COVID-19 and the Sri Lankan Economy

COVID-19 has been rapidly spreading across the globe, taking thousands of lives and bringing hundreds of economies to a standstill. Its initial impact on China’s economy and China’s consequent slowdown may have adverse economic impacts on the rest of the world as well. This article examines the impact of COVID-19 on the Sri Lankan economy, focusing on the sectors such as national output and employment, tourism, exchange rate and financial market and social and welfare. 

The outbreak of critical diseases and pandemics cannot be predicted or controlled as yet. Severe acute respiratory syndrome (SARS) in 2003 and the Middle East respiratory syndrome (MERS) in 2012 are recognised as epidemics in recent history together with the most recent outbreak of the coronavirus, COVID-19. It was first identified in Wuhan, People’s Republic of China, in early January 2020. As confirmed by scientists. COVID-19 also belongs to the same family of coronaviruses which caused SARS and MERS in 2003 and 2012, respectively. However, the mortality rate of COVID-19 is approximately 4.3% (as of 24 March 2020) which is significantly lower than that of SARS (10%) and MERS (34%) (Abiad et al 2020). Nevertheless, the infection rate of COVID-19 (between 1.5% to 3.5%) outnumbered that of SARS and MERS and also Ebola (Abiad et al 2020).  The total number of confirmed cases of COVID-19 rapidly increased in China initially and then the rest of the world. In fact, the confirmed number of cases had surpassed the total of SARS by the end of February 2020 and currently, there are 170,444,706 (as of 30 May 2021) confirmed cases across 220 countries with a death toll of 3,544,083 (as of 30 May 2021). The outbreak spread to a vast number of countries in record time and the World Health Organization had announced a global emergency. 

Apart from the health consequences of COVID-19, there are many economic and social impacts of the pandemic which should be addressed sufficiently. Recalling history, SARS in 2003 cost $50 billion of the world’s output (Raga 2020) and the Asian Development Bank (ADB) has now estimated that global output may drop from $77 billion to $347 billion or by 0.1% to 0.4% of the global gross domestic product (GDP) (Abiad et al 2020). No doubt that China is the most adversely affected economy, approximately accounting for two-thirds of global GDP drop-down and the rest of the impact on the global economy is shared equally by developing countries in Asia and the rest of the world. The impact on China’s economy is more substantial through their stock markets, paused production and cancelled flights, and international travels. Currently, China is the second largest economy in the world and therefore China’s slowdown will adversely affect other countries as well. 

Impact on Sri Lanka’s GDP and Employment 

Sri Lanka has been maintaining strong economic and diplomatic ties with China since its independence. In particular, the bilateral economic relations between Sri Lanka and China have strengthened significantly during the last decade. Bilateral trade and investments agreements and tourism relations between the two countries are stronger than ever before. In fact, China is not a major export destination for Sri Lanka but China is the second largest source market for Sri Lanka in terms of imports and tourist arrivals. Therefore, China’s slowdown due to COVID-19 may have a significant impact on the Sri Lanka economy. The ADB recently estimated the economic impact of COVID-19 on selected economies considering the best case, moderate case, and worse case scenarios (Abiad et al 2020). 

Table 1: Impact of COVID-19 on GDP and Employment of Sri Lanka


Best Case

Moderate Case

Worse Case


As a % of Sector GDP

As a % of Sector Employment

As a % of Sector GDP

As a % of Sector Employment

As a % of Sector GDP

As a % of Sector Employment

Agriculture, mining and quarrying







Business, trade, personal, and public services







Light/heavy manufacturing, utilities, and construction







Hotel, restaurants and other personal services







Transport services














Source: Asian Development Bank.

As Table 1 indicates, the GDP of Sri Lanka may drop by 0.119%, 0.179% and 0.358% under best, moderate and worst hypothetical scenarios, respectively. Similarly, the shrinking of employment may vary from 0.205% to 0.617% under the same scenarios. Adverse effects on hotels, restaurants and other personal services are more substantial followed by transport services. However, these figures have been estimated only considering China’s domestic demand and travel bans and therefore the estimates may increase after incorporating the current situation in Sri Lanka. Especially, island-wide curfew due to COVID-19 completely disrupted economic activities while shutting down of airports and seaports interrupted export and import mechanisms extensively. Apart from that, COVID-19 has now outreached the United States (US), United Kingdom (UK) and other European countries as well. In fact, the European Union, UK and US are the main export destinations of Sri Lanka and, therefore, the demand for Sri Lanka exports is going to be severely affected. It is estimated that the export revenue from tea may drop by $520 million, while a $10 million reduction in the apparel sector (Gunadasa 2020). Hence, an overall drop of $750 million is expected during the second and third quarters of 2020 (Gunadasa 2020). Therefore, COVID-19 may have a larger impact on Sri Lanka’s GDP and employment than ADB forecasted.  

Impact on the Tourism Sector 

The tourism sector which is the third-largest foreign income generator for Sri Lanka has been severely affected by COVID-19. In fact, major tourist destinations in Sri Lanka have been suffering due to the travel bans which apply to domestic tourists also. China, which contributed the second largest number of tourists till January 2020, will most likely not be part of the top 10 countries with the most tourist arrivals in Sri Lanka in 2021. Specifically, 54,452 Chinese tourists had visited Sri Lanka during January–February of 2019, and Chinese tourist arrivals dropped down to 24,459 during the same period in 2020, reporting a 55.1% drop in Chinese tourist arrivals and which has drastically dropped down to 144 during the same period in 2021 (SLTDA 2020–21).

Table 2: Tourist Arrivals from Top 10 Countries

Country of Residence

Tourist Arrivals in February 2019

Tourist Arrivals in February 2020

Tourist Arrivals in April 2020

Percentage Change in Tourist Arrivals from February 2019 to February 2021






United Kingdom 

























United States 




















Source: Monthly Tourist Arrivals Report, February 2020, Sri Lanka Tourism Development Authority. 

Table 2 highlights the tourist arrivals from the top 10 tourist markets in February 2019 and February 2020 along with a comparison with April 2020. With the declining trend of Chinese tourist arrivals due to COVID-19, the UK, Russia and Germany have become the topmost countries providing tourists to Sri Lanka after India. Nevertheless, the majority of European countries are suffering from COVID-19 and, therefore, the tourism sector of Sri Lanka has been dramatically affected, especially after losing tourists from European countries. In the immediate aftermath of the pandemic, that is in April 2020, tourist arrivals saw a significant decline. Further, tourist arrivals from all the top markets dropped from 84% to 100% by 2021 when compared with the 2019 figures for the same. As a result, Sri Lanka’s total tourist arrivals during the period between January to April 2021 have dropped by 97.3% compared to the same period in 2020. Consequently, the contribution of the tourism sector to Sri Lanka’s economy declined sharply in 2020.  

Pressure on Exchange Rate and Financial Market 

Decreased tourism receipts, reduced export earnings and outstanding foreign debt payments essentially increase the pressure on the foreign exchange rate. Apart from that, a considerable number of Sri Lankans, employed in the Middle East, South Korea and Italy, are severely affected by the pandemic. Thus, it is expected that foreign remittances to Sri Lanka will drop by $2.7 billion during this year (Gunadasa 2020). Thus, the Sri Lankan rupee started to depreciate against major currencies from the first week of March 2020. In particular, it depreciated against the US dollar and reached Rs 198.46 (As of 30 May 2021) reporting one of the highest depreciation in its history. The current depreciation of the rupee essentially increases the country’s expenditure on imports and burden on foreign debt. Hence, the Central Bank of Sri Lanka has immediately taken a few measures1 such as suspension of the import of motor vehicles, non-essential goods and purchasing of Sri Lankan international sovereign bonds by licenced banks in Sri Lanka. However, no immediate response can be seen as yet in the exchange rate.  

COVID-19 has now caused global financial unrest as well and it is more apparent through the collapse of stock markets in many countries around the world. In fact, Sri Lanka has no escape from the crisis and Colombo Stock Exchange (CSE) in Sri Lanka has also been affected severely. On 10 March, CSE fell to an eight-year low and it was one of the largest one-day falls, due to an outflow of foreign funds (News First 2020a). A considerable volume of treasury bills and treasury bonds held by foreign investors has declined by 9.03% (that is, Rs 8.236 billion) bringing the total to Rs 19.6 billion in foreign outflows during the first two weeks of March 2020 (News First 2020b). Consequently, CSE closed on a negative note during the first two weeks of March with a 4.47% decrease in the All Share Price Index (ASPI) and a 5.79% decrease in the S&P Sri Lanka 20 index compared to the end of February 2020 (News First 2020b). Moreover, CSE fell by 16% since January 2020 and 8.4% out of 16% fall was in February itself (News First 2020a). There is a greater possibility of further weakening the stock market damaging the financial stability of the country with rapid outreach of the coronavirus globally and also in Sri Lanka.

Welfare Measures Implemented by the Sri Lankan Government

The Sri Lankan government has implemented a variety of strategies to control COVID-19 by allocating financial and non-financial resources extensively. Sri Lanka continues to maintain a large number of quarantine centres with many hotels and a few public places converted as quarantine centres. Maintaining such quarantine centres and facilitating suspected patients in the centres requires huge additional funding, which ultimately affects the budget deficit through increased welfare expenditure. However, the additional funding requirements cannot be compensated in the current situation and therefore will have adverse economic impacts in the long run. 

In particular, the President has allocated Rs 100 million to a special bank account opened by the Bank of Ceylon in order to help COVID-19 patients. Moreover, the President has pledged to donate $5 million to SAARC COVID-19 Emergency Fund to lend a helping hand to the regional counterparts ( 2020a). Apart from that, the government of China agreed to provide a concessionary loan of $500 million with a term of 10 years in order to strengthen Sri Lanka’s financial position to battle with COVID-19 ( 2020b). However, the long-term impact of such welfare measures should be addressed appropriately to avoid a possible economic downturn in the near future.

Lastly, the government’s decision to impose an island-wide curfew helped in controlling the pandemic. However, the livelihoods of low-income groups were adversely affected due to the imposition of this curfew. Particularly, casual workers and workers who are employed in the informal sector are temporarily unemployed and are struggling to make ends meet. Government policy should potentially help in providing a safety net to these groups as well.

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