Covid-19 Would Undoubtedly Be A Turning Point

Daily Mirror - Sri Lanka|May 14, 2020

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Covid-19 Would Undoubtedly Be A Turning Point
Interview with CB Governor W.D. Lakshman
Sandun A. Jayasekera

Q Early this year the ADB forecast a GDP growth of 2.2% for this year and 3.5% next year, the inflation rate to remain at 5% in 2020 and 4.8% in 2021. In this backdrop of the Central Bank has already indicated a lower GDP growth of 1.5% in 2020. How do you see the challenge of rebuilding the national economy in the aftermath of the COVID-19 pandemic?

The annual growth rate of an economy, in the past is calculated using (i) Gross Domestic Product (GDP) estimates for any two years, (ii) expressed “at constant prices” i.e. after removing inflation effect. These GDP numbers are what an average educated person refers to as “real” GDP estimates. The comparison of real GDP of two years gives us the widely used economic growth rate.

In Sri Lanka the official agency that is responsible for producing these GDP data and price index numbers are the Department of Census and Statistics (DCS). It is these numbers that the Central Bank also uses in its analytical work and its publications. Due to slight differences in definitions and statistical practices, the growth rate number published even for a given year in different publications may not always be uniform.

What you have asked me is about a growth rate number, presented as a forecast for a future period – for whole of 2020 and for 2021. These numbers may vary from one publication to another even more than growth rate numbers for past periods. This is because the forecasting frameworks and assumptions used vary from one computation to another. This explains the difference between ADB and CBSL forecasts of Sri Lanka’s expected growth rates for 2020 and 2021. Indeed, the estimates presented by the IMF and the World Bank, although you have not mentioned these, indicate even lower growth prospects for these two years. The Central Bank, having made its computations with greater familiarity with domestic socio-economic and political conditions, believes that its forecast is likely to be closer to expected reality in overall 2020 and trusts also that 2021 growth would be higher at 4.5%, still a little less than the ADB forecast of 4.8%.

Q The industrial sector, tourist industry, small and medium enterprises, rural and domestic industries are the most affected from COVID-19. How do you suggest these vital segments of the economy could be revived in the shortest possible time period?

It is true that the Small and Medium Enterprises (SME) in agricultural, industrial and service sectors, cottage industries, micro-enterprises and self-employed and casually employed people are the most affected by the spread of COVID-19. Viewed from a humanitarian angle, the plight of low-income families in these groups appears particularly distressing. The large enterprises, particularly those employing large numbers of workers, are also badly affected. Therefore, the large enterprises might be able to tide over the financial difficulties of the lockdown period and workers in those enterprises would have been provided with a living wage even when the industries were locked down.

The lasting solution to revive these affected segments of the society and their livelihoods is obviously the recommencement of economic activities kept under locked down conditions for several weeks. As a prerequisite for this, the health authorities must gain the confidence to recommend to authorities that the further spread of COVID-19 would remain subdued. The government would then begin the gradual and selective lifting of restrictions on social movements, thus permitting people to commence their normal economic activities.

Although nationally the spread of COVID19 is under control, its global spread has not yet reached that stage. Inevitably the global economy will come to experience conditions of recession, the worst after the Great Depression of the 1930s. The post-coronavirus world economy, particularly the countries of the West, will take quite some more time to turn around. The time when the process of unlocking would begin in earnest in the rest of the world is yet unclear and unknown. The best example to highlight these difficulties is the export-oriented garments and apparel industry. The spread of COVID-19 led to a drop of about 40% (in 2020) in the demand for its products from overseas market.

The other activity area closely linked to the rest of the world is the tourism sector. The best approximate estimate of total employment in tourism was around 450,000, about 5% of total Sri Lankan employment. Of this number, 180,000 are directly in tourism industry and 270,000 (55% of the total) indirectly so. Another classification is that of total employment (direct and indirect) about 60% are in the “informal” sector.

That the 21st century would be the Asian Century was a prognosis heard over many years. In the same way as the USA was a catalyst for the recovery of Europe and countries like Japan, during the post-WWII era, China and India are likely to play an important role during the Asian Century. Post-COVID-19 Sri Lanka is bound to gain from these regional developments, growing with the surrounding Asian economies.

A point to be noted in passing is the recent use of digital technology to carry out delayed tea auctions. This shows that export-related problems have technological solutions as well.

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May 14, 2020