Will Sri Lanka’s economy collapse due to lockdown?


By Charith Isuru 

The answer is a BIG NO…..

What are possible scenarios that can cause a possible economic collapse in Sri Lanka during this Covid pandemic?

1. Substantial downturn in exports.

2. Sizable loss in foreign worker remittances.

3. Unexpected surge in imports to an unbearable level.

4. Lack of foreign currency inflows to service the country’s foreign debt.

5. Hyperinflation with almost no value of the local currency.

6. Loss of a significant portion of workforce due to the virus.

None of the above scenarios are possible due to a 30 days lockdown which is requested by health experts.

(There are many other scenarios that can lead to economic depression during an ordinary time which the writer does not want to discuss in this article)

Sri Lankan Government has carried out a successful operation in terms of controlling covid pandemic since its inception in March 2020 with the help of the healthcare sector as well as Tri-forces and Police. Sri Lanka has been able to maintain a very low level of mortality rate compared to developed nations for the last 12 months.

None of these achievements could have been possible without the proper guidance of the government and efforts of the health care sector along with unconditional support of Tri forces & Police. As Citizens of Sri Lanka we should be thankful for our healthcare sector as well as Tri forces/Police and Government leadership for containing the pandemic throughout the past 14 months.

However, Sri Lanka has come to a trigger point in terms of active cases compared to its healthcare sector capacity which requires lightening quick decision making to contain the situation.

What are the possible implications of a Lockdown ?

Sri Lanka’s GDP in 2020 was approximately Rs 15,000 billion and Per day economic value addition was Rs  41 billion. It means the whole SL population’s average daily total income per day was Rs 41 billion in 2020. To elaborate further, Sri Lankans Collectively earn Rs 41 Billion per day from economic activities.

On a simple note, one can say that if Sri Lanka goes for a lockdown, per day loss of income can be as high as Rs 41 Billion. However, if you closely analyzed the scenario you may identify certain realities on the ground.

1. General public’s primary expectation is to see strict Government measures with a view of containing the virus spread and deaths

2. General public can use their own savings for short-term survival.

3. Daily wage workers can be given Rs 5000 allowance to mitigate economic burden to a certain extent.

4. Further, nationwide/localized donation campaigns can be organized with the help of religious leaders and media organizations. (These types of donation campaigns were carried out in the aftermath of Tsunami and other natural disasters such as floods/earth slips).

Good side for the Economy

The most important thing is lockdown is different from an economic recession/depression.

In a lockdown, economic potential is artificially controlled whereas peoples’ willingness for economic activities will be continued. No sooner, the economy is fully opened, economic activities will be bounced back within a short period. However, in an economic recession/depression, the economy will take a much longer time to return to normalcy due to systematic issues created during the recession/depression.

The beauty of a lockdown is that we can design a lockdown in a way that will enable the economy’s critical economic activities to progress amid strict controls. Actually, a lockdown can end up with more economic benefits to Sri Lanka in the short term.

For eg: per day crude oil consumption is approx. USD 10 million in Sri Lanka(assuming oil barrel is $ 60 dollars). If a lockdown announced and 80% movement is controlled, crude oil consumption will at least be reduced to USD 5 million per day. Therefore, if Sri Lanka is locked down for 30 days, SL may save USD 150 million (USD 5 Mn* 30 days) worth of crude oil consumption cost per month.

Actually, if Sri Lanka can go for a lockdown with exports sector open, Sri Lankan Rupee will be strengthened and pressure on the exchange rate will be reduced. This was witnessed in 2020 with the help of ban non-essential imports.

On the other hand, lockdown will put temporary breaks to economic activities which will lead to slower private sector credit growth and eventually result in a lower import cost to the economy during lockdown period.

Sri Lanka’s import bill is approx. USD 50 million per day (USD 1,500 million per month on an ordinary year). As discussed above country may save at-least USD 5 million per day from lower crude oil consumption and if another USD 5 million worth of imports is saved due to lower private sector demand, as a country Sri Lanka can save upto USD 10 million per day by way of lower demand on imported items. Therefore, the country can save up to USD 300 million for 30 days lockdown period. (USD 10 Mn * 30 days)

The above scenario was witnessed in 2020 and the exchange rate was stabilized around 185 level during 2nd half of 2020. (Ban on non-essential imports and mandatory credit on import settlement also helped the sentiment in 2020)

Lockdown in Sri Lanka has almost zero correlation with foreign worker remittances volumes. However, Sri Lanka should facilitate services relating to foreign employment with a view of increasing remittances volumes.

Further, export sector has been allowed for business during the locked down periods with help of other essential services such as banking, ports, airfreight services and etc.

Lockdown means less economic activities. Less economic activities mean lower consumption of both imported and locally produced resources. These will result in lower inflation and less pressure on the exchange rate. Further, lower economic activities will lead to lower private sector credit demand and thereby ease pressure on interest rates.

Therefore, 30 days lockdown will help Sri Lanka to stabilize macro economic factors such as exchange rate, interest rate and inflation rate since supply side is protected as essential services. (Agriculture, estates, Food production, exports, Banking and etc are protected and running as essential services during locked downs).

All above economic benefits of a lockdown will be short lived (Maximum up to 1 – 3 months) and once economy is fully opened, imports will surge and credit growth will pick up as economic activities return to normalcy.

When the economy is fully opened for Business, Sri Lanka will face challenges in stabilizing macroeconomic factors such as exchange rate due to zero foreign currency income from tourism.

This was witnessed in early 2021 where imports hit around USD 1,500 million per month, private sector credit growth was Rs 218,000 million during Jan – Mar 2021 on the back of gradual easing of health restrictions relating to covid 19. Moreover, the surge in spending with help of private sector credit caused more imports together with Govt spending on infrastructure projects.

The writer believes that managing Sri Lanka’s economy during a locked down is easy compared to managing macroeconomic factors when the country is fully open for business with zero foreign currency income from tourism. This was evident if you compare macroeconomic factors such as exchange rate in the 4th quarter of 2020 Vs 1st quarter of 2021.

Disadvantages to the Economy

The main disadvantage is negative economic growth. If a locked down is announced economic growth will be hampered. However, Sri Lankan people are not interested in impressive economic growth stats at this moment as people desperately want to see a control in the pandemic.

If a locked down is imposed it will lead to less economic activities. Less economic activities will lead to loss of income to economic participants.

The main concern of the government is daily wage workers in the country. Daily wage workers earn Rs 20,000 minimum per month. Lockdown means they do not have job opportunities.

However, Sri Lanka has a rich culture where poor people are protected within the community during a disaster period. We saw it during aftermath of Tsunami / Floods where people of this country did not allow any death due to hunger. Rich and able people helped the poor via various programs conducted through Temple / Church / Kovil after each and every disaster.

The same strategy can be applied at this crucial moment where rich and able people in the community help the poor in the community. A nationwide program can be implemented with help of “Religious Leaders” and media organizations. This

On the other hand, Government can continue with its Rs 5000 Monthly allowance targeting poor people.

Government spent around   Rs 25  – 30 billion per month for Rs 5,000 allowance.  On the face of it, one may see spending Rs 25 – 30 billion per month is a huge burden on Government. But as discussed in the previous section, Sri Lanka can save upto USD 300 million worth of much need foreign currency due to lack of demand during a locked down. (USD 300 Mn is equal to Rs 60 billion).

Therefore, spending 25 – 30 billion on subsidies backed by USD 300 million saving on imports per month will not create any adverse economic impact to the economy.

Moreover, providing Rs 5000 allowance to a person who earned Rs 20,000 will not likely to create any inflationary pressure in the short term. 

There is another disadvantage arise from a lockdown. Government tax income will be disturbed during a locked down due to lack of economic activities. On a normal year Government collects more than Rs 150 billions per month via taxes. This can reduce drastically during a locked down where money printing will only be the alternative.

This is inevitable in a lockdown scenario. However, Govt. has the option to print money. Since “money multiplier” impact to is lower due to lack of economic activity during a lockdown period, Government money printing will not create any adverse inflationary pressures in the short term. However, Govt will have to carefully manage inflation after the pandemic since the money multiplier will be fully operative with printed cash. The Spiral impact can be seen after 1 to 2 years.

As long as import restrictions are in place, Government Money Printing will not create unnecessary pressure on the exchange rate. However, Government will have to be extra cautious when easing restrictions on imports after the pandemic since printed money within the system can create import demand. There are tools that can be used to manage macro-economic fundamentals after the pandemic which will enable Sri Lanka to put the economy back on track.

Allowing the economy to operate in full capacity with zero foreign currency income from tourism will create more issues than a lockdown scenario. This was evident during Q1 of 2021.

Moreover, the people of Sri Lanka request a nationwide lockdown from the Government on the back of health expert’s comments. Opposition is also trying to gain an advantage over pandemic spread/deaths numbers. According to health experts, a 28 days lockdown will be adequate to break the 3rd wave cycle.

For Example :

People survived during two and half months lockdown in 2020 and praised the Government for controlling pandemic situation. Eventually, people voted in favor of the Govt and gave 2/3 power to the President. Even people who lost their income sources due to pandemic locked downs generously voted in favor of the Government in the parliamentary election because of the success showed in containing the pandemic.  Hence, Controlling Covid 19 pandemic will be a key priority and expectation of people at this moment. If Government can respond accordingly, Govt. will be able to retain/regain its popularity.

Therefore, breaking Covid 19 cycle via 30 days nationwide locked down, expedite vaccination program, tourism promotion after vaccination, securing port city investments will be critical success factors in bringing SL economy back to normalcy. 

Thew riter believes that a 30 days nationwide locked down can bring health benefits such as breaking of the 3rd wave of Covid 19 cycle, less stress on the health care system, and economic benefits such as short term macro-economic stability, and political benefits such as retain/regain of Govt. popularity.

Therefore, a nationwide lockdown is a win-win scenario for people as well as for Government including the healthcare sector.

(The author is a CIMA qualified University of Sri Jayawardanepura graduate. Email  : charithisu07@gmail.com)