This article intends to explore the vulnerabilities faced by Sri Lanka in terms of economic effects related to COVID 19 for the year 2020. Further, focus on the performance of the key economic activities of the country; Agriculture, Industry and Services. A brief comparison of the four quarters will be discussed in the article to understand how Sri Lanka has managed through the unfavorable effects of the pandemic.
Comparison of the quarters
Like all other countries in the world, the COVID-19 pandemic has caused an adverse impact on Sri Lanka as well. Local and international mobility restrictions in addition to health and safety measures that were imposed dragged down the domestic and external markets hampering the economic performance of the country. Further, the increased expenses to manage the pandemic have also impacted the economy negatively.
Sri Lanka faced the first wave of COVID-19 in March 2020. The first quarter of 2020 had a GDP growth rate of 1.8% with minor impact of the lockdown restriction imposed commencing mid-March to manage the first wave. The second quarter accounted for a massive fall in the economy by 16.4% subjected to the disruptions caused in many economic sectors with the island-wide lockdown that prevailed for nearly a month.
With the relaxed mobility restrictions, the third quarter picked up gradually reporting a 1.3% expansion. The impact of the second wave in the fourth quarter was comparatively low as there were no lockdowns imposed in the second and third quarters. The business activities were carried out smoothly except in the isolated areas in different parts of the country. Similar to the third quarter, a 1.3% expansion was recorded in the final quarter of 2020.
Economic impacts of COVID-19 on Sri Lanka
As per the Central Bank of Sri Lanka, the year 2020 recorded the highest economic downturn since independence which accounts for a contraction of 3.6% in real terms. The three main economic sectors; agriculture, industry and services recorded a negative growth for the first time in history reflecting the impact of the pandemic on economic activities. The growth rates for the said key economic sectors compared to 2019 were 2.4%,6.9% and 1.5% respectively.
Even though the growth rate of agriculture was negative, there were notable expansions in many agricultural activities compared to the previous year’s figures. Relaxation of mobility restrictions for farmers even during the island-wide lockdown period, positively contributed to the performance in the sector. The key driver for the overall contraction in the agriculture sector was the setback in the fisheries sector due to the loss of demand for fish in the market with the emergence of a COVID-19 cluster within the supply chain. The total fish production declined by 15.2% in 2020.
A contraction in the industry sector was observed with the slowdown of economic activities such as construction, mining and quarrying and manufacturing resulting from the pandemic. The construction and manufacturing sector accounted for a contraction of 13.2% and 3.9% respectively. As per the industry experts, adhering to social distancing measures and healthcare guidelines is very difficult since the construction sector is more labor-intensive. In addition, the employees in the sector are working in much confined spaces and share equipment and tools which thereby makes it challenging for the sector to perform at its best capacity even with different work schedules. The apparel industry, which is a sub-sector of the industry sector, had a hard hit with the discovery of a COVID-19 cluster in the apparel industry workforce. This had a negative impact on external performance of the country as the apparel industry was the prime source of foreign export income of Sri Lanka.
The impact on the services sector was better compared to that of the other two sectors. IT and telecommunications activities in the sector were boosted by 10% and 15.4% respectively resulting from the creation of high demand for digital platforms and communication services during the pandemic. However, the tourism industry was severely affected due to local and international travel restrictions. The setback of the services sector was mainly driven by the retrenchment in transportation which accounted for 6.7% compared to 2019. All the modes of transportation; land, air and water, were constricted during the year.
The total economically active labor force contracted further from 8.592 million in 2019 to 8.467 million in 2020. Labor force participation in the first quarter of 2020 was reported as 51% whereby it decreased to 50.2% in the second quarter. Again with the ease of mobility restrictions in the third quarter, the labor force participation picked up to 51%, however, the last quarter again hindered this to 50.1%. The contraction in labor force participation was due to lack of interest in reporting to work for the fear of contracting the disease, loss of jobs and lack of job openings.
On the other hand, the employment in the agriculture sector showed an increase from 25.3% in 2019 to 27.1% in 2020. According to the experts’ point of view, there was a shift of employment from sectors such as apparel, construction and tourism to the agricultural sector during the year due to loss of jobs and Income.
The World Bank projected Sri Lanka to achieve a growth of 3.4% in 2021 with the stabilization of the economic activities along with the success of the vaccination process. The forecast and expectation for growth could be revised with the on-going third wave.