Containing, reactivating, and managing: Sri Lankan economy’s triple challenge

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

By Dhananath Fernando

There are many questions wafting around and these questions need solutions. In a crisis, we may not have the perfect answers for most of our questions, but we have to keep our eyes open for alternatives. The problem at hand requires a wider social discussion and ideas for pragmatic action within our capacity which fit the current context.

Problem 1:

Containing the spread of the virus as well as ensuring food and other essential supplies reach 5.3 million Sri Lankan households is the need of the hour. An urgent day-to-day operational strategy is required and this needs to be complemented by fast decision-making at a macro level.

Problem 2:

Re-activating the economy and covering the losses due to the lockdown. This too requires a short to medium-term strategy and poses the most challenging task.

Problem 3:

Managing macro-level financial commitments and stabilising the economy. The third problem requires diplomatic relations alongside negotiation with international donor agencies and bilateral international partners.

Problem 1: Economic angle of stopping the spread of the virus and providing essential supplies

According to the World Health Organisation (WHO) and health experts, testing as much as possible followed by contact tracing of the positive cases is the recommended formula for success. “Trace, test, treat,” they say. However, this approach may change depending on the phase of the pandemic. According to the Government Medical Officers’ Association (GMOA), Sri Lanka is at the third phase where cases from the community or small clusters have been reported.

Other countries have succeeded in using the testing method, with South Korea being one such example. They organised drive-through testing facilities and centres and now have the distinction of being the country to have conducted the most number of tests for Covid-19 per million people. (Sri Lanka has currently tested only 2,277 cases, or 87 per million people. Countries such as South Korea have tested 410,564 cases or 7971.04 per million people.)

They also came back strongly following the Patient 31 incident (a patient who attended a religious observation with a few thousand people, causing a sharp rise in the reported cases of Covid-19 in South Korea over a short period).

To increase the testing capacity in Sri Lanka, the Government opened testing facilities for the private sector under the condition the tests can only be conducted for in-house patients and would not be conducted as a laboratory operation. However, Vidya Jyothi Prof. Vajira H.W. Dissanayake highlighted the need to have more collaboration with private hospitals and university laboratories in order to scale up Sri Lanka’s testing capacity.

This same recommendation applies for the distribution of food and essential items to households. The Government setting up a new delivery channel at this point in time will be costly. The faster route is to utilise the existing private sector delivery channels to distribute food from farms to households. The Government’s initiative in partnering with existing food delivery companies is a move towards the right direction. We need to expand more from farmers to wholesale shops and wholesale shops to retailers.

As a piece of advice, the Government should not move in the direction of imposing price controls on vegetables to avoid market shortages, which we are currently experiencing in the case of tinned fish and dhal. The Government should refrain from setting up price ceilings or making promises to the farmers to buy all the vegetables in the market as this will distort the price elasticity of supply and impact the quality of the produce, as well as negatively impact small businesses, delivery channels, and small newly formed ICT (information and communication technology)-based food supply operations.

Problem 2: Reactivating the economy

Reactivating the export businesses requires recovery in international supply chains and production networks as well as recovery in the local economy. It was estimated that during the global financial crisis in 2008/10, Sri Lanka lost about 90,000 jobs. The global financial crisis was confined to one part of the world and we felt the impact of secondary shocks.

The Covid-19 pandemic has affected almost all countries and so a serious impact can be expected. Providing a stimulus package or giving the option for EPF (Employees’ Provident Fund) members to take 20% of their money have been put forward as proposals.

The important focus is to have businesses with the capability of bringing in foreign exchange as this has become the need of the hour. We have had high hopes for the tourism sector and have invested resources into this sector, including a campaign with international media agencies to scale up the industry from $ 4 billion to $ 10 billion.

For this year, our hopes on tourism have been dashed given the obvious global dynamics. In export industries, there are no short-term solutions and the Government has allowed a special pass system to operate certain export industries. Having working capital for export industries to operate till the markets come back to normalcy has to be the priority, and next, reforms on export development to improve competitiveness must be the long-term game.

As a suggestion post-Covid-19, we can declare a six-day work week to compensate for possible losses. The Government can consider declaring some holidays as working days, providing space to observe one’s religion on religious holidays.

Problem 3: Managing macro financial commitments and stabilising the economy

It is evident that the Central Bank and our economy is at an absolutely serious juncture of not having adequate foreign exchange (or US dollars in layman’s terms) to pay for our imports and settle upcoming debt repayments.

Central Bank data indicates that it has sold about 12 tonnes in gold reserves. On Thursday (2), the Central Bank announced the halting of imports except essentials, pharmaceuticals, and fuel. They further made a public appeal to deposit foreign currency in the Sri Lankan banking system and that all deposits will be exempted from exchange control regulations and taxes.

While we expect well-wishers will bring the money back into the system, it is critically important that the Government negotiates bilateral loans with neighbouring and supporting countries. Unfortunately, all countries may require urgent cash injections, but given the size of our economy, there will still be space for negotiations, hopefully with no strings attached.

In the meantime, we need to negotiate our loan repayment plan and reschedule wherever possible with international donor agencies. The near-zero interest rates in the US will provide further space for rescheduling.

Finally, as a fallback option, the Government has to start discussions with the International Monetary Fund (IMF) for a bailout programme to support our debt repayments of more than $ 5.8 billion this year and approximately more than $ 8 billion from 2020-2024.