External sector battled strong headwinds in 2020: Central Bank

Supported by timely policy measures undertaken by the government and the Central Bank, the external sector battled strong headwinds in 2020, the Central Bank of Sri Lanka said last week releasing its Annual Report for the Year 2020.

“The slump in merchandise exports due to the mobility restrictions and lockdown measures was swiftly overcome, demonstrating the resilience of Sri Lankan

exporters.Accordingly, export earnings rebounded within a relatively short span of time to reach pre-pandemic levels. Measures to curtail non-essential imports, together with the significantly low global petroleum prices, helped reduce the import expenditure in 2020, resulting in a notable improvement in the trade deficit. The

tourism sector was severely affected by global travel restrictions. Foreign inflows, in terms of trade in servicesrelating to the Information Technology and Business Process Outsourcing (IT/BPO) sector, recorded a significant improvement,

supported by the surge in novel work arrangements amidst the pandemic,” the report said.

“The complex challenges encountered by the Sri Lankan economy in 2020 were efficaciously addressed through extraordinary policy interventions by the Government and the Central Bank.These interventions were essential to mitigate the socioeconomic impact of the spillovers of the COVID-19 pandemic and the resultant scarring of households and enterprises. Such interventions were also required to uphold the confidence in the economy, thereby averting acute stresses on macroeconomicand financial system stability.”

“Alongside the global economic downturn induced by the pandemic, the Sri

Lankan economy contracted by 3.6 per cent in real terms in 2020, recording the deepest recession since independence. Mobility restrictions and other containment measures imposed locally and internationally, with a view to preventing the spread

of COVID-19, hampered real economic activity across all sectors. The sharp contraction observed in Industry activities during the year was driven by the

significant slowdown in construction and manufacturing activities. Services activities also registered a notable contraction due to the pandemic driven deceleration in transportation, other personal services, and accommodation, food and beverage services.”

“The Agriculture sector, too, registered a contraction during the year as the impact of the pandemic outweighed the positive effects of timely policy support and favourable weather conditions. Investment expenditure contracted in

2020, reflecting subdued investor sentiments, while consumption expenditure displayed a marginal growth.”

“The contraction of investment expenditure exceeded the reduction in national savings, resulting in a decline in the savings-investment differential in 2020.

Meanwhile, the unemployment rate rose above 5 per cent for the first time since 2009, with a decline in the labour force participation rate, in the wake of uncertainties surrounding the pandemic. Reflecting the combined effect of the contraction in Gross Domestic Product (GDP) at current market prices and the depreciation of the Sri Lankan rupee against the US dollar, GDP per capita declined to US dollars 3,682 in 2020 from US dollars 3,852 in the previous year,” the Central Bank annual report said.