Economic impact of COVID-19 in Sri Lanka: Insights by ICRA

Apr 18, 2020 (LBO) – ICRA Lanka expects the Sri Lankan economy to face a recession of magnitude -1.9% in 2020 with a U-shape recovery path returning to its pre-crisis level by Q1 of 2021.

“All alternative scenario simulations point to recessionary outcomes – an escalation of the pandemic leading to a severe L-shape recession of -3.3% while the most optimistic estimations showing a mild V-shape recession of -0.6%,” ICRA Lanka said in a report.

“The expected blow to the revenue collection and heavy fiscal stimuli will come with a hefty price tag. The budget deficit will widen close to 8% of the GDP.”

With companies already moving forward with salary cuts, as the crisis deepens, unemployment could rise to upper single digits.

In the more severe case, the unemployment rate can accelerate to the levels before the late 90’s where Sri Lanka used to have a double-digit unemployment rate.

According to the ICRA, the domestic demand may remain subdued for the remainder of the year amidst weakening demand and therefore inflation is expected to be in the range of 4 to 7%.

The impact of COVID-19 on the agriculture sector will be minimal as the sector is quite resilient to the external shocks.

Most of the impact will be felt in services and industry sectors as these sectors are more open to external shocks.

ICRA Lanka Limited is a credit rating agency licensed by the Securities and Exchange Commission of Sri Lanka and a fully owned subsidiary of ICRA Limited of India, a subsidiary company of Moody’s Investors service.

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