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The global economic fallout of the coronavirus (COVID-19) health pandemic is anticipated to be far worse than anything experienced in recent history. From a range of possible outcomes, developing economies will fare far worse, with greater exposure to contractions in world trade, declines in commodity prices, loss of foreign capital inflows, etc. In fashioning appropriate macroeconomic policy responses, they will also be more thinly stretched to provide adequate resources to safeguard public health, precarious jobs and limited social security cover. Amongst developing countries, those with higher initial public debt levels need to be particularly concerned. Despite a commendable health policy response, Sri Lanka is one such country, facing the COVID-19 economic fallout with a public debt ratio of near 90% of GDP and foreign debt settlements averaging USD 4 billion in the next few years.

However, given the necessity of doing everything possible to avert a sharp economic contraction, the tolerance levels for fiscal laxity and monetary easing are much higher. Sri Lanka has leaned heavily on monetary policy interventions, including direct financing of government spending and yield curve control measures to keep borrowing costs down. Whilst these measures make possible some attractive short-term numbers in the form of a V-shaped recovery, the resilience and sustainability of that recovery process will depend on efforts to ensure that equity concerns are addressed.

Contact
Subregional Office for South and South-West Asia +91 11 3097 3700 [email protected]