Given the stark choice between saving lives with no certainty vs saving livelihood with some certainty, Sri Lanka, like some other countries, opted for the former and acted early. Would this wreak havoc in the Sri Lankan economy? ...Using a forward-looking econometric methodology that combines estimates from pre-crisis data with calibrated estimates for the Covid-19 impact, this exercise tries to shed some light on what to expect by fifteen major sectors of the Sri Lankan economy. This is not a forecasting exercise. Instead, the methodology that accounts for sectoral interdependence generates not only the direct growth impact on a sector from the ‘Covid-19 sentence’, but it also generates the indirect growth impact propagated by other sectors. It is these indirect effects that prolong the downturn in many sectors. One sector cannot recover fully in isolation.
Under the optimistic scenario, if Covid-19 pandemic withers away and normalcy returns before the end of the year (2020), a V-shape or U-shape recovery is likely for all the sectors. Some sectors, however, may take more than two year to fully recover. This is too much of a drag and calls for effective policy interventions to expedite the recovery process. Under the pessimistic scenario where Covid-19 outbreaks linger on, the economy would go into an L- shape drag. The growth numbers by sector indicate that GDP in 2020 alone may contract by about 4.3%. The very objective of these warning lights is not to realize the bad outcome.
Universal free education, healthcare and food subsidy and land (and housing) for landless were the key features of the Sri Lankan welfare state. ...In the 1960s and 1970s Sri Lanka stood as an outlier among developing countries for high human development indicators for a low- income country. Sri Lanka cannot make the same claims today. Many developing countries have surpassed Sri Lanka. Insufficient economic growth and perpetual budget deficits have resulted in an unsustainable build-up of public debt. A segmented trend analysis of the debt- to GDP ratio shows that social welfare programs are not the main drivers of unsustainable debt trends at present. It is debt servicing that perpetuates the debt burden. In fact, fiscal constraints of the country have taken a heavy toll on the quality of the social programs. The debt burden resulting from aging population, though largely offset at present by falling young population proportion, is bound to increase further. Interestingly, apart from higher GDP growth, quality adjusted road network seems to contribute to lowering the debt burden through indirect growth effects. By implication, essential infrastructure development may increase the debt burdn in the short run, but lowers in the long run when growth effects start to kick-in.