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Coronavirus to cost Sri Lanka 1.5-pct of GDP in 2020: ADB

NO MOVEMENT: The usually busy Fort, Colonial quarter of Sri Lanka’s capital Colombo during Coronavirus curfew.

ECONOMYNEXT – An going Coronavirus epidemic may cost Sri Lanka up to 1.5 percent in economic growth in 2020, the Asian Development Bank said as fears over monetary stability continued to grow with large liquidity injections being made into the credit system.

Sri Lanka would grow around 3.5 to 4.0 percent in 2020, the central bank had said earlier, while the International Monetary Fund was projecting 3.7 percent before the Coronavirus hit, and central bank started making large liquidity injections in February and March.

“The projected slowdown is in sharp contrast to earlier signs of a growth rebound in 2020,” ADB’s Senior Country Economist for Sri Lanka Utsav Kumar said after the agency’s Asian Development Outlook report was released.

“COVID-19 and the measures required to contain it have curtailed movement of labor, disrupted livelihoods and supply chains, and created cash flow problems for businesses, representing simultaneous demand and supply shocks.

“So, the longer this disruption lasts the greater the risk to Sri Lanka’s growth prospects.”

The ADB said health spending will add new pressure to the to the budget and tax revenues would also be lower.

“This will push the fiscal deficit up, amid already high public debt and external refinancing needs. Export and tourism earnings, as well as remittances will weaken amid a global slowdown,” the ADB said.

The agency said the so-called external current account deficit would be kept at 2.8 percent of gross domestic product, helped by lower oil prices subdued domestic demand and import restrictions by the central bank.

Any effect of a currency collapse did not appear to have been made factored into the ADB projections.

However analysts have raised fears over multiple ‘helicopter drop’ style liquidity injections of over 120 billion rupees made by the central bank which has undermined the credibility of a peg with the US dollar.

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Another Zimbabwe-style central bank re-financed 50 billion rupee Coranavirus bailout fund has been announced.

Currency collapse leads to output contractions as well as worsened debt and business failures. Sri Lanka’s bad loans had already been rising after a currency collapse in 2018. (Colombo/Apr04/2020)