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.