One year after the Easter attacks, What was the cost to the economy?

It has been a year since the deadly Easter attacks which claimed 259 lives and injured at least 500 individuals. The incident left deep scars in the society as well as the economy. Tourism was the most affected sector of all. Arrivals dropped over 70% (Y/Y) in the month following the attacks. Rupee depreciated by just over 1% from the day of the incident to end of June 2019. In April 2019, the Hotels Association of Sri Lanka said it was expecting USD 1.5 Bn revenue loss for 2019 [3]. Early estimates expected a revenue loss of approximately Rs.26 billion from VAT and NBT alone [4]. Despite these setbacks the economy performed better than expected. Therefore, ICRA Lanka feels it is timely to attempt to document the impact Easter attacks had on the economy.

ICRA Lanka’s analysis indicates aftermath of Easter attacks followed a V-shape recovery. The crisis peaked during Q2. The impact on agriculture was minimal. Manufacturing sector recovered in Q3 while services made a near complete recovery in Q4.

Agriculture Sector Impact

The growth of the agriculture sector was nothing but dismal for the past decade (CAGR 2.6%). In all quarters except the Q1 in 2019, the agriculture sector underperformed mostly due to unfavourable weather conditions that prevailed during the year. Main impact of the Easter attacks was transmitted to the agriculture sector through the fisheries subsector which is the largest component of the agriculture sector (15% in 2018). The impact affected fishing communities, and this delivered a major blow to the fishing industry. The impact of the Easter attacks caused the agriculture to lose 1% of its projected GDP in the Q2 and 0.8% in the next. This shock translates to about LKR 5 Bn.

Figure 1: GDP growth and shocks in agriculture sector -2019

Source: ICRA Lanka Research, CSD

Agriculture sector lost about 1% of its projected GDP in the Q2 and 0.8% in the next which translates to about LKR 5 Bn.

Industry Sector Impact

Figure 2: GDP growth and shocks in industry sector -2019

Source: ICRA Lanka Research, CSD

In ICRA Lanka’s assessment, the Easter attack shock caused the industry sector to lose of about 2% of its projected GDP in Q2 which comes down to around LKR 18 Bn.

Close to 60% of the gross value added to the industry sector comes from the manufacturing activities. Following the Easter attacks, the manufacturing sector activities plunged across the board immediately dragging the quarterly growth rate down. In the last week of April, due to security concerns and supply disruptions there was a significant drop in production activities. In the subsequent months, the manufacturing sector functioned overtime and on weekends to clear the backlogs and to supply new orders, which led to a faster recovery of the industrial sector within the quarter itself. In ICRA Lanka’s assessment, the Easter attack shock caused the industry sector to lose of about 2% of its projected GDP in Q2. The total shock on the industry sector is around LKR 18 Bn.

Service Sector Impact

Figure 3: GDP growth and shocks in services sector -2019

Source: ICRA Lanka Research, CSD

Services sector enjoyed a solid growth over the years (averaging 5.6% per quarter for last 10 years), but lost the momentum after the Easter attacks. In Q2 it only grew by 0.7%. The sector started recovering in subsequent quarters and by Q4, with improving tourist arrivals, the sector saw almost a full recovery.

The sector experienced a deterioration in activities weeks following the Easter attacks. Sectors related to tourism, especially accommodation (2018 sector share 3%) had the most impact (10% decline on Q/Q) of the Easter attacks. Education sector, which is comparable in size to accommodations sector also had a considerable impact (4% decline on Q/Q). The largest component of the sector, wholesale and retail trade (2018 sector share 19%) activities also decelerated as normal day-to-day lives of the people were disrupted. Transport & warehousing sector, which is similar in size to wholesale and retail trade, also had a significant impact (1.3% decline on Q/Q). This is mainly due to the drop in tourism where many vehicles were deployed. Health sector activities were also subdued as fear drove people to avoid public places such as hospitals (0.9% decline Q/Q). Overall productivity of the sector declined due to weakened sentiment and stringent security measures that prevailed following the Easter attacks. Employers in accommodation, food & beverage, and other personal services sectors laid off part of their workforce to minimize their losses.

However, by the end of Q2, the sector was showing signs of recovery. The government announced a one-year debt moratorium and subsidized working capital for the tourism sector as a slew of measures to help revive the tourism industry [6]. These measures may have helped to speed up the recovery in the subsequent quarters.

The service sector was the hardest hit of all. The total loss to sector GDP is over LKR 108 Bn

The shock caused by Easter attacks costed nearly 3% of the projected quarterly GDP of the sector in Q2, 1.4% in Q3, and less than 1% in Q4. Unlike, in the agriculture and industry sectors the impact of the shock lasted for 3 quarters straight making the service sector the hardest hit of all. The total loss to sector GDP is over LKR 108 Bn.

Impact on Taxes

Figure 4 illustrates the growth and shocks to tax during 2019. Slight increase in the revenue growth in Q2 can be attributed to several tax changes that were carried out prior to the Easter attacks. However, the Easter attacks had a direct impact on the tax base and tax collection. The government’s relief package included tax concessions (a reduction of VAT to 5%) for affected sectors especially tourism [15]. An initial estimate indicated, on the short run the direct contribution to the government revenue by affected sectors like finance, tourism, trade and construction, would come down by LKR. 50 billion approximately [15]. ICRA Lanka estimates the revenue loss from the taxes on goods and services to be close to LKR 18 Bn.

Figure 4: Growth and shocks in taxes on goods and services -2019

Source: ICRA Lanka Research, CSD

ICRA Lanka estimates the revenue loss from the taxes on goods and services to be close to LKR 18 Bn.

Impact on GDP

Figure 5: Shocks on quarterly GDP

Source: ICRA Lanka Research

Three broad parameters can be used to qualitatively describe an economic crisis. Depth refers to how deep the reduction in demand internally and externally.  Length refers to the duration it takes the crisis to peak. Shape of the recovery means how strong the bounce back is. V-shape recovery implies a strong abrupt rebound while U-shape recovery implies a smoother and longer rebound. Apart from these there could be an L-shape recovery where the shock sets in quickly and sustains or gradually diminishes over a longer time horizon. Impact from a V-shape crisis can be low to moderate while the same for a U-shape crisis can be moderate to high. US economic recovery after 2008 financial crisis is an archetypical example for a L-shape crisis and it can cause severe pain to the economy.

The total shock is about 1% of the GDP which is about LKR 150 Bn.

By looking at Figure 5, it becomes clear that Easter attacks was a V-shape crisis where it peaked in Q2 and almost bounced back  to the pre-crisis level in Q4.

Figure 6: Real GDP predicted vs. actual

Note: W/o EA- without the Easter attacks

Source: ICRA Lanka Research, CSD

Easter attacks had a profound impact on the GDP. As evident from Figure 6, had the Easter attacks not taken place, the country’s GDP would have not altered its original trajectory (orange dotted line) that much (green  dotted line). ICRA Lanka’s estimations show in such a case the country would have grown at a rate of 3.3%. The total shock is about 1% of the GDP which is about LKR 150 Bn.

Abbreviations

CAGRCompound Annual Growth Rate
CBSLCentral Bank of Sri Lanka
CSDCensus and Statistics Department

References

Daily FT. (2019, 25 April). Tourist hotels fear $ 1.5 b revenue loss from terror attacks. Retrieved from http://www.ft.lk/front-page/Tourist-hotels-fear—-1-5-b-revenue-loss-from-terror-attacks/44-676993

Daily Mirror. (2019, June 4). Loss from VAT, NBT to reach Rs.26bn by year end: CBSL. Retrieved from http://www.dailymirror.lk/breaking_news/Loss-from-VAT–NBT-to-reach-Rs-26bn-by-year-end:-CBSL/108-168608

Ministry of Finance. (2019). Mid-Year Fiscal Position Report. Ministry of Finance.

The Hindu. (2019, May 8). Sri Lanka offers relief package to revive its tourism industry hit by Easter attacks. Retrieved from https://www.thehindubusinessline.com/news/world/sri-lanka-offers-relief-package-to-revive-its-tourism-industry-hit-by-easter-attacks/article27070137.ece

To subscribe to ICRA economic updates, contact: Lalinda Sugathadasa, Head of Research & Business Development, Call: +94 77 478 1343, Email: research@icralanka.com

Published date: 4/20/2020