The Central Bank this week as an emergency measure slashed policy rates by 25 basis points, in addition to the reduction of 50 basis points in January. The monetary institution hopes that if banks pass on this benefit to the consumer faster, it may assist to offset an economic slowdown. While a stronger reduction in interest rates will undoubtedly assist the economy, a stronger recovery needs people to be actively engaged, free of self-quarantine, travel including international travel needs to be accessible, and safe and global value chains need to recover. Remittances, apparel and tourism require these things, perhaps more than lower interest rates at this stage. Government expenditure, always a point of concern and more so now as flagging productivity also means less Government revenue, could need careful balancing as Sri Lanka attempts to hang on to growth in the first quarter. The economic impact of COVID-19 is harder to gauge, with economists concerned the fallout could be serious for an economy already battered by slow growth, high debt and suffering from consistent structural challenges. Exporters in particular are worried that the loss in revenue could be as high as $ 750 million with sectors that are already suffering continuing to be hit once again by the outbreak.
Perhaps top of the list is tourism. Having been severely hit by the Easter Sunday attacks last year the industry was making a faster-than-expected recovery and was set to do well in 2020 before the coronavirus took down such hopes. While it is difficult to predict exactly how much in earnings could be lost, it is nonetheless concerning when considering the fiscal challenges faced by the country and the estimated 7% or higher budget deficit that is expected this year. The Government has already stepped in by extending the moratorium that was put in place after the Easter Sunday attacks by one year, under a larger moratorium covering all Small and Medium Enterprises (SMEs). Sweeping tax cuts that were introduced by the Government shortly after the Presidential Elections are also expected to boost growth and counter some of the impact of coronavirus, but given the challenging macroeconomic fundamentals faced by Sri Lanka, it may not necessarily be able to maintain this fiscal support in the long term.
In addition to tourism, the sectors of apparel and construction could be the next worst hit. Apparel of course is facing a double whammy due to both supply chain disruptions and possible slowdown of growth in key export markets. Top industry officials have already predicted that factories may need to close earlier and stay closed past the Sinhala and Tamil New Year in April due to lack of supplies and orders. At the moment companies have mostly decided to keep people on pay roll, but if the disruptions are prolonged then layoffs may become inevitable. Construction has already seen some of its projects delayed as Chinese workers remain in their home country after returning to celebrate the Chinese New Year. Traditionally construction has been a major growth contributor but it is highly dependent on imports so a slowdown could have mixed results. The silver lining is that a construction industry slowdown could reduce the trade deficit and reduce impact on reserves. The same could happen if vehicle imports are also curbed.
Maintaining strong macroeconomic fundamentals in such an environment could be challenging and it is crucial to consider this as Sri Lanka also has to repay $4.8 billion in debt repayments this year. Fortunately the next large repayment of $ 1 billion is only due in September, giving the Government some breathing room to get elections behind them before tackling the debt situation. The relative smallness and the insular nature of our economy could assist it to weather this storm better, but coronavirus has nonetheless managed to take the lustre off the growth turnaround that was expected in 2020.