COVID-19 could alter SL’s strategic economic focus to food security & agriculture: Report

• COVID-19 brings opportunity to tackle pressing economic and structural issues plaguing country 
• Provides eye opener to evaluate efficacy and purpose of local govt. bodies, provincial councils and Parliament 
• Fall out on external sector may be less than severe as seen from outset 
• Puts growth at 1.1% with potential to accelerate beyond 2.5% for 2020, if spread stops by end-May 
• Commends president, government, frontliners in healthcare, police and military for managing crisis 

As Sri Lanka’s early but extreme actions to contain the spread of the new coronavirus is bearing fruit and the government is contemplating on reopening the economy by at least from May or even before, the pandemic could easily alter the country’s strategic economic focus to food security and agriculture and such sectors would attract revived attention in the coming decade, according to Softlogic Capital PLC.  

As the China-originated virus grew rapidly to become a global pandemic in scale and speed nobody has seen at least since the Spanish Flu in 1918, the countries around the world woke up to the grim realities of the globalised system, which shaped everything from politics to economics and trade for the last half-century.

Softlogic Capital, which houses the research arm of its stockbroking company, expects that Sri Lanka’s industry and services sectors, which account for 84 percent of the economy, would shrink in their contribution in 2020, with agriculture taking a wider space in the economy—growing from 7 percent to 8 percent.  

“The pandemic could easily alter the strategic focus, while food security and domestic agriculture could garner revived attention in the coming decade,” the authors to the report published recently said. 

As there are no atheists in foxholes, as the saying goes, the crisis also reminds there are no free traders in a pandemic, as dangerous times have reminded the governments around the world, including those who went around the world advocating open markets, that their first loyalty is to their own citizens. 

Although Sri Lanka is at the mercy of its trading partners for its medical supplies, the country for the most part could feed its citizens even during in full lockdown, thanks to the local farmers. 

Some legislators of the former government and their economic policy advisors were on record urging the farmers to abandon cultivating paddy as it was cheaper to import rice from India than producing locally. 

The administration of Gotabaya Rajapaksa instead listed farming, agriculture and plantations as essential services when the country went to lockdown and urged every household to grow vegetables and grains in their home gardens under its Saubagya scheme aimed at national food security. 

Under the scheme, the government is even distributing seeds and plants to some households through its state mechanism. 

Apart from the virus containment efforts, the state mechanism was also deployed and stepped up to buy paddy and agricultural produce directly from farmers at guaranteed prices, as they are unable to sell their harvest due to lockdowns. 

As the executive branch along with the Cabinet and the task force have so far handled this crisis in an exemplary manner, prioritising safeguarding the people over elections and the economy, the authors of the report said this would be a good eye opener for the people to evaluate the purpose of maintaining three levels of elected public bodies at a time when the public finances have become trying. 

“Further, the COVID-19 crisis also brings about opportunity for Sri Lanka in tackling burning economic and structural issues. 

Faced with dwindling government revenues, it could be an eye opener for the GOSL and the public to evaluate the efficacy and the purpose of having three levels of elected public bodies (namely, local government bodies, provincial councils and Parliament) consuming a significant portion of public funds,” the report said. 

The Treasury and Central Bank also came up with some unprecedented measures to support the vulnerable and provide backstop to small businesses and self-employed personnel to prevent them from defaulting on their loans to financial institutions.  

Meanwhile, echoing the sentiments of First Capital Research, Softlogic Capital also said the fallout on the country’s external sector would be less severe despite the heavy blow on textile and garment exports, earnings from tourism and worker remittances. 

The authors of the report estimate a 40 percent dip in exports – led by apparel and tea but that would be largely negated by the estimated 20 percent decline in the oil import bill, imports to apparel sector and the import controls imposed on non-essential goods. 

Oil accounts for 20 percent of the total import bill of Sri Lanka. 
“And the short-term measures taken by the GOSL to halt imports of vehicles and non-essential consumer goods will provide some breathing space for Sri Lanka to manage its external account, albeit still with challenges. 

Hence, we forecast the trade deficit to reduce in absolute terms to US $ 5.5 billion in 2020E, from US $ 8.0 billion in 2019,” the report added.

Meanwhile, Murtaza Jafferjee, Managing Director at J.B. Securities Limited, a Colombo-based stockbrokerage, who is most worried about the foreign investors fleeing the international sovereign bonds (ISBs) issued by Sri Lanka, excoriated the government for its decisions to ban non-essential imports, suspension of purchase of ISBs by licensed banks and easing of forex rules to attract foreign currency. 

“Recent announcement have disastrous implications,” he lamented last week speaking to Mirror Business adding the IMF bailout is a must for Sri Lanka at this moment to alleviate the fallout from the crisis. 

Meanwhile, Softlogic Capital estimates the Sri Lankan economy to register a growth of 1.1 percent for 2020 with the possibility of growing by over 2.5 percent, provided the spread of the virus ends miraculously by end-May, failing in which the economy runs the risk of recording a de-growth. 

“Also, if history provides any consolation, the Sri Lankan economy in the past had shown remarkable resilience in overcoming obstacles and given it is relatively small at US $ 90 billion, few billion dollars can make a huge positive difference.

The president and GoSL too have the will to implement economic reforms and we believe they will not shy away from taking bold decisions for the medium-term benefit of the economy. Introducing tax reforms, simplifying the tax structures and creating equality in personal income taxation was such a huge step taken in January 2020 to drive economic growth in the next few years, which also could be an impetus, bolstering economic growth in a post COVID-19 environment,” the report added.