COVID-19 AND SRI LANKA'S EXTERNAL SECTOR: CHALLENGES AND POLICY CHOICES

The COVID-19 pandemic exerted significant downward pressure on global trade as well as the global economy at large.

- THARINDU UDAYANGA

Unprecedented declines in merchandise trade, foreign direct investment (FDI) flows, tourism and cross-border migration have all been hallmarks of the economic fallout. As a result, growth expectations for countries worldwide dimmed.

Nonetheless, thanks in part to substantial expansionary monetary and fiscal policies being rolled out to achieve preCOVID economic recovery levels and the development of vaccines, the contraction in global trade and economic output are less than what was anticipated. The Sri Lankan economy too has been impacted by these external developments, witnessing fluctuating fortunes in its external sector performance.

This article discusses the impacts of global economic developments on Sri Lanka’s external sector and suggests ways to cushion them.

Sectoral impacts of COVID-19

The impact of COVID-19 on global trade flows was substantial, contracting merchandise trade by -5.3 percent in 2020, albeit a much-improved outcome from the initial -12.9 percent forecast. As expected though, global FDI flows saw a sharp decline in 2020 contracting by 42 percent in 2020 compared to 2019.

There have also been significant impacts on other forms of cross-border capital flows such as world tourism, migration and related cross-border remittance flows.

Even before the pandemic, Sri Lanka’s long-term export growth rate was on a declining trend, despite some improvements in the immediate pre-COVID-19 years. In 2020, the pandemic amplified this long-term decline. Merchandise exports contracted by -15.6 percent in 2020 compared to 2019, reflecting both demand and supply shocks.