IS3301 BASIC ECONOMICS

GROUP ASSIGNMENT

GROUP 08

Mirahawaththa R.W.M.N.D.T.A. EG/2018/3395

Mufahir M.M.M. EG/2018/3399
Nahalwathura N.M.G. EG/2018/3401
Niroshanda W.G.M.W. EG/2018/3405
Nishamani K.S.A.T. EG/2018/3406
 Impact of COVID - 19 on the Sri Lankan Economy

Impact on the overall economy

COVID-19 is a worldwide epidemic and the worst economic shock in recent

history. Sri Lanka is a middle-income country suffering from this new viral disease. Worst of all, this
affects the shock of demand, the shock of supply and the shock of finance. Consumer demand drops
sharply when the entire population is locked up for months. The main impact is that it will significantly
reduce the demand for Sri Lankan exports and lead to significant job losses. Implementing the necessary
social remote measures and curfews have effectively halted the local economy, especially in the service
sector, and effectively halted manufacturing and retail services. Although the government has allowed
agricultural production to proceed unhindered, the temporary lifting of the curfew and uncertainties over
the distribution of essential commodities to households have slowed the supply and storage of waste and
perishable agricultural goods. This report covers the impact of COVID-19 on the Sri Lankan economy,
including tourism, apparel and retail, and banking and finance.

Impact on key sectors:

 Tourism Sector

The tourism industry is an interconnected industry for several other segments of the
economy, including hotels, community-level activities, education, banking, agricultural, medical, travel
and transport, manufacturing, and vice versa. There are a range of service providers, such as Hotel
Suppliers, Travel Agents, Event Coordinators, and Transportation Suppliers, etc. They do not earn any
revenue from their tourism products due to Covid-19 coronavirus pandemic. And also according to the
data released in March 2020 by the global hospitality data company STR Sri Lanka, the tourism sector
has decreased by 30% of overall visitor arrivals relative to the first quarter of 2019 and It would have a
serious impact on the Sri Lankan economy. Therefore, it is necessary to protect these service providers
and to remain so as to fulfill the future demand for tourism in the country. In order to solve this condition,
it is good to release them from their company debts on a temporary basis, to help keep workers in their
organization, using tourism services such as hotels as quarantine centers with monthly rents to
organizations. The available technology and media advances are expected to resolve this emergency
within a limited period of time. Safeguarding the tourism sector will also be a successful investment in
potential developments.
 Apparel exports Sector

Apparel exports 46.5% of total export earnings up to August 2019 and employs over 990,000 people in
this sector. A significant portion of exports go to countries most affected by the COVID-19 epidemic.
According to the Sri Lanka Apparel Exporters Association (SLAEA), factories are already suffering due
to the cancellation of important orders. Revenue loss in the second quarter alone is expected to be $ 1.5
billion. Low consumer spending in these affected countries has reduced demand and there is no
improvement in the medium term vision until the destination economy recovers from its recession.
Manufacturers usually start production 4-6 months before they arrive at the retail store. Some
cancellations are related to products manufactured in January. Some products that are ready to ship may
not be taken out due to cancellation or locking. And this has led to cash flow problems, delays in
customer payments and some local players cutting their employees' salaries based on their income zone.
About 20 factories have come together to produce two face masks, which will be donated in collaboration
with SLAEA.

The apparel sector imports most of its raw materials from China. The closure of the long extension due to
COVID-19 after the Chinese New Year has disrupted production lines and unstable supply chains for the
apparel sector. And also the Chinese have begun to return and have begun to receive supplies due to not
operating at full power. However, due to the lack of labor, many production lines across the country were
inactive.

 Retail (non- essential goods) Sector

Around the world as well as in Sri Lanka, many markets are now
planning their exit strategies from living restrictions implemented to flatten the curve of the COVID-19.
Each government is preparing its own pathway to “a new normal,” complete with restrictions, health
safety protocol and changed consumer behaviors, in hopes of restarting the economy while still keeping
the virus under control.

The retail and consumer goods sector is one of the most affected sub-sectors of the
service sector in Sri Lanka. Due to the COVID-19, most corporations expect a recession in 2020 as well
as a negative revenue impact. The sales volumes of large-scale institutions were dropped by 35% - 50%
in March and April while medium and small-scale sales volume rose by 40% in April compared with last
year. Several large-scale institutions were trying to lower the operational cost and were able to remain
only on a 25% profit lost.

As the working from home concept worked only with 50% of the staff, the production
capacity of the total industry dropped by 50%. As the debtors failed to pay back to the companies, there is
a loss of working capital for reinvestments. As the continued effect of this issue, the production process of
consumer goods industry will be damaged. Since there will be a lack of imported items, the supply chains
of the industry are at risk.

The total volume demanded by the hotel industry has now totally dropped and
this will lead to a profit loss in the consumer goods industry. The buying patterns of the consumers are in
a changing trend owing to the income loss of consumers and unsettled mindsets. This will sharply affect
the consumer goods industry on a negative aspect.
 Banking Sector

Since the banking sector is the backbone of any economy, any significant recession will directly affect the
banks. The government has introduced a series of policy measures to assist affected businesses and
individuals. Credit growth is expected to level off with NIMS pressure in the medium term after the relief
period expires. The low demand for credit and the rise in non-performing loans have adversely affected
the banking sector. Due to difficult operating conditions, the performance of the banking sector is more
challenging, which affects the restoration of asset quality and profitability. Banks, which have already
made significant investments in digital banking, are holding back their investment bear as households
move away from physical money due to social isolation and use debit cards and e-wallets.