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The containment of the COVID-19 virus, meeting the nation’s foreign debt obligations and moving towards fiscal consolidation are three foremost and formidable problems that have to be resolved this year.

Each one of them is a formidable problem, resolving all three are daunting tasks. Reviving the economy and achieving even moderate economic growth is only possible after these severe constraints are addressed. Expectations are for a four percent growth in the economy in 2021.

Containing COVID

Containing COVID from spreading and ensuring the least dislocation of economic activities is a tricky problem, as many countries have found. While lockdowns contained the spread of the virus in many countries, their relaxation led to fresh outbreaks necessitating further lockdowns.

The world’s infected cases amounted to about 83 million and the death toll is approaching two million. It has infected millions in all five continents and is still spreading.

Economies

Many economies are paralysed. Most countries have opted to open up their economics with restrictions and health guidelines and social distancing. Sri Lanka too has advocated limited area-specific lockdowns and is administering regulations on complying with health regulations, limiting social and religious gatherings and practicing social distancing.

Nevertheless, the adherence to these precautions and social safety measures appear to be less rigid now. People are more relaxed in their adherence to COVID precautions and COVID cases are climbing up.

Travel

Meanwhile the increase in island-wide travel during the festive season, large congregations at some churches, political gatherings, the travel to and pilgrimage to Adam’s peak for the annual pilgrimage, and the opening up of the country for limited and controlled tourism are fraught with dangers of a new wave of the pandemic.

Danger

The country is in a critical stage when the opening up of the economy could be a threat to the spreading of the virus. While stringent controls of social activities are difficult when the revival of economic activities are needed, the dangers must be recognised and prompt responses are needed to contain any resurgence. The relaxation in controlling the pandemic could rekindle a new and more dangerous wave of the epidemic.

The containment of the pandemic is a precondition for the country to return to its economic potential. Gradual opening up of the economy while containing the virus has proved difficult in most countries. Achieving it is the most formidable challenge and determining factor.

Resurgence

A resurgence of the pandemic could set back any economic recovery. The achievement of an economic growth of over four percent this year is very much dependent on the containment of COVID in the country and globally.

Repaying foreign debt

The most serious economic challenge this year is the meeting of the country’s foreign debt repayments. With the country’s foreign reserves as low as about US$ four billion, a continuing trade and balance of payments deficit and no significant inflows of capital, the country’s external finances are in a perilous state.

However, the Government, the Central Bank and responsible Governmentspokesmenhave repeatedly said the Government is confident and capable of meeting its foreign debt obligations in 2021. Whether this is by further commercial borrowing at high interest costs, loans from friendly countries, large foreign investments that have been negotiated or facilities from multilateral agencies is not clear. Hopefully the strengthening of the foreign reserves to meet the foreign debt obligations will unfold soon.

Fiscal consolidation

Bringing down the large fiscal deficits that the country has incurred in recent years is a prerequisite to macroeconomic stabilisation and economic growth. In the current state of the country’s public finances, the deficit could be brought down only slightly from nine percent of GDP or more this year. Even achieving the desired four to five percent fiscal deficit by 2024 is indeed a challenging tough task.

Necessary condition

The fiscal deficit has to be brought down gradually and progressively from this year. Bold decisions are needed to reduce the ballooning fiscal deficit by enhancing revenue by a comprehensive programme of progressive taxation, cutting down of non-productive and wasteful expenditure, reforming loss making state enterprises to reduce government expenditure and an effective implementation of development projects that increase the country’s output and exports. Without fiscal stabilisation the country’s economic and social development cannot be achieved.

Summary and conclusion

The containment of the COVID pandemic, the ability to meet the country’s foreign debt repayments and fiscal consolidation are needed to stabilise the economy and provide an enabling environment for economic growth.

Much as we hope the New Year would be a year of economic recovery and growth, global economic conditions, the pandemic and the serious problems of foreign debt repayment are serious challenges.

The good news is that unlike the two previous years of economic retardation, the economy is expected to grow by about four percent in 2021.The growth statistic being assisted by the low output of the previous year when the production of goods and services contracted.

At the beginning of 2021, let us hope for a healthier world and a global economic recovery.