Easter attacks 2019 vs. COVID-19 outbreak 2020: What lies ahead for SL
Nisha Arunatilake
On Easter Sunday last year, Sri Lanka was shocked by a series of bomb attacks. The security concerns that followed kept people home and curtailed economic activities.
Less than a year later, the country is again under curfew for a different reason. A new disease, COVID-19, which first emerged in the city of Wuhan in China, in December 2019, is fast spreading across the world. With no known treatment or vaccine for the disease, the only means of containing its spread is large-scale social distancing, isolating patients, and quarantining those who have been exposed to the virus.
By March 2020, health systems across the
world were struggling to cope up with the rapidly increasing number of COVID-19
cases. The Sri Lankan government, too, put several measures in place to contain
the spread of the disease, starting from 12 March 2020. Schools closed early
for April holidays and employees were asked to work from home. This was
followed by an all-island curfew from mid-March. In addition, the country’s
main airports were closed for arrivals from 22 March, to prevent imported COVID-19
cases which is the main source of outbreaks in Sri Lanka.
Unlike the Easter Sunday attacks, COVID-19
is not only affecting Sri Lanka. Its effect is felt by almost all countries
across the world. The economic impact of this on Sri Lanka will not only be influenced
by what is happening in the country, but also by how the disease is affecting global
values chains, markets, and the movement of goods and people across the world.
With the COVID-19 pandemic still unfolding,
it is too early to estimate the economic impact of the crisis. This blog
compares the economic impact of the Easter Sunday attacks to illustrate the
likely impact of COVID-19 on Sri Lanka’s economy.
Manufacturing
Sector
The pandemic began affecting Sri Lanka’s manufacturing
sector, even before the number of COVID-19 patients started increasing in the
country. The Purchasing Managers’ Index (PMI), which takes values between 0 and 100, indicates whether the
manufacturing sector is expanding or slowing down, as viewed by business
managers. A value above 50 indicate an expansion, while a value below 50
indicates a contraction. The manufacturing sector activities, which were on an
expansionary phase in January (with a PMI value of 54.5) started slowing down
in February, with weakening demand, reduced supply of essential raw materials,
as well as longer time taken to receive raw materials from countries such as
China, which were affected by the COVID-19 from January onwards. The
government’s COVID-19 containment efforts also included closing factories which
bring together large numbers of workers. The recent closure
of export industrial zones is an example.
The Easter Sunday attacks last April saw
the manufacturing sector slowing down sharply (Figure 1). The PMI moved from a
healthy 66.9 points in March to 41.0 in April in 2019. However, the contraction
of the sector was short lived. By May, the sector was already picking up.
Even if the COVID-19 situation in Sri Lanka
is brought under control, local industries will continue to be affected by raw
material shortfalls and reduced demand. As more and more countries lockdown and
keep citizens at home, aggregate demand will fall, as customers reduce
non-essential purchases due to future uncertainties. Further, the cut down in
factory work will result in reduced work hours and layoffs, bringing down
incomes. This will also affect the purchasing power of customers, thereby
further reducing demand. Small and
medium scale firms which have limited reserves will be severely affected by the
downturn.
Figure 1
Source: Constructed using Central
Bank Data
Services
Sector
With Sri Lanka under curfew and a ban on
international arrivals, the impact of COVID-19 on the services sector is likely
to be long and severe. The Services PMI,
like the manufacturing PMI, tracks market sentiment as expressed by managers,
from month to month, based on sales, employment, inventories, and prices. Like
the manufacturing sector, Sri Lanka experienced a slowdown in the services
sector early on, with the Services PMI falling by almost seven points from
January to February 2020.
Sri Lanka’s Services PMI dropped to an
all-time low of 44.7 in May 2019, following the Easter Sunday attacks, mainly
due to the contraction in accommodation, food and beverage, and other personal
services sectors. But the services PMI started recovering by June 2019. However,
with the ongoing curfew, wholesale and retail trade, as well as transportation
of goods and people, will be severely limited. With the future uncertain and limited
consumer spending, other financial and real estate activities will also slow
down. With no visitors coming into the country, the tourism industry will be
one of the most severely affected. Comparatively, the bomb attacks mostly
affected the big hotels and the impact was short lived. It has been the
practice of the tourism industry to lure local tourists when there is a
slowdown of international visitors. But, with most of the country on curfew and
restrictions placed on leisure travel, the industry is not likely to benefit
from increased demand from the local market either. The tourism industry was
already experiencing a slowdown from the beginning of this year with reduced
Chinese tourists arriving in the country. With arrivals completely banned, the
number of foreigners coming to the country is near zero. In addition, the hotel
industry will also not benefit from local tourists due to the ban on internal
travel.
Agriculture
Sector
Restrictions relating to COVID-19 are
mainly in place in the Western and the Northern provinces. The government is facilitating
agricultural activities through a taskforce covering all districts in the
country. The agriculture sector will mainly experience a fall in demand. Due to
a drastic slowdown in the hotel sector and in the food and beverages sector,
the local demand for agricultural goods will reduce significantly. At the same
time, the export agriculture sector will see a dramatic decline in demand, due
to lockdowns in operations across the globe and severe restrictions imposed on
international transport of goods and services. In addition to reduced demand, restrictions
in trade could result in shortages of inputs, such as fertiliser, and reduced
availability of workers.
Labour
Market Impact
With economic prospects looking bleak, the demand
for labour in the next few months is likely to be poor. The returns from
business activities will also likely to decline. Workers who are not in
permanent employment such as daily workers, casual workers, and those who are self-employed
in the informal sector are the most affected. The incomes of non-permanent
workers are expected to decline due to layoffs and reduced work hours. Workers
who are not covered by social protection, such as the self-employed and casual
and gig-workers, will also be affected by adverse economic shocks. According to
the 2018 Labour Force Survey, of the 8 million workers in the country, 4.7
million (or 59%) were informal workers. Of this, the most affected would be the
2.5 million non-agricultural, low skilled workers engaged in elementary
occupations, craft and related trade work, and plant and machine operators and
assemblers.
Policy
Responses
As long as the health threat to Sri Lanka
continues, the economy will not be able to recover. Very correctly, the
government is giving priority to containing the disease. Even if the disease is
contained within the country, as long as COVID-19 is present in the rest of the
world, the threat to Sri Lanka from a recurrence of the disease will be large.
Hence, existing measures to reduce the disease from being imported to the
country should continue as long as COVID-19 threat is present in the rest of
the world.
Unlike the Easter Sunday attacks, COVID-19
affects both the demand and supply side of the economy. Hence policy responses
should look into both supporting jobs
and incomes, as well as providing a stimulus
to restart the economy. Any stimulus package should benefit those in the
informal sector as well as formal sector workers and registered companies.