PwC forecasts Sri Lanka’s economic growth to fall below 2% this year

• Says pressure on rupee likely to continue 
• Recommends govt. to secure adequate funding lines to manage short-term pressure on LKR
• Proposes tax-free status for export industries to drive 
• post-COVID-19 recovery
• Stresses need for establishing employer grants to ensure employee salaries 

PricewaterhouseCoopers (PwC) expects Sri Lanka’s economic growth to fall below 2.0 percent, the lowest since 2011 with further pressure on Sri Lankan rupee amid coronavirus (COVID-19) pandemic.

“If the pandemic is contained by mid-2020, the economic recovery could begin towards the latter part of the year. We expect real GDP growth to be less than 2 percent this year,” PWC stated releasing a report on the COVID-19 impact on Sri Lanka.

Prior to the coronavirus outbreak, the Central Bank of Sri Lanka (CBSL) was projecting the economy to grow between 4.5 to 5.0 percent with a modest recovery from the Easter Sunday attacks in April 2019 and the political stability following the presidential election.

However, PwC noted that given the increasing economic consequences from the pandemic, this growth target is unlikely to be achieved.

Meanwhile, PwC also expects further pressure on the Sri Lankan rupee as the country’s foreign inflows get adversely affected by the pandemic despite the recently enforced measures by CBSL and the government.
The selling rate of the US dollar crossed Rs.200 for the first time in the country’s history yesterday, and so far during the year, the Sri Lankan rupee has depreciated by over 9 percent against US dollar.

“Despite the actions taken by regulators, given the current market conditions, we expect the Sri Lankan rupee to experience further pressure,” PwC stated. 

The report recommended the government to secure adequate lines of foreign funding to manage short-term pressures on the currency. 

However, it emphasised that the government must look at policies enabling a strong export base and sustainable FDI in the long-term for a strong currency, including granting tax-free status for export industries.

“Export industries in our view should be provided with tax-free status for a considerable length of time to attract investment, create employment and generate foreign exchange,” PwC said.

It also prescribed a medium to long-term strategy, which would encourage investment and capital flows at the end of the pandemic targeting sectors that could fast-track economic recovery and growth.

Although, the government has announced several measures to fight the economic downturn caused by the pandemic, PwC is of the view that additional measures should be put in place to support the economic recovery process, which should include funding-based initiatives and tax or grant-based initiatives.

The proposed funding-based initiatives are aimed at enabling enterprises to strengthen cashflow and liquidity position in the short to medium-term.

The proposed tax or grant-based initiatives are aimed at enabling enterprises to ease cost pressures and preserve cash in the short to medium term, and PwC stressed that these initiatives are supplementary to the sweeping tax cuts announced by the government at the end of last year.

These initiatives include VAT deferrals, corporate tax rate relief for all companies for 06-12-month period as well as releasing of dues from the government to construction, fertiliser, pharmaceuticals, financial services and other sectors which have substantial receivables.

Furthermore, PwC has also proposed a voucher-based scheme (none or limited cash grants) for affected employees in retail, hospitality and leisure businesses and SMEs. 

“Alternatively, an employer grant should be established to pay salaries depending on the number of employees,” it stated. 

It was highlighted in the report that many countries have implemented some form of wage support to enable employers to continue paying basic wages to the sectors worst affected by the pandemic such as tourism and other service sectors, construction and export manufacturing.

“The focus should be job retention by easing the cost of employment of affected sectors. An employer grant will enable enterprises to pay salaries and refrain from job redundancies. This could also come through interest-free loans or limited pay-outs from pension funds savings. Some relief on cost management has been provided in some countries by reducing utility bills,” PwC said.

It also emphasised on the need for more flexible laws to permit staggered/flexi working hours, shorter day weeks and flexible work arrangements that suit employers and employees and improve productivity across the State and private sector.