Macro & Micro Economics and Financial Impact of COVID-19 in Sri Lanka

Abstract

Sri Lanka had early success in battling COVID-19, only 3000 cases and 11 deaths by the end of September 2020. This helped to revive economic activities, but a second and more severe wave of infections has seen those numbers spike sharply to over 43,000 infections and 204 deaths as the drew to end.Dealing with Sri Lanka’s foreign debt settlements remains the most critical priority for now. Despite sovereign credit rating downgrades, the government remains confident of meeting all repayments without resorting to a conditional arrangement with international monetary fund. This is in keeping with the government’s stated intentions of moving away from foreign loans to foreign investment, with the latter already earmarked to raise an estimated us$2.3 billion in 2021. For Sri Lanka’s debt burdened economy, the strategy makes good sense. Yet it will also pose fresh challenges in dealing with rivalries closer to home, such as that between china and India.While the Chinese debt trap narrative can be disabused, china does remain Sri Lanka’s largest bilateral creditor, owing 9.6 per cent of cent of total outstanding foreign debt at the end of 2019. India’s share is much smaller 2.4 per cent. Sri Lanka made an early appeal to both countries to provide debt relief and hard currency to shore up its foreign exchange reserves. China and India responded swiftly and positively-China granted a us$500 million loan top up and India provided a us $400 million swap arrangement. Sri Lanka is reportedly seeking an additional us$2.5 billion swap funding from both.This time around, Sri Lanka is emphasizing an Asia-centric outlook in its political, economic and strategy positioning. Tellingly, it also assures an India first strategic and security policy within this realignment. How it will work in the harsh light of Sri Lanka’s economic reality is yet to be determined.For now, Chinese investments into Sri Lanka are speeding ahead. The china harbor engineering company that built the Colombo port city signed its first us$1 billion agreement in December 2020. This was on the back of approval to set up a us$300 million Chinese tire factory in close proximity to the Hambantota port. At the same time, a decision on whether India will be allowed to operate a terminal at the port of Colombo that the previous government had agreed to is still pending, despite a recent high level visit by the external affairs minister.Fresh hostilities between china and India on renewed border conflicts, India’s decision to withdraw from the regional comprehensive economic partnership negotiations – which china played a leading role in and rising battles over technology all point to a hardening geopolitical stand off. In this environment of escalating big power rivalries and unrelenting pressure on the economy from the COVID-19, 2021 promises to be yet another testing year for Sri Lanka.