As such, while Sri Lanka should also prioritise mask supply for health care workers and others on the frontline on this crisis, the government should revisit its position on mask-wearing, and actively engage with the private sector to rapidly increase mask production.  

Letting the markets work

Re-visiting price controls and understanding their medium to long term impact

The government has already imposed price controls on a variety of items.  As research by Advocata Institute shows, even in normal times these controls mostly serve as political theatre,  with the government’s own data showing many consumer items being sold at above the controlled rate. A  price is a signal wrapped in an incentive; it signals shortages and surpluses,  if a producer can’t make a profit they would not go through the trouble and risk of acquiring the item. In a lockdown,  price controls will only exacerbate the supply constraints.

In the coming months, price controls are a policy measure that should be avoided. 

Moving away from planned import restrictions

In an attempt to ease pressure on the exchange rate and protect the local agricultural industry, the government has announced the halting of all non-essential imports. As of the point of writing, this statement has not been substantiated by either the Central Bank or the Ministry of Finance, creating policy uncertainty. The introduction of a negative list of those items that will not be imported into the country in order to protect the rupee could be considered,  yet this should be a short-term, time-bound measure.  

Prolonged import restrictions and a government-imposed ‘essential lists’ will create ripple effects that will harm the welfare of consumers, producers and vital supply chains. The revitalization of our export industries and the manufacturing sector will be key to economic recovery in Sri Lanka. Intermediate goods and raw materials amounted to 46% of Sri Lanka’s imports in 2017, and long term import restrictions will hamper the ability of local businesses to recover and recoup losses after this crisis passes. This will also make domestic incentives favourable to non-competitive import subsidies. 

Moving towards a recovery 

Going forward, monetary policy and fiscal policy must work together well based on a credible macroeconomic program. While its effectiveness will be low in the short run due to COVID-19, it will signal a government committed to surmount the present difficulties.

The World Bank project of USD 128.6 million was much needed, and now having secured this, Sri Lanka should work towards a concrete engagement with the IMF. Apart from being a source of much-needed funding, an IMF programme will also bring fiscal discipline to the country. We should also actively explore engagements with the Asian Development Bank, with an aim to speed up the disbursement of existing loans. 

Overall macroeconomic policy should aim to keep inflation and current account deficit in the BOP sustainable, as this would create the necessary environment to undertake real sector reforms. Trade reform to ensure the free exchange of goods and services, and domestic regulatory reform to help businesses recover and restart should be priority areas of focus.   

Private sector participation in the path to recovery is crucial. Clear, consistent engagement with independent-minded experts, and including these individuals in an advisory capacity to the Central Bank and Ministry of Finance would lend credibility to the government, and signal that Sri Lanka is serious about laying a strong foundation for a healthy economy.

READ COMPLETE POLICY NOTE.