IPS Policy Insights: COVID-19, the global economy and Sri Lanka’s external sector outlook
Global economic developments have impacted Sri Lanka’s external sector performance, and the economy overall. While Sri Lanka managed the first wave of the COVID-19 outbreak imposing lockdown measures for two months (March to May 2020), it has since been hit by a second outbreak since October 2020 and a third wave in April 2021. The latter is leading to a substantial increase in active cases of COVID-19, along with higher numbers of deaths, disrupting the gradual economic recovery witnessed from the second quarter of 2020. Merchandise exports, tourism earnings, and foreign direct investment (FDI) inflows are all bearing the brunt of the resultant fallout, except for remittance inflows into the country.
Along with the considerable disruptions to world trade, Sri Lanka’s merchandise trade flows also proved to be fairly volatile, with the overall result being weakened exports and imports during the pandemic. Even prior to the pandemic, Sri Lanka’s long-term export growth rate was on a declining trend, albeit with some improvements in the immediate pre-COVID-19 years. In 2020, the pandemic amplified this long-term decline. Merchandise exports contracted by -15.6% in 2020 compared to the previous year, reflecting both demand and supply shocks.
Overall, as Sri Lanka’s export sector strategies and policies are not firmly integrated into regional and global value chains (GVCs), the impact of supply chain disruptions to the country’s export sector has not been very prominent. However, the country has been facing several adverse issues related to declining demand in its major export markets. Sri Lankan exports traditionally target product markets in a few destinations such as the US, UK and some EU countries. Its export basket too remains rather limited, with overwhelming dependence still on T&G and a few agricultural products. The need to revive export performance with sound strategies will take on even more urgency in the wake of the pandemic to build greater resilience.
As countries adjust to the economic fallout of the pandemic, existing global supply chains will change. Sri Lanka too must be prepared to change direction in favour of strengthening regional linkages. The Asian region is expected to recover swiftly, led by China’s resurgent economy. Whilst India is struggling to bring its latest COVID-19 spread under control, the Indian economy too can be expected to record a strong bounce back eventually. Against these developments, Sri Lanka must exploit potential integration opportunities with the Asian region, to better connect to trade, technology and FDI flows.
Compared to exports, Sri Lanka’s import expenditures fell even more sharply in 2020, contracting by as much as -19.5%. A part of the decline was no doubt a reflection of weakened private investment, declining oil prices and subdued consumer demand. However, a large quantum of the drop in import expenditures is due to restrictions imposed on ‘non-essential’ merchandise imports such as motor vehicles, as well as restrictions on import substitute sectors such as agriculture and processed agricultural food products.
Sri Lanka’s fuel import bill accounts for the country’s largest import category. The expenditure on fuel contracted by -34.7% in 2020 compared to 2019.1 Weakened oil prices in the global market and the sharp decline in domestic demand supported this contraction. While the oil price war between Organization of the Petroleum Exporting Countries (OPEC) and Russia, and declining global oil demand created this decline in prices, a continuation of these advantages cannot be expected as global demand picks up and oil producing countries agree to curb oil supplies.
Tourism and Remittances
In the aftermath of the Easter Sunday attacks in April 2019, Sri Lanka’s post-war tourism sector recovery came to an abrupt halt. In response, several strategies were implemented, including financial assistance to the sector as well as promotional campaigns to secure visitors. The mobility and physical containment measures imposed with the onset of COVID-19 dealt a further blow to the Sri Lankan tourism industry. With the suspension of tourist arrivals from all countries with effect from mid-March 2020, tourist arrivals came to a complete halt more or less for nine months (April to December 2020). International arrivals to the Sri Lankan border saw a sharp decline of -73.5% in 2020.
By contrast, Sri Lanka’s worker remittance inflows have performed much better than what had been forecast. Remittances had been experiencing a consistent decline over the past few years, reflecting external and internal developments related to foreign employment. In 2020, after an initial brief drop, remittances grew by 5.5% to USD 7.1 billion. The increase is perhaps explained by Sri Lankan migrants who may be remitting larger amounts as coping mechanisms for their households, as well as those remitting funds in preparation for returning to Sri Lanka owing to loss of employment in host economies. Additionally, the pandemic conditions, including limited mobility and greater uncertainty may have encouraged the diversion of remittances from informal to formal channels.
Capital Flows: FDI and Capital Market Trends
Even though Sri Lanka is argued to have a strategic geographical advantage straddling major shipping routes in the Indian Ocean, the country has not yet been able to convert this to substantive progress in attracting FDI inflows. FDI inflows saw some improvement in the post-war period and reached a peak in 2018 but has been on a declining trend thereafter. The pandemic has amplified this shrinkage. Retaining investor confidence through sound policy decisions, ensuring domestic security measures, and providing a transparent and accountable regulatory environment are vital to attract more FDI to the country.
The government is attempting to facilitate foreign investments into favourable locations in the country such as the Hambantota industrial zone, the Colombo Port City, as well as easing regulatory constraints to address time taken to set up a business in Sri Lanka, etc. The priority in these efforts appears to hinge on the Colombo Port City which will be granted special tax dispensations and other inducements to kick-start FDI inflows into mixed development projects and other infrastructure dominant sectors. The urgency to attract more FDI is partly related to the governments stated policy intention to move away from debt creating capital inflows to non-debt creating sources such as FDI. In the context in which Sri Lanka is struggling to access international capital markets in a COVID-19 environment, an enhanced inflow of FDI will provide relief on the external front.
For a country with a small domestic consumer base, Sri Lanka must remain competitive in international markets as a source of goods and services. Calibrating trade policies to integrate into re-fashioned GVCs, especially in a regional context, should remain an important part of the country’s medium-term recovery efforts towards a stable external sector environment that will support the country’s long-term growth and development aspirations.
* This Policy Insight is based on the comprehensive chapter on “COVID-19, Global Economic Developments and Impact on Sri Lanka” in the ‘Sri Lanka: State of the Economy 2020’ report – the annual flagship publication of the Institute of Policy Studies of Sri Lanka (IPS). The complete report can be purchased from the Publications Unit of IPS located at 100/20, Independence Avenue, Colombo 07 and leading bookshops island wide. For more information, contact 011-2143107 / 077-3737717 or email: firstname.lastname@example.org.
EU funded SEDR Project launches Policy Brief to strengthen alternative dispute resolution in Sri Lanka
The Supporting Effective Dispute Resolution (SEDR) project, funded by the European Union and implemented by the British Council in partnership with The Asia Foundation, launched a Policy Brief titled ‘Strengthening A Just Alternative’ to strengthen community-based alternative dispute resolution (ADR) mechanisms in the country.
The launch event, held at the British Council Library in Colombo, was attended by several distinguished dignitaries, including Dr. Wijeyadasa Rajapakshe, Minister of Justice, Ms. Beatrice Bussi, (Interim) Head of Development Cooperation of the European Union to Sri Lanka and the Maldives, Priyanath Perera, Secretary of the Mediation Boards Commission, Hon. Justice Yapa, Chairperson of the Mediation Boards Commission, and Commissioners of the Mediation Boards Commission.
Speaking at the event, Ms. Beatrice Bussi stated that “The importance of mediation in Sri Lanka is twofold, as it ensure an easy and economic access to justice to citizens, while it provides the opportunity to reduce the burden on the Sri Lankan court system. I want to praise the model of Sri Lankan community mediation boards, for its effectiveness and for the value it delivers to communities in addressing local disputes preventing their escalation”.
Dr. Wijeyadasa Rajapakshe stated ” One of the main tasks of the Ministry is to ensure the necessary legal, policy, and institutional framework is set up for efficient resolution of disputes. Alternative dispute resolution, including mediation, play a major role in this regard. There are different opinions regarding the effectiveness of alternative dispute resolution mechanisms, especially mediation among the community and stakeholders. In the meantime, the Ministry has initiated a number of reforms to improve dispute resolution processes in Sri Lanka. Accordingly, the Ministry highlights the importance of surveys of this nature to facilitate evidence-based decision-making regarding alternative dispute resolution mechanisms. As such the Ministry would like to congratulate the SEDR project on this successful initiative.”
The Policy Brief is based on the findings of a Knowledge, Attitudes, and Practices (KAP) survey commissioned by SEDR and conducted by the Centre for Poverty Analysis (CEPA) in 2022. The survey aimed to assess knowledge, attitudes and practices of various community-based alternative dispute resolution mechanisms, including mediation boards. The survey covered six districts in the country, targeting 1,712 households of all three main ethnic groups.
COYLE urges government to engage business leaders in policy-making process for fair, sustainable, and economically sound decisions
The Chamber of Young Lankan Entrepreneurs (COYLE) held its 24th Anniversary Celebrations on 10th March 2023, at Shangri-La Hotel, Colombo. The event was attended by the chief guest, Prime Minister, Dinesh Gunawardena; the guest of honour, U. S. Ambassador, Julie Chung; former President of Sri Lanka, Maithripala Sirisena; Chief of the Defense Staff, General Shavendra Silva; cabinet and state ministers; parliamentarians; commanders of the Sri Lanka Armed Forces; government officials, and business leaders.
The Chamber of Young Lankan Entrepreneurs (COYLE) comprises more than 116 prominent individuals who serve as Chairmen and Controlling Shareholders of some of the most influential companies in Sri Lanka.
It has over 500 member organizations and is affiliated with nearly 50 business chambers in the country. The organization is managed and controlled by young entrepreneurs but also boasts a number of senior and respected business leaders who joined the organization during its formative years to help shape COYLE into what it is today.
The Chamber actively promotes entrepreneurship, the development of rural communities, and thought leadership. In adherence to the organization’s strongly held principles and as a mandatory service to the community, COYLE engages in countless CSR initiatives through its member companies around the country. The Chamber provides leadership, learning, and development for its members and stakeholders, and over the years, it has grown into a vehicle for business growth in Sri Lanka via its many local and global networks.
The past year was an exceptionally challenging one for all parties in the Sri Lankan economy. Remarking on this, the Outgoing Chairman of COYLE, Mr. Dimuth Chankama Silva, stated during his address, “This year was the greatest test of our mettle. Even diamonds are born out of pressure. This year gave us the opportunity to shine through pressures from all directions. I believe we shone. We are here alive and kicking, our businesses are growing, we are conquering international markets and territories, and COYLE has grown in leaps and bounds.”
A notable emphasis was given to the introduction of the COYLE theme for the year 2023/24, EVOLUTION: #Resilience, #Agility, and #Transformation. The incoming Chairman, Mr. Rasith Wickramasingha, stated, “Evolution is to upscale capability, enhance skills and increase creativity, innovate at a time of chaos, and re-imagine a new business environment. Evolution requires change: change in mindset, attitude, self-awareness, and acumen of the surrounding environment as well as culture.”
He went on to note that in today’s environment, every five years constitutes a generational gap and emphasized the need for COYLE to evolve as a chamber in order to be relevant and sustainable for the future. He further mentioned that decades of ill-conceived, politically driven policies based on the advocacy of a few, rather than consultative decision-making with recognized business chambers, have led to the current crisis. Elaborating on this point, Mr. Rasith Wickramasingha said, “Policy formulation should be done based on sound economic principles and business acumen. Businesses rely on stable policies so that they may plan ahead. Ad hoc policies which bring no economic benefit have led to losses in the private sector and leakage of foreign exchange from the country.”
He emphasized that it is heartbreaking to see that the individuals who strive continuously for the betterment of the country and persistently do the right thing get penalized while those engaging in unethical practices to avoid taxation are rarely held accountable. COYLE hopes for more genuine dialogue from policymakers regarding these issues and affirms that the organization’s globally exposed and experienced members could be a great value addition to any actions taken to revive the economy. What sets COYLE apart from the rest is that its members are made up of business owners and decision-makers who are passionate about doing something good for the country, who are genuinely aligned with this cause, and willing to embrace the future without diluting our national and cultural heritage.
The 24th Anniversary Celebration of COYLE closely reflected in its overarching tone the state of the country following the Easter Bombings, the pandemic, and the economic and political crisis. The event also honored and recognized the Chamber’s numerous members who weathered the storm by building resilience, being agile, and transforming their businesses. It also highlighted the many CSR initiatives undertaken by COYLE member organizations, many of which were carried out quietly, purely as a service to the country.
These initiatives focus on communities most affected by the calamities of the past years and were chosen regardless of race, religion, or creed. With a host of esteemed and influential guests attending the celebrations, COYLE made this event a platform to convey a strong message calling for sociopolitical change in the country. COYLE believes that the hardline decisions taken by President Ranil Wickremesinghe and the Governor of the Central Bank, Dr. Nandalal Weerasinghe, were tough but necessary considering the state of affairs. The Chamber also notes that as a result of these decisions, gradual change for the better is apparent in the economy. Considering the massive pool of collective experience, expertise, and connections held by COYLE, it is capable of providing significant value and insight for economic reform. Hence, COYLE urges the government to actively engage and work together with the Chamber to expedite economic revival.
Once again, AIA Ran for their Lives – proud sponsor for the 3rd consecutive year
AIA Insurance was humbled to be a part of Run For Their Lives 2023, in raising funds for the Apeksha Cancer Hospital. The charity run aligns with AIA’s brand purpose of helping people live healthier, longer, better lives with focus on the prevention and management of Non-Communicable Diseases in Sri Lanka. The company will continue its commitment to fight NCDs and actively engage in creating awareness on leading NCDs in the country.
With AIA’s goal of making a positive impact on one billion lives by 2030, participants at RFTL were encouraged to make a pledge for a healthy habit that could help prevent illness and remain healthy in the long run. The participants also took part in a real-time survey that measured their unhealthy habits and recommended healthy lifestyle habits. Participants were also instantly rewarded for taking part in the wellness games and the free BMI sessions organised by one of AIA’s wellness partner Vida Medical Clinic.
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