Economic Impact of COVID-19 in Sri Lanka

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Key Insights

  • ICRA Lanka expects the Sri Lankan economy to face a recession of magnitude -1.9% in 2020 with a U-shape recovery path returning to its pre-crisis level by Q1 of 2021. All alternative scenario simulations point to recessionary outcomes –  an escalation of the pandemic leading to a severe L-shape recession of -3.3% while the most optimistic estimations showing a mild V-shape recession of -0.6%.
  • The expected blow to the revenue collection and heavy fiscal stimuli will come with a hefty price tag. The budget deficit will widen close to 8% of the GDP.
  • With companies already moving forward with salary cuts, as the crisis deepens, the unemployment could rise to upper single digits. In the more severe case, the unemployment rate can accelerate to the levels before the late 90’s where Sri Lanka used to have double digit unemployment rate.
  • The domestic demand may remain subdued for the remainder of the year amidst weakening demand and therefore inflation is expected to be in the range of 4 to 7%.
  • The impact of COVID-19 on the agriculture sector will be minimal as the sector is quite resilient to the external shocks. Most of the impact will be felt in services and industry sectors as these sectors are more open to external shocks.

Potential Outcomes for Sri Lanka- 2020

Sector Focus

  • Agricultural exports will experience a decline in demand. This includes fisheries, which is exported as processed food under the industrial sector.
  • Tea prices likely to be affected due to economic-instabilities of the main exporting markets from the COVID-19 pandemic.
  • Textile and apparel sector’s heavy dependence on the overseas markets, will have an augmented impact on the sector.
  • Agrochemicals would experience a supply chain disruption as the main agrochemical markets such as US and Japan have also been affected by the global pandemic.
  • Construction sector impact to be medium to high. Due to fiscal constraints, large scale public sector construction activities may be suspended temporarily to facilitate funding to other sectors but other multilateral projects may restart.
  • Real estate is also expected to be affected. The delays in the project-executions will have a negative impact on the real-estate developers. Moreover, with the overall slowdown in the economy, this sector will experience a decline in new sales, in addition to the stretched cash collections from the presale stocks.
  • Power sector impact is relatively low. In fact, the tumbling oil prices may help to improve the balance sheet of Ceylon Electricity Board (CEB).
  • Health sector may face a temporary setback but the performance of this sector will remain strong in the long term.
  • Tourism is expected to take a major blow due to social distancing requirements, travel disruptions/restrictions, and quarantine requirements.
  • Transport sector performance has a strong connection with the manufacturing and tourism industries. The knock-on effect of both these subsectors will be strongly transmitted to the transport sector.
  • Wholesale & retail trade may face significant challenges as it relies heavily on imports given the supply disruptions, worsening exchange rate, import restrictions and declining real incomes. However, food retail segment is better positioned because of its business mix including drugstores and convenience stores.
  • Automotive sector is also highly exposed because of their reliance on international supply chains. The crisis will exacerbate the already dwindling demand for vehicles.
  • Banking & Finance services sector outlook to be quite challenging as the pandemic situation poses a substantial risk for the overall loan growth and asset quality of banks and NBFIs.

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