Sri Lanka’s fight against the recurring COVID-19 waves

Sri Lanka seems to be beaten down by the recurring Covid-19 waves. Even before it could recover from the third wave, it found itself fighting with infectious fourth wave. The mortality remained high with its positivity rate close to 15%, however, the reproduction rate lowered. The only way out of this viscous cycle would be vaccination. 68% of the Sri Lankan population has received at least one dose of the vaccine which is higher than the 45% global average. 

The country’s growth started on a positive note but come June, it plummeted back into the red zone. The onset of third wave, the recovery momentum weakened. Port activity, IP growth and electricity demand all went down.  However, this only lasted until June when their PMI came out of consolidation. But again, this didn’t last long as the fourth wave restricted further growth. The country announced 6-week nationwide curfew, although this time around garment, construction and export industries were permitted to function. For now, the economic growth would rely on the increasing export with increasing global recovery. Tourism would still be shunned upon due to the recurring waves. The overall GDP is expected to grow at 3.5%

The inflation seems to be rising. In August the Core Inflation breached the 4% target for the first time, while the headline inflation is expected to grow at 5.8% in H2FY21. Higher oil prices, pandemic-related supply disruptions, and currency depreciation are some other pressures mounting on inflation.

With the global recovery and higher import bills, both the exports and imports have been performing well and have crossed the pre-pandemic levels. Remittances income coming from abroad played a vital role in the current account. After sluggish years of 2018 and 2019, the country saw a stronger inflow in 2020 and the same momentum is expected to continue in 2021. However, the inflow has dropped in the past 3 months.

After a shortfall in May 2021, the tourism has significantly increased in August. However, the increase is only 5% in the recent months as compared to the normal times. Even if the tourism doubles in December in comparison with August, the tourism economic contribution would still remain low. For the tourism to really pick up, the country would have to control the recurring pandemic waves, increase the vaccination drives and wait for the international travel demand to recover.

During a policy meeting held in August, the central government unpredictably increased the policy rates by 50bp and the statutory reserve ratio by 2ppt. This caused increased inflationary pressure and external sector imbalance. The official reserves of Sri Lanka have gone up to $3.8 bn from $2.8bn with little help from IMF. There is also undue pressure on the exchange rate due to increasing trade deficit caused by higher imports, limited conversion by exports and some speculative activities.

Given the concerns and to tackle them accordingly, the central bank may hike policy rates again by 50bps in H1FY22 and later another 50bps in H2FY22.

The recurrence of the Covid-19 waves has cost the $80b Sri Lankan economy to deal with an amplified amount of debt of $47bn and the fiscal outlook remains uncertain. The high fiscal deficit level is expected to remain the same at the 202 levels. The public debt has touched 100% of the GDP.

Only in the recent has the Sri Lankan government decreased its dependency on the foreign funding. The country has high pressure of repaying the public debt of 4bn each year until 2025. Even though the government is making all possible arrangements to repay the debt, there is an urgency to find a long-term solution to roll over debt at a reasonable cost. Until the government finds a solution, uncertainty looms over debt repayments and external sector which may scare the investor and keep them away which is desperately require for the sustainability and growth of the economy.