There is an expectation that coronavirus pandemic would be under control to a certain degree. Sri Lanka needs to look at effective structural adjustment programs (SAP) to spur the overall economic growth. However, if the coronavirus pandemic is contained by the middle of this year, Sri Lanka’s economy is expected to grow at 2.2% this year according to the Asian Development Outlook (ADO), the annual flagship publication of the Asian development Bank (ADB) (PWC, April 2020). At this point government spending is a vital measure that controls the consistency of public finances that affects on fiscal balances and national liabilities. On the other hand, short term borrowing to accelerate GDP growth creates a debt trap that could in turn weaken the economy.
Last year Sri Lanka’s budget deficit rose to a record of 7% of the Gross Domestic Product (GDP). As per Financial analysts, the budget deficit could widen to 10% of the nations gross domestic product (GDP) in the current fiscal year. Further, a higher balance of payment deficit has been a burning issue for the island nation for the past few years. Considering the facts and figures, the distress caused from the coronavirus pandemic to the Sri Lankan economy is much worse than the previous financial crises. At this point, policy makers must adopt “out of the box†pragmatic policies to revive the economy during these challenging and uncertain times.
Keynesian Hayekian Schools of Thought
In this scenario, policy makers at the highest level prefer to adopt either the Keynesian economic model or the Hayekian economic model, to achieve monetary stability. Another step forward is the mix of Keynesian and Hayekian economic approaches, to stimulate the stagnated economy. According to the Keynesian model, increasing public spending and lowering taxes would result in increased economic growth. However by increasing aggregate demand (AD) triggered by higher government spending cannot increase aggregate supply (AS). Fundamentally analyzing the Hayekian schools of thought seemed to be poles apart from Keynesian model of monetary policy. Hayekian espouses that Keynesian model would surge inflation and eventually lead to low interest rates through increased currency supply. Surprisingly, the Keynesian school of thought is the most preferred economic thinking the Sri Lankan policy makers are inclined to adopt, throughout Post-pandemic pace.
Sri Lanka’s Economic Stimulus Model
The coronavirus pandemic was, in many ways a test for the struggling Sri Lankan economy. Moreover as a part of economic stimulus approach the Central Bank of Sri Lanka (CBSL) carried out four helicopter drop-style liquidity injections into the financial system from February to April 2020. Other than the 149 million dollar purchases from the forex markets to prevent the rupee from appreciating, over 124 billion rupees worth of helicopter drop-style liquidity injections happened during this period. Further, a range of tax relief measures by the Sri Lankan government are expected to provide a fiscal stimulus to the economy.
Both India and China are very important to Sri Lanka’s economic stability. These third party nations, through their lending capacity have been able to increase the chances of economic stability for the island nation.
Firstly, in March 2020, China granted a soft loan worth around $500 million to help the island nation to combat the coronavirus pandemic. Secondly, the Central Bank of Sri Lanka (CBSL) stated that the Reserve Bank of India (RBI) has agreed to provide USD 400 million under a currency swap arrangement to boost the island nation's reserves. (Economic Times, April 2020). Thirdly, the Sri Lankan government is in an advanced stage of talks with the International Monetary Fund (IMF) to secure a coronavirus relief package worth US$ 800 million (Ceylon Today May 2020). Finally, the Central Bank of Sri Lanka is giving a serious consideration to maintain price stability with low inflation rates .
Sri Lankan merchandise exports
There is, further a complementary aspect of the pragmatic economic policy strategy chosen by the government, to facilitate the stabilization efforts in Sri Lanka. Priority areas of assistance to Sri Lanka’s export community are also linked to the national carrier, Sri Lankan Airlines being instructed to use its entire fleet to air lift massive amounts of cargo to Europe, Middle East, Far East, and the Indian Subcontinent from 18th May.
Additionally, most of the factories began operations even during the lockdown. Hence, over 90% of the total factories within the Board of Investment (BOI) export processing zones, were operational with 50% of its employees reporting to work (Board of Investment (BOI), Sri Lanka, May 2020).
More recently, Brandix apparel manufacture exported over 200 million face masks consignment to US. This incentive involves a big change in the nation’s apparel sector. Meanwhile, Sri Lankan exporters could look for new areas of focus to enhance management of fisheries' resources. The 40 Fish exporters have been emphasising about the unprecedented global demand for fish, following the coronavirus pandemic.
From Sri Lanka’s stand point, although economic reforms as cited above will play an important role in attempting to increase economic performance, there is still a long way to go for meeting the set macroeconomic targets for the coming year. It is vital that the South Asian island nation pursue a stable fiscal policy position to revive the economy.
(Pic courtesy -Srimal Fernando)
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(Srimal Fernando is a Doctoral Fellow at Jindal School of International Affairs (JSIA), India and Advisor / Global Editor of Diplomatic Society for South Africa. He is the winner of the 2018/2019 ‘Best Journalist of the Year’ award in South Africa, and has been the recipient of GCA Media Award for 2016.In the field of politics, and Policy affairs, Fernando is a specialist, with over ten years of first hand experience in Sri Lanka and the Maldives. The views expressed are personal).
