10 August, 2020

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Are We Prepared For The Economic Doomsday Resulting From The Covid-19 Pandemic? 

By Lalith Goonatilake

Prof. Lalith Goonatilake

We hope the Covid-19 control measures on-going will work and we will all be safe. While major disease control measures are in place, in parallel we need to consider the economic and social impact we will face from the Corona pandemic within Sri Lanka and induced from the rest of the world.

As stated in the UK Guardian on 26 March, the coronavirus-pandemic-has-delivered-the-fastest-deepest-economic-shock-in-history. It will have a major impact on the industrialised countries as well as the developing ones. A G8 wide recession is very likely, leading to a decline in purchasing power and consumer demand. While the G8 countries have already started major economic remedial measures, developing countries are currently more focussed on controlling the epidemic, and at the same time offering ad-hoc measures on the economic front. While we sincerely hope the Government of Sri Lanka, Corona control measures would succeed, we need to take stock of the potential impact on the Sri Lankan economy. Let us look at some sectors and potential economic impacts:

1. Tourism will be severely affected for a minimum 6 months. There are no tourist arrivals now and even if the pandemic is controlled, it is very unlikely that many people will venture out from their home countries. It is highly likely that the impact will be felt for more a year or so. Many global airlines face bankruptcy or nationalisation. Cash rich Middle Eastern airlines would survive. Sri Lanka tourism sector directly employs close to 600,000 while a further 300,000 are employed indirectly. Almost a million workers face redundancy. The Hotels and the support industries face a real threat of potential bankruptcy.

2. Over 80% of our garment exports are to the USA and Europe. Shopping malls in these countries have been shut. The summer and autumn orders are unlikely. The USA and Europe recession from Corona, would dampen demand. Our garment sector would take a major hit- perhaps over 50% of the future orders. The sector directly employs 350,000 and indirectly employs around 650,000. Huge unemployment in the sector inevitable.

3. Over 50% of tea consumption worldwide is outside home and in bars and restaurants. The current closure of restaurants and bars in Europe and the USA will have a major dip in tea demand and consequently a price drop. This will affect tea small holders and the sector.

4. Over 70% of the natural rubber production is used in Tyres and tubes. Germany and India has drastically reduced car production. Global oil prices have collapsed and synthetic rubber will be used as a cheaper alternate to natural rubber. The global recession will seriously impact on global rubber prices. Considering the labour cost and declining prices, rubber extraction may not even be economically viable. Massive unemployment in the sector is inevitable.

5. Our informal sector estimated as 48% of employment in 2018 and contributes to about 40% of the GDP (Dept. of Census and Statistics). The sector includes the daily artisans (Labourers, carpenters and bricklayers), small barber shops, beauty salons, “phone kades”, village “petti kades”, sweep ticket seller, small local “restaurants/hotels/ tea shop”, street vendor selling vadai, thaambili etc. These will be the worst hit and least protected by the government.

6. Construction Sector will face a major hit. The upcoming high rise apartments would go unsold, and pose a major threat to the Banks. Real estate values will fall. Already from post-Easter economic slump we see a rise in banks selling real estate kept as collateral for loans.  

7. Currency depreciation- The reduction in employment, debt servicing commitments, drop in foreign remittances would drive our currency down, perhaps 10% in 6 months. This would lead to higher prices and inflation.

8. Banking and finance sector though relatively stable can be hit hard by deposit withdrawals, non-payment of loans (partly driven by Govt. induced debt moratoriums).

9. Agricultural sector is relatively safe at present and allowing farming and fishing during the curfew is a good initiative. However, the recession and drop in consumer spending will have a serious negative impact on agricultural produce. Reduced consumption will lead to a noticeable decline in domestic rice and vegetable prices, impacting the farmers.

Above shows that we will be hit by a major economic down turn, mass unemployment, inflation and a recession. The social implication of such a doomsday scenario is difficult to comprehend. We already saw isolated cases where parents coming to market without money to buy essentials to the family, shouting at Samurdhi Officers etc.  Mass un-employment is possible and civil unrest cannot be totally ruled out in the real doomsday scenario. We need to look at different worst case scenarios and prepare.  Are we going for simple populist solutions or looking for more long term economic stabilisation programs? Let me quote the Key points from the just announced Government relief measures: 

A grace period of 6 months will be granted for the lease payment on three-wheelers. Deducting loan instalments from the salaries of public servants and non-staff employees in the private sector suspended until May 30, 2020. Recovery of personal loans less than Rs 1 million issued by banks and financial institutions, suspended for 3 months. The allowance of Rs 20,000 for the month of March for those selected under the Graduates employment scheme, deposited to their respective bank accounts. Implementing a debt moratorium of 6 months tourism, apparel, small and medium scale businesses and the re-evaluation of the amounts by the Central Bank of Sri Lanka (CBSL).Credit card repayment of a maximum limit of 15% and reducing the minimum monthly charge by 50%d Samurdhi card holders to be issued an interest free advance of Rs 10,000 by all Samurdhi bank associations. “

At a more practical level, the measures may create a different undesired impact. If three-wheelers, and other lease holders and government servants are not-paying loans and lease instalments, how can the finance sector survive? How can Banks and Finance companies pay their depositors monthly interest? The Banking sector is still trying to cope with the post-Easter attack announcement that SME loans up to Rs 300 MN need not pay interest for six months. These unilateral populist measures can actually back fire. A person not paying the monthly loan instalment will take it easy and not pay even if he can afford. Then after 6 months, the loan amount will increase and more likely to default on the loan. If the Government is issuing such loan relief, it has to be matched by an immediate refund package to the Banks, and Finance Companies facing such defaults. No such loan guarantees have been announced by the Government. Going by past practice, the previous Government guaranteed 15% interest on Senior citizen deposits up to Rs 1.5 MN. Banks are yet to receive the promised interest rate difference.

We need to move beyond populist easy solutions to facing the stark reality. Let us see some actions from developed economies:

* UK announced the Government will pay 80% salaries of staff retained in the SME sector, subject to a salary ceiling of £2500 a month.

* US Government is providing US$1,200 for an individual earning up to $75,000 a year. Also “liquidity assistance” for distressed industries and loans to small businesses

* Germany has set up a €600 billion rescue fund to provide virus-hit companies with loans and guarantees as well as buy stakes in stricken businesses.

The best advice is from Hans-Werner Sinn -Professor of economics at Munich University:  “What are really needed are fiscal measures to save companies and banks from bankruptcy, so that they can recover quickly once the pandemic is over. Policymakers should be considering various forms of tax relief and public guarantees to help firms borrow if necessary. But the most promising option is a short-time work allowance. This approach compensates for the underemployment of the workforce. It costs hardly anything, because it prevents the losses that would follow from increased real unemployment. All countries should be replicating this part of Germany’s policy to prevent job losses 

These are fully thought out interventions to stabilise these very rich economies and retain jobs, and highly likely to succeed. Sri Lanka must shift gear and move to a concrete program of retaining jobs rather than populist measures.

The Samurdhi loan of 10,000 is a good idea. But future such payments should not be seen as a free hand out for consumption. It should be seen as a micro enterprise loan with even zero interest spread over 20 years, or a consumption loan in the short term, and the loan deducted from Samurdhi entitlement after one year (over a period).

If the SME sector is to retain the jobs, just like the UK did, Sri Lanka Government should offer up to say 80% of the salaries of those earning less than Rs 30,000 (for those who have paid EPF/ETF for at least one year).

For self-employed (having business registration evidence) Government can offer business loans with minimal interest over say 10 years. Some form of collateral in terms of assets or two personal guarantors can be designed.

How to finance these interventions in the debt-ridden country is a complex task. Let me hint at a few:

* Immediately re-introduce the tax concessions granted by the new Government (VAT, PAYE etc.). Introduce a marginal increase in the tax rates, say for one year only.

* Government and corporate sector employs close to 1.3 MN and fairly well paid. We hear Railway drivers and Guards earning Rs 150,000 or more a month and an electricity meter reader around Rs 100,000. Our informal sector is struggling to make Rs 1000 a day. In this situation the most secure is the public sector employees. It is definitely fair to impose a 15% salary cut on the public sector for 6 months, to support the informal sector.

* A one-time “rich” tax can be imposed on the upper middle class and the rich. Can be a wealth tax on the properties owned, May be using annual municipality tax assessment value as a guide. (If not paid immediately, doubling of the tax in a year to encourage.)

* Doubling tax on liquor and cigarettes, gaming/gambling sector. One-time luxury vehicle tax (say over Rs 5 MN). Heavy tax on non-essential imports for a year (electronics, phones, luxury goods) etc.

* While retaining the high fuel price despite the global crude oil slump, impose a tax on IOC reaping the windfall price gain from the global oil price slump.

These are examples of unpleasant measures, but these are unusual times. (China & US agreed to cooperate despite blaming each other for creating Corona). Sri Lankan politicians do not have the courage to do this. This is not the time to play party politics. If the situation is not well managed, it is the current Government that would become unpopular. It is in their interest, to share the responsibility and eventual blame. A multi-party task force headed by professionals should do this. This will protect the selfish politicians – “I did not impose the tax- it was the independent committee”. We need to establish an independent Economic Advisory panel to devise these measures. No politician or professional seen as having a political affiliation should be in the panel.

The media at this time is competing with each other to get cheap popularity. There is no coherent message. Nothing so far mentioned about the Economic doomsday.  The Government too has no such credible mechanism to warn the public. We need to have a new media mechanism. It is essential in every news channel, the first 10 minutes be devoted to a message from the “Government”. The message will cover Corona status in Sri Lanka, Global status, actions citizens must make and educate them on the inevitable Global economic downfall, and the need for Sri Lankans to make sacrifices.  

No politician should be shown with the message. Ideally Director General of Health Services and a highly respected apolitical person. (Kumar Sangakkara fits the bill).

As stated here, a new non-political serious intervention is called for to face the economic doomsday that is on the horizon. I still doubt if our politicians and the Government has the capacity and the courage to move in that direction?

*Prof. Lalith Goonatilake – Former Professor of Industrial Management, University of Kelaniya – Retired Director, Trade Capacity Building-United Nations Industrial Development Organisation- Vienna.

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Latest comments

  • 4
    0

    1. How long this will take to clear,
    3months -6 months, 18months.
    All depends on time.

    2. How much are we going to take social distancing, or are we going to let the most vulnerable die and life goes on, as people don’t want to die of starvation.

    We can learn from the Spanish flu 1918
    Where the First World War was going on, people died, still war went on, then most people got immunity, others died.
    60 million deaths,
    No vaccine still.immune system kicked in.
    British lost their empire, America became the empire,

    • 1
      0

      Imposing a tax like NBT during ltte war will be a better idea from the monthly salary earners in Gov and public sector.
      In addition to that the facilities of parliamentarians should be reduced like done in the private sector during the 2008 recession.
      Imposing high tax on luxury items would be another good idea

      • 0
        0

        This is the time a body of INDEPENDENT PROFESSIONALS with no political Affiliations or inclinations should take the country’s administration. Economic specialists and health sector professionals should be in the forefront. The administrative team should be out of bounce for politicians.

  • 3
    0

    Excellent article with facts. Hope someone will make use of the proposals as remedial measures.

  • 3
    1

    Prof. Laith Goonetilleke, have you a proposition or any suggestion?
    Unwittingly we all have to be prepared to face a Economic Dooms Day.
    Does Prof. Lalith need to think whether America can survive with a $ 2.2 tr bailout?

    In Sri lanka, Villagers will survive but have my doubts for the Colombians………………
    British lost their empire, America became the empire, & now the mantle will pass on to China.

    With COVID 19, Conquerors and Bullies have been Conquered………………….

  • 0
    2

    Prof. Lalith Goonatilake,

    No need to worry too much about it, we’re quite used to live with these sorts of crisis time to time. Trump says, “The cure can’t be worse than the disease”, and wants to open the economy by Easter. Guess, soon a treatment will come out first and after that based on demand and profits, the companies will invest in completing vaccines.

    This recession is voluntary. People & Govts are panicking and shutting down businesses because countries are not readily equipped with hospital beds and other supplies.

  • 0
    1

    I do not agree with how many discuss the impact of Covid-19 effects. Sri Lanka and India have lot of foreigners because of tourism. Yet see the impact. On the other hand, Europe and USA were careless or they were saying that it was CHINA’s disease and neglected.
    Sri Lanka’s population is 40% youth. The disease is fatal for elderly of over 65%, people with chronic diseases such as diabetis. So, many develop natural or body immunity because of the exposure to the Virus. I know in the North America viral flu is occurring twice a year. The fatality is about 1-2% but vaccination is available. Common cold which is a viral disease and there are many variations of common cold because of many viruses cause it (It is said, that infants get often becuase they keep on developing immunity every strain of the virus(es).
    So, in about 12 months, once they find a vaccine things will be different. I heard, china has already began human trials with the vaccine while USA is beginning it’s human trials in April in the UK. After that only problem will be frequent vaccination.
    Mean while, Sri Lanka also has reported one Corona death of a 60 year old.

  • 0
    2

    Sri Lankan economy was having similar effects for four 4 and half years as would an epidemic destroy the country. That is because of the way parliament worked.
    Sri Lankans have to change life styles. They have to eat with NUTRACEUTICAL VALUE (many spices in sri Lanka is example). They have to stop eating meat. Because flu virus needs a differwent kind of nutrition to thrive.

  • 0
    2

    Sri Lanka survived even DURING the second world war. Sri Lanka is not an economic or technology super power. Only thing is people can not continue to buy cars, petrol and automobile parts or go to restaurants to have the dinner out or no partyyying. Because we do not get foreign money from remittances and there won’t be money from SERVICE JOBS and not from high skilled jobs.
    We had an economic dooms day during last four and half years during the Yahapalana dya. In that the viruses were inside the parliament. Only thing is excahnge rate may go to Rs 200 from 183.

  • 0
    0

    Imposing a tax like NBT during ltte war will be a better idea from the monthly salary earners in Gov and public sector.
    In addition to that the facilities of parliamentarians should be reduced like done in the private sector during the 2008 recession.
    Imposing high tax on luxury items would be another good idea

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