A Closer Look At The Economy After Covid-19

By DNR Samaranayaka –JULY 31, 2020

DNR Samaranayaka

The government headed by Gotabaya Rajapaksa has been very successful in controlling the Covid-19, also known as, the Corona virus with very few causalities. Although a second wave of the virus cannot be ruled out, the authorities are very confident that they can face any challenge. The focus is now on rebuilding the economy. The economic and financial problems that emerged with the Corona virus are now becoming clear: foreign exchange earnings have dropped, government revenue has fallen, and unemployment has risen.  Like most other countries, Sri Lanka too enforced a lockdown covering many districts of the country. Its aim was to protect the people from getting the virus; it greatly succeeded, but at a heavy cost to the economy. There was very little economic activity anywhere in the country during the lockdown period. After nearly four months, the situation has greatly improved with the removal of curfew and the resumption of economic activities. Now it is important to address the economic down turn after the four months of the lock down in a bid to contain the virus. 

Sources of foreign exchange earnings

The biggest problem caused by the virus is its impact on foreign exchange earnings, which to a greater extent determines the ability of the government to rebuild the economy after the crisis.  This is mainly due to the significant fall of foreign exchange earnings from the three main sources: apparel (garments) exports, tourism, and remittances. According to Export Development Board (EDB), exports of goods and services are expected to decline to USD$ 10.75billion in 2020 from USD$ 16.1 billion in 2019, almost a 40% drop. This category includes apparel exports, tourism, tea, and various other exports and services that earn less than USD$ 1 million. Apparel exports earned US$ 5.2 billion in 2019. However, it is expected that the demand for garments is likely to fall sharply this year and given this uncertainty, some garment factories have already decided to close down until the demand for Sri Lankan garments pick up. Tourism is also badly affected by the corona virus. The arrivals have dropped during the first three months of the year to 507,311 from 740,600 during the same period in 2019. Along with the drop of arrival, the income too has dropped from US$ 1.78 billion to US$ 963 billion. Since March 2020, there have been no tourist arrivals so far this year. Remittances are the foreign exchange receipts derived from money send by those Sri Lankans working abroad to their families in Sri Lanka. It is the main source of income of the middle and low-income families. 

Apparel exports

Apparel (garments) exports are the main source of foreign exchange earnings in the country since 2000. However, its share in the world market is only about 1.2% of the total world supply. Sri Lanka’s apparel industry mainly consists of readymade garments and it contributed to 40% of the total export earnings of US$12 billion or 32.2% of total foreign exchange earnings of US$ 16.1 billion in 2019. The US is the main market for clothing from Sri Lanka and accounts for 35% of total exports. The other countries that import clothing from Sri Lanka are UK, Germany, France and Italy. Among the garments exporting countries in the Asian region, Bangladesh takes the lead earning US$ 32.5 billion in 2018  followed by Vietnam (US$ 31.5 billion), India (US$ 16.6 billion), Hong Kong (US$ 13.9 billion) and Indonesia ($8.2 billion) respectively. China is the world leader in exports of both textile and clothing followed by European Union (EU) with US$ 74 billion in textile and US$143 billion in garments. 

There is potential for Sri Lanka to do well in the supply of clothing to the world market. This is the ideal time to seriously pay attention to this industry since the clothing export is lower and the import demand has not completely picked up even though the impact of the virus is stabilizing in some parts of the world. However, if this opportunity is missed, the entire textile industry can be severely affected due to the strong competition from other markets participants in the region.  Consumer habits are also changing quite a lot after the virus, which means that people are looking for innovative ideas to reflect what they wear at a reasonable cost.  It appears that industry needs to absorb new ideas to make a difference in the clothing that Sri Lanka exports. It is also important to locate clothing industries outside the Western province to help the skilled workers, and particularly, women in relatively poor areas in the country such as the Eastern Province. 

Sri Lanka’s textile industry depends on imported textiles. A project to produce raw materials to the clothing industry has been recently initiated by the BOI (Board of Investments) and it is located in Eravur. This is a long awaited requirement and it could reduce the production cost by about 25%. In 2018, the value of imported textiles was around US$ 2.7 billion, of which around 50% has been used by the clothing industry. However, the raw materials needed to make textiles will have to be imported.

Tourism 

Tourism is the next highest foreign exchange earner of the country. In 2018, it generated US$ 4.2 billion from 2.3 million tourists. In 2019, the earnings from tourism dropped to US$ 3. 6 billion as the industry was affected by the Easter Sunday attack in April 2019. Due to the attack, the arrivals also declined to 1.9 million from 2.3 million in 2018. The Corona Virus, which is having a disastrous impact on the economy, led to a complete shutdown of the industry at the end of April 2020. Between January and March 2020, Sri Lanka received 507, 311 tourists and none thereafter.  In comparison to the 2019 arrivals of 740,600 during the same period in 2019, the arrivals in 2020 so far show a 32% decline.  Tourism earnings during this period also declined by 46.3% to US$ 963, 963,932 from US$ 1.78 billion in 2019. In comparison with other countries in the region, Sri Lanka is not a popular destination for international tourists, especially from the EU and the USA. In 2018, China received 60.7 million tourists, Thailand 35.5 million, Malaysia 25.9 million, Singapore 13.9 million, Vietnam 12.9 million and Cambodia 5.6 million. In comparison with these figures, the Sri Lanka’s total of 2.3 million in 2018 is very insignificant. Italy received the highest number with 95 million tourists in 2018. 

The Sri Lankan Tourist Board (SLTB) had earlier set a target of 4 million tourists for 2020 with a projected income of US$ 6 billion. Given the disruption caused by the virus, it is very unlikely that it will become a reality. Even if the government decides to open the airport to facilitate the arrivals of tourists, the maximum that the country can expect is around 500,000. SLTB has also developed a plan with a target of 6 million tourists and US$ 10 billion foreign exchange earnings by 2025. It has also increased the visa fee to US$ 100 per person; if the new visa fee is implemented it will apply to all visitors to Sri Lanka. The proposed visa fee is more than double the current fee of US$ 30 dollars. However, this is not a move that helps to attract more tourists to the country. This policy goes against the efforts to increase the number of tourists as expected by the authorities. It can, however, help the government to cut down tourists from India and China, the two countries that bring the majority of tourist to Sri Lanka at present. The visa fee may be too high for some from both countries. If this policy is implemented, a family with two children is required to pay USD$ 400 compared with the existing visa fee of USD$ 120. The government also collects an entry fee from tourists when they visit tourist sites and that is much more than the Sri Lankans living in the country pay for the same purpose. 

It is very unlikely that tourism will return to the pre corona virus period soon, despite the efforts made globally to develop a drug or vaccine to control the virus. The treatment is likely to take a much longer period than that is anticipated. Even if it is developed, it will take some time for the vaccine to reach the people throughout the world. Even though the countries like Sri Lanka would like to have tourists as soon as possible, this is not going to happen soon as the virus has serious health implications. 

Setting a target of 6 million tourists by 2025 also requires urgent attention to the facilities available for tourists in Sri Lanka. Most facilities available in the country are much below the expected standards based on other countries where tourism is a major industry. The lack of decent toilet facilities, limited resting places along the popular routes to rest and have a cup of tea are major hurdles for the industry. For example, Sigiriya is a popular tourist destination, however the vehicle park at the bottom of the rock looks like a place prepared by clearing the jungle. There are vehicles everywhere and no place to sit and relax. There are no proper services for those who need at least a drink. The vendors who are there provide services to satisfy the needs of local tourists. Another hurdle is the increased time taken to travel between popular destinations compared with few years ago. For example, I travelled to Kandy by car last year and it took 6 hours to go and 6 hours to return to Colombo on the same day, after spending only about one hour with the friends during the visit.   

Both the prime minister and the minister responsible for tourism promotion are only interested in the foreign exchange that tourists bring; they both are unaware about how to promote tourism. The first thing that the tourist board should do is to undertake a comprehensive survey to find out shortcomings in existing facilities and what needs to be done to improve the conditions of the tourist sites. Another requirement is to develop more tourist sites so that tourists can stay little longer. The focus now is mainly on the few religious sites, which can be covered within two to three days or even less. I was at the beach in Trincomalee in January this year and I was surprised to see the place completely deserted. Only a few Sri Lankans were there. I cannot understand how the country can develop tourism without paying attention to the beautiful sea front around the country. SLTB needs people with new ideas and new destinations (that is cultural, culinary and ecotourism).  

Read More