What could happen in 2022?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

- Charles Dickens, A Tale of Two Cities
The Victorian author could not have been more illustrative of our times. Sandwiched between the fear of winter of despair and comfort of spring of hope we welcome 2022. What follows are six things that may happen in the year to come. Predicting during turbulent times, is difficult. These may or may not happen, but they look possible. Let us call them foresights. Here we go.

FORESIGHT #1: 
Covid-19: The pandemic will certainly not end. Perhaps the spread will continue with almost the same speed. Only the importance we give to it will gradually die, as we may have more things to worry about.

By January 2022, we have lived with the pandemic for a little more than two years. According to WHO, over 276 million, by the time of writing this, have been infected since the first known outbreak that started in Wuhan, Hubei, China, in November 2019. Out of that 5.4 million or 2 percent have died. 

In Sri Lanka by December end, out of nearly 600K infected, 15K, or 0.25 percent have died. Though the media talked about four waves, only two waves are visible from data; one culminating in May and the other in August 2021. In terms of COVID-19 related deaths, the climax was in August 2021, when for a limited period the country almost ran out of medical facilities. Then the number of infections as well as the deaths seems to slide. 

A third wave in Sri Lanka is unlikely for three reasons. Firstly, the vaccination drive looks successful. By December end, out of the total eligible population (above 16 years) 68 percent or 11 million have received at least two doses. As we move into 2022 vaccines will become more accessible and more powerful.  While jabs will not fully eliminate the possibility of infections, they will break the link between the infection and death. Then COVID-19 will be as dangerous as common cold, a product of another variant of coronavirus. Still, it could be possible vaccination could be an annual event from 2022. 

Secondly, the acquired immunity will largely prevent the spread of virus. The ones who have either infected or vaccinated now have developed antibodies. Thirdly, the medical service will be better so the infected will receive a far better treatment. At least two countries have recognized Molnupiravir, a pill, the first oral, direct-acting antiviral shown to be highly effective at reducing nasopharyngeal SARS-CoV-2 infectious virus. With all that, the outbreak will be limited to pockets. As The Economist says ‘The harm caused may end up somewhere between that of influenza, which kills an estimated 300K to 650K people annually, and of other coronaviruses, such as the common cold.’  

However, we should not rule out the possibility of a dangerously more powerful variant. Fortunately, the probability for that, with the advancements of science and healthcare facilities looks derisory.   

FORESIGHT #2:
Global Economy: A global financial setback looks possible in the wake of a possible recession in USA, a global supply chain crisis triggered by lockdowns in China and other factors. India will be an exception.

The year 2022 will not economically be good. That is not just for Sri Lanka. US economy has resurged in 2021, after a year marked by lockdowns and stay-in-place orders.  This recovery was driven by a combination of monetary and fiscal stimuli, as well as firm consumer spending. 

Against this backdrop, the second half of 2021 has been an economy grappling with supply-side constraints and rising price pressures. New virus variant concerns have elevated demand to push up inflation, which is expected to rise to near 7 percent levels – the highest in the lives of most Americans.

In Europe, the conditions are a bit better. Economists see inflation dropping from 4  at the end of 2021 to 3 percent by the first quarter of 2022, and eventually dipping below the European Central Bank’s target inflation rate of 2 percent. 

The European Union is expected to achieve a growth rate of 4.3 percent in 2022, with most countries in Western Europe maintaining above 6 percent. Global GDP will eventually reach the pre-COVID-19 path, but that will take until at least the third quarter of 2023. 

China is a different story. The analysts have cut their forecasts for China’s economic growth for 2022, as the world’s second largest economy faces fresh issues from the new Omicron variant to a severe property sector downturn. So for the next year China will end up anywhere between 5 percent to 5.4 percent - a major setback for the continuously expanding economy. 

This would mark the second slowest pace of growth since 1990, the worst being when the country’s economy increased only around 4 percent following international sanctions related to the 1989 Tiananmen Square incidents. Stabilizing economic growth in the coming year will require Beijing to implement new measures.

The effects of China’s supply chain crisis, started because of the regular and exceptionally prolonged lockdowns, will continue to effect the international manufacturing in 2022. An over-reaction to the supply chain crisis could be possible with large retailers ordering significantly higher quantities on fear of not having enough inventory. This can push manufacturers into deeper stress while making it harder for medium to small businesses to provide goods to consumers.

India, on the other hand, is expected to show a healthy 8-9 percent growth in 2022 despite INR sliding against the strengthening US$. 

FORESIGHT #3:
Sri Lanka’s Macroeconomic Challenges: While is it extremely difficult to predict at this moment, we may end up somewhere between partial repayment of sovereign debts with the rest restructured (The BEST scenario) or a default, as already predicted by mainstream economists (The WORST scenario).

The five billion dollar question: What will happen to Sri Lanka? Will we be ever repay our debts for the year? I do not think anybody can realistically predict what would happen at this point. Many things is yet to take place between now and June 2022. 

That course of processes will decide not just our future, but that of the few generations to come. While almost all mainstream economists have urged the government to request IMF assistance, the latter is stern on its decision not to do that. Both these stances may or may not change by June 2022.

One of the key misconception about the present crisis is that approaching IMF per se will solve it. Hardly, it will only be a beginning. Only thing IMF could add is a bailout package to ease current difficulties and a debt-restructuring programme to address long-term issues. Whatever IMF proposes does not necessarily be favored by the creditors. Reaching a settlement may take months or a year, sometimes. 

On the other hand, the government is in a better position to re-negotiate with creditors for a more flexible solution. The success or failure of such discussions will decide the future, not IMF settlements, even if it plays a role. 
Is the future bleak? Let’s take an analogy. We hear safety precautions before any flight, but how many times we have ended up in the sea with safety jackets on? Turbulences are common, but an experienced and determined pilot can fly through them. 

Only one thing is certain. The country has to undertake serious economic reforms, with or without IMF. They can be divided into short term and long term. An essential short term measure is - laisse la roupie - (Let the rupee go) The LKR to USD rate should be decided by the market, not bureaucrats. 

This will address the Dollar liquidity problem. The long-term reforms should look for means to earn Dollar revenue. They can be extreme and unprecedented. It’s not the time play the populist card. Sri Lanka must adapt a true development agenda, it has been postponing for decades. Only with that, the economy will be stable.  

FORESIGHT #4:
Economic Hardships: Inflation, coupled with foodflation, will upsurge. How bad this would affect the community will be decided on the measures government would take. 

Inflation is bad. It has devastated many economies. There are two unfortunate things about Inflation. When it hits there is nothing we can do to avoid it. More the pull to come out, stronger the push towards it. The other unfortunate (but interesting) fact about inflation is the way out of it too will be through actions that may further increase the inflation for a short term as consequence. Depending upon the trade policy the situation may be similar to 70-77 times. The impact will be worst for the poor, but middle class too will not be spared.          

Foodflation is perhaps more excruciating. The impact on the poor will be worse. With COVID-19, Central Bank of Sri Lanka warned about the possibility of those just above the poverty line falling below. Foodflation will surely aggravate the situation. Is there a way out?   

Rewind to India, early 1990s. Indian economy was in such a bad loss, a cover story of Illustrated Weekly of India boldly has called the country ‘A nation of losers’. India, unlike Sri Lanka, was late in its liberalization efforts. Even by 1991, it had a fixed exchange rate system, where INR was pegged to the value of a basket of currencies of major trading partners. India started showing balance of payments issues in 1985, and by the end of 1990, the state of India was in a serious economic crisis. 

All food prices have risen by more than 50 percent. The government was close to default its sovereign debts. Reserve Bank of India had refused new credit, and foreign exchange reserves situation was just as it was for Sri Lanka today. That could barely finance two weeks’ worth imports. 

What India did was a lesson for all. P. V. Narasimha Rao government at the time gave full powers to Dr. Manmohan Singh, a renowned economist and the Finance Minister then to take Remedial measures. A new Industrial Policy was done; it laid out a plan to foster Indian industry in five points. The ‘Licenses’ Raj’ was cracked. 

To further incentivize foreign investment, India allowed up to 51 percent foreign equity participation, enabling foreign companies to bring modern technology and industrial development. 

Fertilizer subsidy was reduced and sugar subsidy abolished. INR was devalued by 19 percent with respect to the US$, a change which made exports cheaper and accordingly provide the necessary foreign exchange reserves. Reserve Bank of India reduced the statutory liquidity ratio and cash reserve ratio. India used an IMF bailout, but only partially. 

What were the results? In short term it created more hardships with further increasing inflation and worse foodflation, but in long term India settled down, with its path to recovery.

The alternative was to be defensive and restrict imports, incorrectly presuming that would save foreign reserves. Dr. N. M. Perera did that from 70-75, with heavy costs. That is certainly not how a free market economy should face its challenges.

FORESIGHT #5:
Crypto Currencies: They will be more commonplace, but will not replace the fiat currencies. The year 2022 will see Decentralized Finance (DeFi) redefining the landscape, with irreversible transformations. Crypto exchange rates will see ups and downs (many will go defunct) but for the long-predicted “crash” the time is still not ripe.

Cryptocurrency is as unpredictable as Artificial Intelligence. Human mind has its own limitations in envisioning the future possibilities. If we were to believe the finance experts, cryptocurrencies have long been dead now having crashed the global economy. Interestingly they still not just exist but do so well.  

Year 2021 has been good for crypto in general. They have grown into a trillion-dollar industry, causing a massive wave of global financial disruption. DeFi moved beyond just currency and created sophisticated systems and applications with thousands of use cases addressing borrowing, lending, trading, insurance etc. 

The crypto exchange app Coinbase passed TikTok and YouTube to become the most downloaded app in Apple’s App Store also during 2021. Bitcoin fell from around US$ 64K in April to below US$ 30K in mid- May after a tweet by Tesla, Inc. chief Elon Musk but quick to rise again. By the time of writing, it was almost US$ 50k.

Individual crypto predictions are too long to summarize. Mostly the same players will dominate the market. Bitcoin is not too large to fall. Ethereum, the blockchain platform with smart contracts, will give rise to more innovations. Ripple, with its ability to facilitate cross-border transfers of fiat currency more efficiently will become part of the traditional financial system. Litecoin, Neo, IOTA, Tether, Cardano and Dogecoin are few more coins to look for. (This is not an investor advice.)

Will Sri Lanka see a surge in crypto related activities? May be, but we will never know. Crypto mining, trading and investing all happen in another sphere, we hardly have access to. Neither these activities can be monitored centrally nor easily. May be mining will go down with Sri Lanka’s high electricity costs and low gains. Traders and investors may gallop with the falling Rupee.

A word for regulators: You have to live with this universe. Best to find ways to exploit the inevitable than finding reasons to try unsuccessful restrictions. 

FORESIGHT #6:
Digital Economy: The ‘Spring of Hope’ in 2022 will be the growth of Digital Economy. 
In the past Sri Lanka has been amazingly innovative in challenging circumstances. Undertaken by the Dutch in 1740, we were the first country to commercially grow coffee. British followed the tradition. After few experiments in the low country they had first plantation in the hilly Kandyan area in 1827. By 1860, Sri Lanka, Brazil and Indonesia, were the three largest coffee-producing countries in the world. Then hit the calamity. The fungal disease nicknamed “Devastating Emily” was detected in 1869 and over the next 20 years coffee was only a little more than history. 

Thousands of acres were abandoned. Still not for too long. By 1900 Sri Lanka has found its next killer crop - Tea. Within few decades Ceylon Tea, a pillar of Sri Lankan culture, heritage and identity, became an international brand. Such was our power of innovation.

Perhaps it is the time to repeat the history. With tourist industry down with COVID-19 and apparel industry facing a cut throat competition from our own neighbors like Bangladesh, perhaps it’s time to focus on alternatives. The best – and may be the only – viable alternative is the digital iIndustry. With this we speck not just of software and enabled services industries but the whole gamut of opportunities available under the Digital umbrella. 

How big is our Digital Economy? There has never been a universal technique to estimate. The lack of a generally accepted definition of “Digital Economy” or “Digital Sector” and the absence of product and industry classifications for Internet platforms and related services are obstacles to measuring the digital economy. Still, there have been many workarounds. 

Following a working definition by IMF that covers ICT equipment, semiconductors industry, Telecommunication and Internet access services, Data processing, software and other information services, Online platforms, including e-commerce platforms and Platform-enabled services, (e.g., the “sharing economy”) Sri Lanka’s Digital Economy size has been estimated to be 4.37 percent (or US$ 3.47 billion) in March 2021. The policy measures are already in place to further accelerate the growth of this sector. 

Sri Lanka has been in far difficult situations before. In 1953 masses were in streets to bring down then government. In 1971 there was a youth insurrection led by a 26 year old. Black July of 1983 was followed by a 30 year old prolonged conflict that took 70K – 100K lives. 

Tsunami in 2004 took 35K lives within a period of just one and half hours. When we thought everything going fine, nine suicide bombers proved we were wrong in 2019. Then there was COVID-19. Still, like a phoenix, we rose after all those times. So should we be afraid of an economic crisis in waiting? I hope not. Crises will come and crises will go! 2022 will be another year we will prove our resilience. 

(Chanuka Wattegama is an academic and a policy researcher. All views expressed are personal. He could be contacted via: [email protected])