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IPS Policy Insights: COVID-19, the global economy and Sri Lanka’s external sector outlook

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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.

Merchandise Trade

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.

Looking Ahead

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: publications@ips.lk.



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ComBank partners with PayHere to offer Q+ users a unique eCommerce experience

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Commercial Bank’s Group Chief Marketing Officer Mr Hasrath Munasinghe (2nd from right) and PayHere Founder/CEO, Mr Dhanika Perera (2nd from left) exchange the agreement in the presence of PayHere Head of Developments, Mr Karvin Mendis (extreme left) and the Bank’s Senior Manager – Card Centre Mr Seevali Wickramasinghe.

The Commercial Bank of Ceylon has partnered with PayHere, Sri Lanka’s largest Aggregated Internet Payment Gateway Service, to offer users of its Q+ Payment App a unique, user-friendly and secure eCommerce experience.

Commercial Bank customers can now conveniently pay for their purchases via the Q+ app to over 3300 registered PayHere Online Payment Service enabled merchants. The Bank’s Credit, Debit and Prepaid Card holders who pay through Q+, the fastest-growing QR app in the country, will not be required to tap in their card details as this information is already stored on the app, the Bank said.

Payments to PayHere merchants via the Q+ Online Pay facility will enhance customer convenience as the transaction will only require the entering of users’ mobile numbers registered with the app. Disbursements via Q+ require authentication using a static PIN which ensures the safety and security of transactions, making the Q+ App more secure than a normal card as the customers’ sensitive data is not transmitted to merchant websites.

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TAMAP drives Stakeholder Forum for Good Agriculture Practice

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Secretary of Agriculture Prof. Udith K Jayasinghe addressing the forum

The inaugural meeting of the GAP Stakeholder Forum was held with the support of the Technical Assistance to the Modernisation of Agriculture Programme (TAMAP) at the Department of Agriculture in Peradeniya on 17 November 2021. Prof. Udith K Jayasinghe, Secretary Ministry of Agriculture, graced the occasion as the Chief Guest.

The Good Agricultural Practices (GAP) programme, introduced by the Department of Agriculture in 2016, was a promising step taken to minimise adverse impacts of agriculture on the ecosystem and human health while meeting steadily rising demand for food. Although the programme had an encouraging start, the overall conversion of farmers to implementing GAP remained low. Over the past six years, 1500 farmers registered as GAP producers out of the 1.8 million farmers in Sri Lanka. To align with the current policy of the Sri Lankan Government to improve ecological friendliness of farming, it is important to transform all production units towards GAP farms.

Studies showed that to achieve this goal, the GAP implementation strategies needed to be updated and infused into the mainstream agriculture, facilitating a quick transformation of the current approach towards a macro-level system. Therefore, the requirement for a rapid strategizing of such an approach followed by periodic review of GAP performance arose. This initiated the need for a stakeholder forum.

The key purpose of the forum is to provide a common platform for key stakeholders to meet in formulating a strategy to mainstream SL GAP, propose a way forward for implementation such recommendations, and to regularly review program performance and adopt remedial action to achieve GAP objectives.

Prof. Udith K Jayasinghe, Secretary Ministry of Agriculture who chaired the Forum in his opening statement commented, “GAP programme has emerged a solution to challenges faced by Sri Lankan agriculture today to improve safety of users and ensuring good environmental performance. Reinforced by facilitating legislation and approved national standards, GAP programme provides a strong foundation towards addressing above concerns.”.

Over forty participants were present at the forum, representing the various stakeholder groups comprising producers, distributers, SL GAP team, academics, and market players. Ms D. S. Ratnasinghe, Addl. Director (Agribusiness) and Dr W. M. W. Weerakoon, National Coordinator outlined the status of the GAP programme and the challenges faced.

The deliberations during the forum were broken down into five main areas: Technical, financial, institutional, and social problems faced by GAP stakeholders on maintaining production, supply, product quality, and consumer trust. Gaps in technology transfer and adoption, marketing and quality control measures and means for increased rate of adoption and GAP farm certification; Gaps in current GAP process and procedures, user friendliness and applicability; Future technological needs towards increasing production, productivity, product quality and ecosystem sustainability; and Policy needs for increased adoption of GAP to mainstream GAP into national agriculture agenda.

Prof. G. Pushpakumara, Faculty of Agriculture, University of Peradeniya and Ms Jayantha Ilankoon, ADG (Dev) moderated the forum through group activity, outcome presentations and strategic discussions on the way forward.

Concluding the forum, Dr Nihal Atapattu, stated, “TAMAP, along with the European Union that provided the funding support is very pleased to have assisted to launch several interventions that would promote recognition of GAP as a premier means of strengthening Sri Lankan agriculture in sustainably meet requirements of the domestic and export markets. TAMAP expects that the Stakeholder Forum launched today will be a milestone event in advancing GAP to achieve its potential in Sri Lanka”.

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HNB’s commitment to expand e-commerce and digital payments wins Daraz award

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Daraz Managing Director Rakhil Fernando (fourth from left) handing over the award to HNB Head of Cards – Gauthami Niranjan. Also present (from left): Daraz Partnerships Nimesh Dasanayake, Daraz Senior Manager – Prepayments Sandamina Rajapaksha, Daraz Head of Partnerships Dulika Jayamanne, HNB Cards Business Development Executive - Ashokan Harishanna, HNB Assistant Manager - Cards Business Development and Portfolio Management - Imanka Keshini Hikkaduwage and HNB Cards Business Development Executive – Roshan Chaminda Perera.

HNB has been recognized by Daraz for exceptional contribution to its growth, in an independent endorsement of Sri Lanka’s leading private bank’s commitment to expand e-commerce and digital payments throughout the country.

The award, for the ‘Card Base with Highest Overall Growth’, was presented to HNB at the ‘Daraz Payment Partner Performance Awards 2021’. HNB, which ranks among Daraz’s best banking partners, recorded the highest growth on total payment volume, buyer engagement and total transactions month-on-month, for both credit and debit cards for the year 2020-2021.

“This award is an important validation how the local economy – both businesses and consumers – are benefiting from HNB’s cohesive programme to drive greater adoption of e-commerce and digital payments,” HNB Head of Cards, Gauthami Niranjan said. “These efforts are particularly significant at present, given how digital and contactless payments can assist in reducing the spread of the pandemic and support the Bank’s and the country’s vision to transform Sri Lanka to a cashless economy.”

Currently, HNB Cardholders enjoy multiple offers on Daraz, Sri Lanka’s leading online marketplace, a wholly-owned subsidiary of global e-commerce giant, the Alibaba Group. These include zero-interest instalment plans up to 48 months with attractive discounts for HNB Credit and Debit Cards and 10% off site-wide on Daraz for all HNB Credit Cards on purchases made during Saturdays. In addition, HNB tied up with Daraz for its 11:11 and Black Friday sales, which provided HNB Cardholders access to a range of offers and massive discounts.

HNB has been a pioneer in Sri Lanka’s banking industry in the digital banking and digital payments space. These include the launch of digital wallet and payment app, HNB SOLO and introducing Asia’s first-ever fitness-linked savings product in the form of the HNB FIT Savings Account.

With 254 customer centres across the country, HNB is one of Sri Lanka’s largest, most technologically-innovative banks, having won local and global recognition for its efforts to drive forward a new paradigm in digital banking. HNB has a national rating of AA- (lka) by Fitch Ratings (Lanka) Ltd. The bank was also ranked among the World Top 1,000 Banks list compiled by the prestigious UK-based Banker Magazine for five consecutive years. HNB was also declared Best Sub-Custodian Bank in Sri Lanka at the Global Finance Awards 2020.

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