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A PATHFINDER PERSPECTIVE ON THE ECONOMY

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SRI LANKA HAS TO SET AN URGENT GLIDE PATH TO THE IMF:

The Sri Lankan authorities have been able to achieve stable macro-economic indicators despite the severe economic dislocation caused by the pandemic. Inflation has remained well within the 4-6% target range; and the improvement of the trade deficit has had a positive impact on the current account of the Balance of Payments. In addition, interest rates are at historically low levels and there has been some stability in the exchange rate. As in most other countries, growth has been negative, due to both demand and supply shocks in the domestic economy and the decline of external demand due to the slowdown of the global economy. Sri Lanka’s performance has been better than a number of other countries in the region.

However, the model that has underpinned the significant degree of stability in macro-economic indicators to date, is now coming under considerable pressure. The extremely low interest rates have been maintained through administrative action (financial repression). The under-subscription in bill and bond auctions are signs that this policy is coming under stress in a context where credit to government remains high while private sector credit is picking up. At the same time, the currency has also come under pressure. The SLR has been propped up by restrictions on imports and capital outflows. Recently, a ban has also been imposed on forward transactions in the forex market. Despite (or because of) this, there continues to be stress in the forex market as imports rise with the bounce-back of the economy from its contraction in 2020. In addition, the prices of oil and other key commodity imports have been rising in global markets increasing the demand for dollars in the local forex market at a time when supply remains constrained, due to a shortage of foreign earnings/inflows, borrowed or non-borrowed.

The import and capital restrictions currently in place have a negative impact on growth, employment and incomes at a time when priority needs to be attached to bouncing back from the economic scarring inflicted by the pandemic.

The most imminent threat to macro-economic stability, which can affect the whole economy, comes from the Balance of Payments, the external payments in particular. Sri Lanka’s external debt dynamics are extremely challenging over the next six months and urgent action is needed to address them and mitigate collateral damage which can have wide-ranging social and political ramifications. Gross foreign external reserves amounted to USD 5.7 billion (including USD 400 million in gold) as at December 31, 2020. Total debt-related payments during the next six months (February – July 2021) comprise: an International Sovereign Bond (ISB) maturity of USD 1 billion; SLDB maturities of USD 980 million; and interest payments of USD 482 million. In addition, the Reserve Bank of India (RBI) SARC SWAP of USD 400 million would need to be repaid this month (February 2021). This is intended to be a short term facility and cannot be extended further without staff-level agreement on an IMF Arrangement.

In normal circumstances, the expectation is that SLBDs would be rolled over. However, only 25 percent of the maturities of USD 200 million was rolled over at the last auction. This reflects the severe scarcity of Forex in the market. There is uncertainty, therefore, regarding how much of the maturing SLDBs of USD 980mn can be rolled over during the next six months. Any shortfall will deplete the external reserves. The shortage of foreign exchange is also likely to adversely affect the rollover of short term SWAPs with FCBUs which will be maturing over the next six months.

The upshot of all this is that there is a strong possibility that reserves will fall to extremely dangerous levels within the next six months (by July 2021). Unless there are significant inflows in the meantime, there will have to be severe compression of domestic absorption (consumption and investment), i.e., very painful austerity. Instead of a recovery, the economy could well experience further contraction. It becomes important, therefore, to examine the likelihood of inflows which would serve to offset the heavy debt-servicing burden over the next six months. Sri Lanka’s development partners (multi-lateral and bilateral) are expected to disburse USD 1.7 billion during the course of the whole of 2021. Some of this would be flowing in over the next six months. However, because this is project and programme lending, it would not be possible to utilize this funding to boost the external reserve position. Furthermore, the rating downgrades have meant that Sri Lanka is no longer able to access international capital markets at affordable rates (currently 15 percent) thereby curtailing a potential source of financing.

Specific sources, which have been announced by the authorities to fill the external financing gap, include the following:

* Term loan from the China Development Bank : USD 700 million

– SWAP facility from the People’s Bank of China: Yuan 10 billion; equivalent to USD1.5 billion (this facility could have conditions that will constrain its capacity to bolster usable reserves)

* SWAP facility from the RBI: USD 1 billion (this facility is tied to Port development and removal of some import restrictions complicating the completion of negotiations).

The delay in the completion of these transactions seems to indicate that there are challenges in each of these negotiations. Even if all three of these facilities materialize, it is extremely unlikely that it would be possible to get sustained bilateral support of this nature in the magnitudes required to meet the country’s debt obligations of USD 23 billion over 2021-2025. Hence one needs an approach that unlocks a wider base for sourcing external financing.

The second option is to seek the support of the IMF. This will also serve to leverage a number of other sources of external financing. Over 70 countries have been assisted by the IMF through the Emergency Facilities established by the Fund to provide countries with fast-disbursing financing to address the impact of the pandemic. Sri Lanka would be eligible for USD 800 million from the Rapid Financing Initiative. An arrangement with the IMF can also trigger direct budgetary support from the ADB (USD 500 million) and the World Bank (about USD 300 million). It can also pave the way for a rating upgrade and eventually regaining access to international capital markets.

Anchoring policies to an IMF arrangement would also provide foreign investors with greater confidence to invest in the country. However, in the present global and domestic climate, it is unrealistic to expect that FDI will play a major role in filling the external financing gap, particularly in the short term. It is also noteworthy that it is difficult to utilize FDI to give a direct boost to gross official external reserves as much of it would flow out of the country in the form of imports and other payments incurred by the foreign investor. However, in the medium term, FDI can increase the capacity to service debt by contributing to an increase in the production of tradables which would earn or save foreign exchange.

For IMF support to be secured, there has to be a clear medium term plan to achieve debt sustainability. The Fund’s Articles do not permit it to lend to countries where it cannot certify that the debt is sustainable. At present, the IMF finds itself unable to certify that this is so. All options would need to be considered including fiscal adjustment, as well as a market- friendly re-profiling of Sri Lanka’s external debt through an extension of maturities and some relief on coupon payments. This would serve to create some space both in the Government Budget and the Balance of Payments for growth-oriented stabilization.

It is noteworthy that the IMF is currently advocating and supporting a growth-oriented approach to stabilization with a back loading of adjustment. It must be pointed out, however, that Sri Lanka does not have a painless glide path to stabilize the economy. Kicking the can down the road would only serve to increase the severity of the austerity when it is inevitably imposed.

It is crucial that there is early and decisive action as a very disruptive hard default, involving hair-cuts for creditors, could well be looming on the horizon. There are signs that Sri Lanka is facing solvency rather than liquidity challenges. As experienced in other countries, such a default usually means soaring interest rates, a collapse of the currency and severe belt-tightening, which tends to impact the poor and vulnerable disproportionately with unpredictable social and political ramifications.

The longer-term solution for achieving sustainable debt dynamics involves running a primary surplus in the budget and promoting an accelerated growth trajectory.This involves not only stabilization of macro fundamentals but also structural reforms to increase productivity/competitiveness of the economy. Increasing investment, including FDI, and boosting the production of tradables, particularly exports, need to be an integral part of this narrative. The Pathfinder Foundation set out a roadmap to achieve this in its Report, “Pathfinder Beyond the Box: A New Economic Vision for Post – COVID – 19 Sri Lanka” in May 2020.

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Herd immunity and vaccination

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HERD IMMUNITY: A good analogy is protection of calves in a herd of wild buffalos from predation by leopards. A sizeable number of adult bulls and cows in the herd attack and repulse leopards. Once in a way, a leopard would succeed dragging a calf, but a large majority of calves survive to ensure the continuation of the species. (Picture courtesy HAP Channel: https://www.youtube.com/watch?v=igx_pr6ptAg&ab_channel=HAPChannel)

By Prof.Kirthi Tennakone,
National Institute of Fundamental Studies
(ktenna@yahoo.co.uk)

With the advent of coronavirus vaccines, the idea of herd immunity is gaining ground – but often misunderstood or considered something hard to fathom. Herd immunity means the resistance a community develops against an infectious disease, when a fraction of its residents above a threshold acquires immunity either by exposure to the pathogen or vaccination. Thus, achieving herd immunity could safeguard individuals who cannot be immunized for reasons of being too young, convalescent or because of inadvertent inaccessibility.

A good analogy is protection of calves in a herd of wild buffalos from predation by leopards. A sizeable number of adult bulls and cows in the herd attack and repulse leopards. Once in a way, a leopard would succeed dragging a calf, but a large majority of calves survive to ensure the continuation of the species. If leopards prey exclusively on buffalos, they might be starved into extinction. Buffalos and leopards live in the jungle because the latter also hunt other animals. Similarly, in absence of non-human reservoirs of the pathogen, herd immunity provides a way of controlling an infection causing an epidemic or a pandemic and the elimination of the causative agent.

 

History and theory of herd immunity

Epidemics originate when a pathogen invades a population devoid of immunity. Science fiction writer H.G. Wells in his novel, “The War of the Worlds”, says Martian invaders were not immune to earthly microbes and all died due to an infection. We are not so alien to viruses here and the ability to make antibody machinery to fight them are genetically imprinted in our bodies.

Even in olden days when precautionary measures remained completely unknown or misunderstood, maladies ended before everyone caught the infection. Those days, epidemics were considered divine punishments or expressions of anger of deities. The cause that receded them; attributed to prayers, rituals or offerings to the demons, has been in fact the natural herd immunity.

The Mahavamsa and the Elu Athanagalu Vamsa refer to a catastrophe during the reign of King Sri Sanga Bodhi (252-254 CE). According to the legend in the latter script; a demon named Ratharaksha came to Sri Lanka and cast a spell reddening the eyes of people who stared at it in fear. Many who looked at the eyes of those afflicted also developed red eyes and contracted the illness. Very high mortality thinned the population of the land and the distressed king, ritualistically confronted the demon driving it to exile. The version of the story in Mahavamsa is similar but implicate a female demon Ratarakshi. What is the infectious agent behind this outbreak? From the symptoms described and the extreme contagiousness implied, the illness that ravaged the kingdom seems to be measles. The herd immunity threshold of measles exceeds 95%. There was also a famine accompanying the epidemic. Presumably, malnutrition and absence of immunity greatly increased the measles death toll.

Ages ago people lived in isolated communities. Therefore, an infectious disease which decelerated and vanished after reaching herd immunity did not remerge until the immunized percentage was lowered by people born subsequently. Many epidemics, notably small pox and plague followed cyclic patterns for this reason. Later on, the establishment of vast human settlements and extensive migration, turned epidemics into pandemics and many diseases remained endemic. Historians have also argued that the consequent wider dispersion of diseases, boosted the immunity of the global human herd thereby escalating the population growth.

The idea of herd immunity was first introduced by the American veterinarian George Potter in 1917; he noted a cattle disease disappeared on its own when animals were not introduced to the herd from outside. He said disease resembled a fire which extinguished when all fuel has been consumed.

In 1919 bacteriologist W. Topley infected a few mice in a large colony with a germ. He observed the infection expanded, subdued and stopped after infecting only a certain percentage of mice. Further clarification of difference between individual immunity and herd immunity followed from the work of American statistician A.W. Hedrick. He studied the epidemiology of measles in United States 1900-1911 and concluded measles epidemics ceased when 68% of children under 15 years became immunised after contraction of the illness.

The idea of herd immunity was firmly established after invoking mathematics into epidemiology – mathematician turned physician Sir Ronald Ross pioneered the theme.

Ronald Ross, born in India 1857, received his education in the United Kingdom and returned to his country of birth after qualifying as a doctor. He joined the Indian Medical Service 1880 and worked in Bangalore badly infested with mosquitoes. At the time malaria was suspected to be associated with mosquitoes. Curious, Ronald strived hard to understand how it was transmitted. Mosquitoes in the place he lived has been a nuisance; he closed all stagnant pools in the vicinity of his residence and found the mosquito number falling drastically, but realized complete elimination would be an impossibility. When Ronald Ross was transferred to a station free of malaria, he declined to work in a locality free of malaria!

In 1895, Ronald Ross identified the malarial parasite in stomach of anopheles mosquitoes proving its mode of transmission. He was awarded 1902 Nobel Prize in Physiology for this work done in India.

Having found the cause of malaria; Ronald Ross determined to find a way to eradicate it and resorted to mathematics in attempting to find an answer. His remarkably insightful mathematical analysis revealed malaria could be eradicated by reducing the mosquito population below a threshold dependent on human population density, and the impossible task of destroying every anopheles mosquito was unnecessary. Following work of Ronald Ross, another physician A.G. Kendrick and biochemist W.O. Karnack both well versed in mathematics generalized Ronald Ross’s hypothesis, concluding the progress of infectious disease in a community depends on the average number of infected persons reproduced by one single carrier of the pathogen. If this number referred to as basic reproduction number (R) exceeds unity, the infection could expand into an epidemic whereas when the number is less than one the disease subsides after infecting a few. From statistics pertaining to the growth of an infection, the basic reproduction number can be estimated.

It is easy to see how an infection evolves depending on whether R is greater or less than one. Suppose 10 persons contracted with an infection with R=2 enters a susceptible population. On average, they pass sickness to 20 individuals and this 20 in return reproduce 40 cases – an endless series of ascending numbers. If R is less than one you obtain a descending sequence – implying cases die down.

 

Herd immunity threshold

Suppose a population of N persons includes a number M of individuals immune to a disease. The fraction of immunes in the population is M/N (M divided by N). From simple school arithmetic, it follows that the fraction of persons not immune (susceptible) is (1- M/N). In the presence of immunes, the basic reproduction number scale down proportionately to the fraction of the susceptible population so that the effective reproduction number is (1 –M/N) times R, written as (1-M/N) R. The threshold happens when the effective reproduction number is exactly equal to unity, implying (1 –M/N) R = 1 or equivalently M/N = 1 – 1/R. The fraction M/N given by the above formula, referred to as herd immunity threshold is normally expressed as a percentage. For example, measles being highly contagious, the basic reproduction number can take values close to 20. Setting R = 20 in the formula, we obtain M/N = 0.95. Expressed as a percentage, the herd immunity threshold for measles is 95. To protect a community against measles, over 95 percent of the population needs to be vaccinated.

Vaccinating a community to exceed the herd immunity threshold would not abruptly halt an epidemic. Although the incidence of the disease gradually decreases, vaccinations and containment measures have to be continued until positive cases disappear completely – smallpox was eradicated this way.

 

Can we achieve herd immunity to COVID-19?

Coronavirus vaccines have arrived sooner than expected – many countries including Sri Lanka expeditiously commissioning inoculation campaigns.

Vaccinations and continuous adherence to precautionary measures will undoubtedly tame the virus. However, it is premature to assume global herd immunity would follow and the pandemic will soon end.

According to some estimates an upper bound to basic reproduction number for COVID -19 is around 2.5. Formula M/N = 1- 1/R explained previously, imply that the herd immunity threshold corresponding to R = 2.5 is 60 percent. Vaccines may not be 100 percent efficacious. For an 80 percent effective vaccine, the above thresholds increase to 75 percent. The other question is how long the vaccine induced immunity would last. At the moment sufficient information is not available to decide how the duration of immunity will interfere with the herd immunity threshold and how often vaccinations need to be repeated.

If faster spreading variants of the virus take over, the basic reproduction number and therefore the herd immunity threshold will also increase. The variants may turn out to be more resistant to vaccines. Remodeling of vaccines to make them effective towards variants is technically feasible but would delay the immunisation protocols. The answer to the problem of variants and temporary immunity is speedy vaccination – obviously constrained by real world practicalities.

 

Decreasing trends of COVID -19 incidence

Many regions of the world have begun to see a decline in the number of COVID-19 cases and deaths – plausibly a combined outcome of preventive safeguards and immunity derived from exposure to the virus or vaccination.

Israel has given more coronavirus vaccinations per capita than any other country – around 50 percent given one dose and 35 percent both doses. Covid-19 cases are declining and the world is awaiting see the outcome of the Israel experiment.

The United Kingdom has vaccinated more than 30 percent of over 80s and noticed a dramatic reduction in COVID-19 related deaths in this group.

Prompt inoculation of a sizeable fraction of a community is not an easy task. We need to await patiently to see the effectuality of the vaccines.

Dependence of herd immunity threshold on preventive measures

The preventive strategies or so-called non-pharmacological interventions significantly reduce viral transmission thereby lowering basic reproduction number and therefore the herd immunity threshold. Wearing masks, social distancing, hand-sanitizing and ventilation are proven safeguards. There is some evidence and theoretical arguments to the effect that preventive measures not only reduce the risk of contracting the disease but those who catch the disease under such circumstances develop milder symptoms or recover soon, adding to the pool of immunes. Argument rest on inoculum theory of viral transmission, according which the intensity of the infection a patient develops depends on the number of virus particles to which he or she was exposed. Emphasizing this point authors of a recent article published in the prestigious medical journal Lancet appeal to the world to continue strict adherence to preventive measures. This is most prudent method to safeguard against new strains until vaccines are remodeled.

Vaccination priorities

Vaccine production, procurement and organization of immunization campaigns decide the rate at which a community could be vaccinated. These limitations necessitate imposition of priorities. The World Health Organization and individual nations have laid down priority categories. Everyone agree the first priority should be frontline health care workers. The second category the older persons (generally above 65) more vulnerable and at the risk of death after contracting the sickness. Those living under conditions of extreme congestion and poverty are also a priority group identified by WHO. The younger working class, although they are less susceptible to danger of COVID-19, needs to be vaccinated. The policy of neglecting the older group in favour of younger working class is not only unethical but also epidemiologically flawed. In modern societies the percentage older persons (above 65) and socially active are significant. They, being most vulnerable to contracting the sickness because of impaired immunity, if infected, could also be the super spreaders. Recent studies have confirmed the presence of super spreaders, who are mostly elderly patients carrying larger viral loads.

Social reaction to vaccination

Societies react to vaccinations within confines of two extremes: vaccine hesitancy and vaccine overconfidence. The former has prevented eradication measles in localities where the herd immunity threshold stands inordinately high. In some parts of the world, vaccine hesitancy confuses mass COVID-19 inoculation. The latter misconception equally undermines the control effort. Not wearing a mask or not adhering to social distancing because you got the jab is not right. Vaccines are not 100 percent effective and immunity sometimes slacken. People not wearing masks, believing assurance of safety after the jab creates social stigma for those not vaccinated to abandon the precautions.

Vaccines and non-pharmacological interventions will certainly suppress the virus. Rapid decline in reported cases in some parts of the world may be a sign of a distant herd immunity in that region – but what we want is a global effect. As WHO Director Tedros said, “Until we end the pandemic everywhere, we will not end it anywhere “

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Unforgettable memories…

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The memorable meetup – Imran and Alston

Pakistan Prime Minister Imran Khan was in town last week. He has been here, before, as a cricketer, and also has a head of a charity organisation.

Meeting a personality, like Imran Khan, is almost an impossibility, one would say, but it became a reality for ‘Disco Lady’ hitmaker, Alston Koch.

On a trip to Sri Lanka, many years ago, as head of a Charity Organisation, Alston had the opportunity of meeting this flamboyant personality – Imran Khan.

According to Alston, meeting and chatting with Imran was a wonderful experience.

Imran was keen to know from Alston as to how he got the name Koch, and Alston had to explain about the Anglo Asian connection, etc.

Describing Imran, as a person, Alston said he was very pleasant and down-to-earth.

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Manilal does it with ‘Island In The Sun’

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We all know Manilal Perera as a singer, and with a voice that generally captivates…the fair sex, especially. But, what about his talents – as a composer!

I never knew about his ability to create songs…to produce originals, until I was told that Manilal had worked on a song, for an online Independence Day event, organised by the Sri Lanka American Association of Southern California.

And, yes, Manilal did indicate to us that he has been working on originals, during the days when he was associated with bands, and has about 15 creations to his credit.

This online Independence Day celebrations highlighted Sri Lanka in various formats – singing, dancing, etc.

The President of the Association, Sondra Wise Kumaraperu, was in touch with Manilal and requested him to do a popular English song, composed by another local artiste, for their online event

Manilal, however, convinced her to do something new and volunteered to create the song, himself.

Within a few days, with the help of fellow musician Kevin Almeida, the singer came up with ‘Island In The Sun.’

Manilal says he worked on the lyrics, while Kevin did the music.

The finished product, which took the form of a video, was shown during the telecast of the Association’s Independence Day celebrations, which was seen by many, via YouTube.

The Association’s President, Sondra, expressing her views, said that ‘Island In The Sun’ is a beautiful song and quite appropriate in glorifying the beauty of our paradise island.

Sondra has been associated with the Sri Lanka American Association of South California for many years. Her term 2020-2021 ends in April. Although she has been asked to stay on, she has declined to do so because of pressure of work, from other sectors, she is involved in.

Sondra runs a montessori school, and has a beauty salon, as well. So, the work load is heavy for her.

In Sri Lanka, Sondra had success, coming her way, as a singer, and even performed with Manilal, on a few occasion – not only in Colombo, but in California, as well.

She also won the Miss Working Girl contest, held in Colombo.

Due to the pandemic, Manilal does a duo scene now, performing at a five star venue, in the city, Sunday evenings.

He says he plans to hand- over the video of the song ‘Island In The Sun’ to the tourism authorities with the hope that his creation would do justice to their promotion of Sri Lanka.

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