THE WORLD ECONOMY IN CORONAVIRUS PANDEMIC AND POLICY OPTIONS FOR SRI LANKA
Posted on March 24th, 2020

BY EDWARD THEOPHILUS

It is reported that the world economy has commenced to unexpected backward as a result of the corona outbreak and many leaders have commented that this experience could be regarded as the main incident after a century of economic history.  The major impact would be unemployment and lower-income for families. It will impact the aggregate demand in all countries and the significant consequence will be declining the purchasing power of people forcing to restrict spending. It also encourages us to assume that the prices of certain goods and services might get a down turning trend as the demand for goods and services might reduce due to less money in hand. In this situation, the economic impact on companies is vital because it will reduce government tax revenue (combined impact of lower profit and unemployment) thereby reducing the capacity of governments to spending on welfare and investments.

Many developed countries have introduced incentive packages for individuals and businesses. Many countries in the world concern about the impact on small businesses as a result of social distancing which brings into being bad effects on the fashion industry, hospitality, tourism, and many other related business areas.  Some analysts indicate that incentive packages are not working as expected and others indicated that incentives are not enough to revive the economy. Many countries have problems with how to give incentives continuously when tax revenue has a down turning trend and the only way to governments borrowing for the purpose and it may adversely impact the medium term to many countries.  Some countries have limits to borrow.  Australia originally introduced A$ 17.0 billion package and later it has increased to $ 100 billion and economists have predicted that unemployment would rise to 7% at the end of this year, which is a similar situation in 2008. Although developed nations introduced large incentives (USA $ 1.7 trillion) Sri Lanka has no capacity for such a $ billion incentives and the country has limits to borrow. However, the presidential task force has introduced maximum possible reliefs and incentives and controls.

After the cold war, many developed countries shifted from manufacturing base to services and manufacturing industries were absorbed by China and other Asian countries. Corona epidemic badly hit the Chinese economy for a strong slowdown and restricted growth possibilities and it will be a blow to developed and developing countries.  Since the early 1990s, Sri Lanka’s economy also attracted service businesses especially tourism and hospitality, education and training, information technology, construction services, medical and dental services, fashion and many other services and they became areas of employment for the labor force.  Besides, employment overseas also played a considerable contribution to the country, but the corona crisis seems to limit foreign employment opportunities in short and medium terms. Many need to change the field of employment departing from the currently engage in, for example, I had to change my career field from banking and finance to education and training after a deep recession in the early 1990s and similar experience would become of the end of the current crisis.

According to Reuter report Mr. Chen Ulu, Deputy Governor of Peoples’ Bank of China stated that strengthening international cooperation regarding public health policies, trade policies, fiscal and monetary policies are vital policy actions to face international economic backwardness and Sri Lanka is not immune to this situation and it must go along with international cooperation and policy actions.

It is recorded that more than one million population of Sri Lanka are living exile and they send $ billions to the country supporting foreign exchange earnings and the government of Sri Lanka should have multiple strategies to expand foreign exchange reserves.  The Current backward economic environment needs rational thinking intending to maintaining a reasonable level of stability and providing employment opportunities for increasing the labor force. I believe that economic policymakers need to consider the following areas of rational actions despite politically motivating opposition to some rational policy actions.

  • Policy correction process must be continued directing lower spending for public enterprises and allowing private investments of Sri Lankan citizens without selling government assets to foreigners are, vital actions to strengthen the economy of Sri Lanka.  The country needs to maintain a safety net for the poor and some areas of spending must be limited widely using a user-pay system.  Many Sri Lankans living in the country and overseas can contribute to capital management of public enterprises and 30% of capital contribution from Sri Lankan will be supported to innovations, effective and efficient management, research and development and expanding market base of public enterprises.
  • Implementation of productivity enhancement program in the public and private sectors. The attitude of people is normally negative and selfish.  They like to get payments without contributing to the workplace.  They like more holidays and enjoyment.  Many people ready to work hard when they go to work overseas but they are not ready to work similar way in the country.  This situation needs to change and productivity must be the base of payment.  
  • Sri Lanka needs improvement in savings.  There is a considerable gap between savings and investment.  The current price level and inflation don’t permit to massively promote individuals from the salary and wages so superannuation systems should be the strong method of saving.  The superannuation management should be independent of the Central Bank, which is the regulatory authority of the financial system of the country.  The best option is to establish a sperate organization to manage super funds in the country combining the government pension, individual pension funds, EPF, ETF, and others.  This organization can provide at least 10000 employment opportunities.
  • Sri Lanka imports much agricultural produce such as rice, onion and many others. All these agricultural imports must stop and promoting import substitutions-all possible items should produce domestically.  In this way, Sri Lanka can save a large volume of foreign exchange.
  • It is recorded that the monetary unit of the country is badly depreciating and this situation has been influenced by several factors such as lower level of foreign reserves, lower level of product and services export, budget deficit, debt services, and many other factors. To improve the export economy Sri Lanka needs assistance from China and India.  China can help to improve product quality and there are many strategies such as exporting Sri Lanka products through China and India.  In China and India, many products could be improved and such policy action would help to become a nation with export power and strong export revenue flow.
  • Sri Lanka needs to consider and investigate possibilities of currency swap agreement with China and India for the US $ 50 billion which keeps as foreign reserves to settle agreements from exports to both countries.  This quite difficult negotiation and foreign policy-related matters.  Sri Lanka needs supports from China and India both and such diplomatic stewardship would be useful to the entire Asian region. Taiwan is equivalent to Sri Lanka in population and land area but it has more than the US $ 500 billion foreign reserves.  If Sri Lanka can build theUS $ 50 billion reserves within the next five years, there is no doubt that the foreign value of Sri Lanka Rupee radically increases and many international trade advantages could be gained.
  • Sri Lanka needs to maintain market economic policies with strong disciplines. I will generate more jobs and income to disadvantage people. This will support to reduce welfare payments and eliminate disparities in economic status.
  • As Sri Lanka is a small island it is easy to maintain a balanced growth, however, during the past 40 years, economic growth networked to Colombo and many skilled people pushed to go overseas for working than using knowledge and skills of them for the use of the country.  The government spending on education and training is gained by other countries giving small jobs and this situation could be changed by giving good value to Sri Lanka Rupee.  Before 1970, Sri Lanka’s monetary unit was comparatively strong and very fewer people looked for job opportunities in overseas and now all skilled people look jobs overseas.  This could change by improving the value of Sri Lanka rupee.

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