18 August, 2022


IPS State Of The Economy 2020 Report: Compendium Of Policy Analysis To Revive Covid-Affected Economy

By W A Wijewardena –

Dr. W.A Wijewardena

IPS back at its job

The Institute of Policy Studies or IPS is famous for presenting a comprehensive analysis of a hot theme in its annual State of the Economy or SOE reports.

Last year, it was on how Sri Lanka should prepare itself for the Fourth Industrial Revolution or Industry 4.0. The year before, it was on Climate Change, Food Security and Disaster Risk Management. This year, it is on the hottest issue faced by Sri Lanka. That is, how Sri Lanka should revive its economy after the disastrous fallout from the COVID-19 pandemic.

This report, covering every aspect of the issue, is a useful guidebook for the Sri Lanka Government’s economic policy makers.

Impartial, apolitical and objective policy analysis by IPS

IPS was created a way back in 1988 as “an autonomous institution that aims at promoting policy-oriented economic research and to strengthen the capacity for medium-term policy analysis in Sri Lanka”. It is supposed to provide an impartial, apolitical and objective policy analysis to the government through its research programmes.

Thus, it has to be critical in its policy analysis and look at, following the ways of good economists as highlighted by the 19th century French economist and statesman Frederic Bastiat, not the short term but the long term consequences of any policy measure on an economy. Hence, its critical policy analysis cannot be ignored by any government that values such objective and impartial policy recommendations.

Forerunner to other official publications

IPS issues its SOE report well ahead of the official reports released by the other two policy authorities of the country, namely, the Central Bank and the Ministry of Finance. The Central Bank issues its report in late March of the following year, while the Ministry of Finance does so after three more months in June. Hence, SOE, released either in October or November of the same year, is an early reading of the economy.

As a result, in preparing its report, IPS considers the actual data pertaining to the first half of the year and makes suitable estimates for the balance half by reckoning the emerging developments. This is an informed judgment but as the past reports have revealed, its estimates are pretty much close to the final actual data for the year.

Expected economic contraction making Sri Lankans poorer

The COVID-19 pandemic has been an unexpected external shock delivered to Sri Lanka. Due to disruption of economic activities emanating from long social lockdowns, the pandemic has virtually crippled the global economy. Many countries have suffered economic contractions due to this external shock as high as 10 to 15%.

In the case of Sri Lanka, though the Government authorities have put the economic downturn to a growth rate slightly above zero, external agencies have come up with an economic contraction between 4-5%. Though SOE has not given a number, it has prognosticated an economic contraction.

This cannot be verified since the Department of Census and Statistics, Sri Lanka’s official statistical bureau, has not released the second quarter GDP data as promised in its advance release calendar. Its latest statement released last week says that the release of data would be further delayed but some interim surveys it has conducted have revealed the naked truth. It says that there has been across the board contractions in all the three sectors, agriculture, industry and services. The total output of large entities surveyed has declined between 23-33%, while that of the hospitality sector by 78%. SMEs have been the biggest casualties with output falls ranging from 50% to 70%.

All these are indications that Sri Lanka’s economy will contract by a substantially high number contrary to what the Government leaders are envisaging.

From a V-shaped to a W-shaped recovery?

The SOE has been prepared before the country was hit by the second wave of COVID-19 pandemic in October 2020. Hence, it has predicted a quick V-shaped recovery. But the wide geographical spread of the second wave points to a prolonged recovery period with a zig-zag pattern taking the form of a W-shaped recovery. Whatever the recovery pattern that Sri Lanka would experience, the large contraction in the economy means that Sri Lankans would on average be poorer than before.

This is like being hit by double jeopardy since the country had already been downgraded from an upper middle-income country to a lower middle-income country based on its dismal economic performance in 2019. Hence, the revival in the economy is not as smooth as one would expect. In this context, SOE 2020 has presented a detailed analysis of the hard journey which Sri Lanka has to tread in the coming years.

An inflationary recession on the card?

IPS has warned that the decline in the reserve money base right now should not be taken by authorities as a positive development. The reserve money base has contracted not because there has not been in the expansion of the Central Bank’s credit to the Government and the banking sector. It has been an unwarranted consequence of the bank’s drawing down its foreign reserves to service the country’s foreign debt.

At present, commercial banks are inundated with a massive liquidity surplus amounting to a little over Rs. 200 billion in a background of sluggish credit growth to private sector. However, as SOE has noted, when banks increase their credit outflows, money supply would expand causing too much of money chasing after too little of goods and services. Thus, according to IPS, “stoking of inflationary pressures is very real”.

What does this mean? Either the Central Bank will have to introduce inflation-fighting contractionary monetary policy measures by way of applying brakes on credit growth and increasing interest rates or accommodate the high inflation in the future. The monetary policy stance of the Central Bank as at today points to it embracing the second option. It means that Sri Lanka will have high inflation and economic recession, known as inflationary recession.

Adjustment should be through fiscal policy

The following comment made by IPS in this context is well revealing: “Inflation reduces the real value of debt, benefitting the government, but not without major costs for the economy. Sri Lanka’s structurally weak economic growth in the past decade – concentrated on a narrow base of non-tradable sectors like construction – provides ample examples of excessive money expansion finding its way to asset and real estate bubbles, leading to undesirable swings in interest rates and economic activity.”

The solution lies in Sri Lanka making the necessary adjustment not through monetary policy but through the fiscal policy. The present Government has offered a set of very attractive tax concessions to income tax and value-added taxpayers causing a drastic decline in taxes to GDP ratio. This is totally unwarranted and in the words of IPS, “Sri Lanka can no longer be a low tax and low spend economy.”

Self-defeating import controls in the long run

In the very short run, Sri Lanka has resorted to import controls to alleviate the high pressure for balance of payments deficits and exchange rate to depreciate in the market. The problem lies in the country not earning enough foreign exchange. Hence, as a very short-term measure, it has some validity.

However, if import controls are continued to medium to long term, their usefulness becomes questionable. This is what IPS has said about them. “Beyond the short-term, restricting trade is also self-defeating. While curbs on motor vehicle imports to deter non-essential expenditures at this point are reasonable, external sector pressures will need to be addressed directly over time.”

Refashioning of trade policies

IPS says that Sri Lanka is not an exception in re-examining trade policies to support livelihoods, food security and other priorities in the wake of COVID-19. The failure of the World Trade Organisation sponsored Doha Round of Trade Negotiations and the Global Financial Crisis of 2008 have given rise to populist nationalistic economic sentiments.

In the COVID-19 in which the cross-border transactions have been restricted together with the movement of individuals, these types of sentiments have got a renewed life. But for Sri Lanka, opines IPS, export promotion is vital to come out of its severe external debt crisis. But imports are needed in order to export. Hence, immediately after the COVID-19 economic crisis has been subdued, it is necessary for the country to refashion its trade policies. Though IPS has not said so, it would necessarily involve return to free trade once again.

Recommendations beyond COVID-19 

IPS’s mission here is not just to address to COVID-19 pandemic related revival of the economy. It is beyond the pandemic. This is because Sri Lanka’s economic crisis is pre-COVID-19 and what it has done is to exacerbate the crisis. Every crisis should be used as an opportunity to introduce reforms. Reforms are painful but they are a must if Sri Lanka is to move on to a long-term growth path.

Sri Lanka’s economic growth, historically determined at about 4.5%, is its natural economic growth. If the country desires to reach the level of a rich country, it has to first beat the downturn in growth caused by COVID-19 pandemic and then, move up to around 8-9% in the next few decades. This requires the country to look at the broader picture and address each issue involved. IPS has analysed them under 10 broad areas, followed by five areas of policy briefs.

Limited fiscal space is an issue

In the other parts of the world, for instance, countries like Australia and New Zealand, have resorted to using fiscal stimuluses to provide relief to households and businesses that had been affected by COVID-19 pandemic. That was because their fiscal state had been healthy with ability to raise revenue via taxation and funding through money printing.

For Sri Lanka, both these policies are luxuries. Many have recommended in this respect that Sri Lanka should resort to the policy prescriptions contained in the ideology known as Modern Monetary Theory or simply MMT. It says that there is nothing wrong in printing new money and dropping it from ‘helicopters’ at random so that it could be picked by both households and businesses. That money will increase the aggregate demand to previous levels, force aggregate supply to meet the demand and cause the paralysed economy to make a ‘jump-start’ creating wealth and saving jobs. But if it is practised in Sri Lanka, due to the fragile budgetary situation, the results would be disastrous.

Given a high debt servicing burden, IPS says, that Sri Lanka’s ability to use both fiscal policy and monetary policy for this purpose is severely constrained. In the policy brief, IPS, therefore, recommends that the use of the limited fiscal space should be done cautiously with clear objectives that emphasise the support being given without favour to any powerful groups. Then, the support should be targeted to facilitate households to maintain the minimum consumption levels.

What this means is that the limited fiscal resources should not be wasted and be used most effectively and efficiently. Then, a pre and post evaluation of the support programmes to ascertain that they have realised their intended goals is a must.

New normal in education should ensure equality

One of the biggest casualties of COVID-19 pandemic is the system of education. That is because education is delivered face to face in congregation of students in large numbers in limited physical spaces. For a pandemic like COVID-19 that spread through human contact it is a fertile ground for infecting a large population involved in the chain: classrooms, transport services, tuition classes, and finally families. Hence, the first lockdown was imposed on educational institutions.

The severity of this has been noted by IPS as “in what is recognised as the world’s largest educational crisis, interruption to education from COVID-19 can have long-term implications – beyond mere losses in learning.”

The response of governments has been to introduce education via distance learning using internet and Apps like Zoom, Loom and Microsoft Team Meeting. But for this to become universal and inclusive, the most important requirement has been to spread the internet use at affordable rates.

IPS has warned that unless this issue is resolved, e-learning via internet would lead to inequity in the delivery of education. Says IPS: “Less than half of all households in Sri Lanka can benefit from e-learning opportunities; it is crucial that the shift to online education does not contribute to exacerbating inequalities already ingrained in the education system.”

SOE 2020 should be policy makers’ guidebook

What has been covered in this review has been only important aspects of SOE 2020. It is rich with information, analysis, recommendation and policy briefs. It behoves Sri Lanka’s policy authorities to take this report into reckoning when formulating way forward strategies for the country to get out of the present severe economic malaise and push it on to a high growth path in the post-COVID-19 era.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 3

    “The Institute of Policy Studies or IPS is famous for presenting a comprehensive analysis of a hot theme in its annual State of the Economy or SOE reports.”

    is this another Sri Lanka organisation that no politician take seriously ?

  • 0


    It is not “W” Shaped recovery, but “V” shaped recovery with a long flat bottom.

    • 2

      That is a ‘U’ recovery

  • 1

    IPS may be an autonomous body in name, but heavily funded by foreign Donors,

    How independent is it?

    The focus of IPS is is to provide an integrated analysis of development challenges facing Sri Lanka to meet the fundamental objectives of sustainable growth, equity and poverty alleviation.

    Its focus is Just to provide an analysis and then to sit up and watch!

    Whereas Central Bank and Ministry of Finance are implementer !.,

    The traditional role of Central Bank is to manege , the country’s Monetary Policy and Ministry of Finance not only manages fiscal policy, but with a political bias. yet do a lot whether mandated or not??

    It is not realistic to compare IPS with Central Bank and Ministry of Finance.

  • 5

    A fine essay Dr. Wijewardena. Thank you;

    After almost 150 years of British colonial rule, at the turn of Independence in 1948, a mere 5% of the population had knowledge of the English Language and that too at varying levels.

    Free education- The Pearl of great price introduced by Dr. C.W.W.Kannangara had a great impact in the country reaching all nooks and corners of the country.
    Now with e-learning via the internet what would be the percentage of the student population that will have access to this form of Education?

    Once the Covid-19 leaves us, it is just not the Economy but we will be grappling with a social problem.
    There will be just a few haves and a huge segment of the population would be rendered as have-nots. A recipe for chaos!

    The 20thA will make things worse!

  • 2

    C.W.W.Kannangara introduced free English education.
    There was an island wide Scholarship examination for those who had passed 5th Standard in Tamil/Sinhalese before 10th birthday, only one student chosen for each province.- prize was Rs 50 each month for six years to enrol in any “English” school which was fee levying.

  • 7

    We don’t need a comprehensive analysis of statistics to say that SriLanka’s economy is good or bad after the Covid-19 second wave. Most of the population believes that China will give all our debts and our economy will reach to the standard of USA. It is a common sense that what are the sectors generated income to this country. Over 60% of the GDP contribution is from service sector including Tourism, Transport & communication and trade and banking sector. Another 30% from Industrial sector and 10% from agricultural sector. Covid 19 reduced the income of many households and do not know what more come from Covid. In order to get through the 20A, it is obvious that billions worth of deals were made by Ruling family and this should come from public money, not their pockets. It is also an indicator that corruption is going to dominate as in the past. Import bans means export bans and price hike. Price hike means poverty, unemployment, iron hand of military and bloodbath.So, future is bleak.

  • 4

    It is time to “CHANGE” from these terms of “GDP”, “GNP” in the measurement of the “Health” of a country to a more “REALISTIC” method of assessment such as “GROSS NATIONAL HAPPINESS” (GNH) of the PEOPLE in particular and the country in general. One country that this method is very successfully adopted is Bhutan, a small country nestled between two “Giants” viz. China and India. I call this “GNH” a “Realistic” because that “Index” would convey to the people the “Success” or “Failure” of the country’s Government of the day, in very SIMPLE, UNDERSTANDABLE, MEANINGFUL and VISIBLE terms than these “Complicated” terminology of “GDP” and “GNP” – the “TOOLS” in the hands of “CROOKS” to mislead and capture power to ascend the “THRONE”.

  • 0

    The morons who voted for the current lot of scoundrels and don’t understand anything about economics cannot be counted on to do anything to lift them selves up. By nature they are dishonest buffoons. Corruption and the lack of honesty runs in the blood. No one will be inclined to invest anything in a nation of crooks who have been sustained and reinforced in their way of thinking by like minded utterly stupid politicians. We are about to face a debt repayment crisis from which we will have to extricate ourselves by asking for a debt restructure. This will come wiht a sever currency devaluation and austerity the likes of which the supporters of the current government never imagined. When you toss out a decent educated government because you are too stupid to appreciate what they were doing and replace it with the Rajapakshes there is no redemption. IPS or all the economics wizards are not going to make any difference with a dictatorship run by a family of clowns.

  • 0

    Ever since the current fellows came to power their supporters have been hit with lower or no income. Hotel staff for example have gone from a take home pay of Rs 50,000/= including tips to Rs 15,000/= Government servants shave lost not only their promised increments but the ones they were already getting. Pensioners have lost their promised increments. The cost of food has sky rocketed. A military regime menaces the public with eternal curfews and restrictions. The Rataviruva’s are homeless begging on the streets of middle eastern countries while the clown family prioritizes the 20A aimed at strangling democracy. Chyna knows where Sri Lanka is headed. It likes what it sees. It will keep stringing the morons along for a short time further strangling the poor victim in ever increasing debt until the time is right for a complete take over.

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