Recovery amidst ruin and why Sri Lanka is better positioned to deal with its impact this time around
Cyclone Ditwah is in many aspects one of the worst natural disasters to hit Sri Lanka in recent times, second only to the Boxing Day Tsunami in 2004. Across the country, in various regions and sectors, the immediate damage to lives, livelihoods, businesses and infrastructure appear to be significant. Initial estimates of the damage and loss are varied, and it may take some time for more formal assessments to come in.
Does Sri Lanka have the strength to rebuild and recover? For Frontier, the answer is, “Yes”
What does history tell us?
While a one-to-one comparison is not realistic because each disaster would have affected different parts of the country and sectors and took place in years with different levels of infrastructure development, looking back at the past natural disasters in 1978, 1989, 2004, 2016 and 2017 showed us one clear message; there was a divergence from the painful situation on the ground and what was reflected in topline macroeconomic indicators. Looking back at varied data points, what was noticeable is that they followed a path that was broadly in line with the pre-existing economic structure and there was no clear indication of significant changes resulting from the impact of the disaster. Micro-level divergences across sectors, provinces and industries were clearly there but the counter effects in various forms meant that these did not show up in the economy’s aggregate numbers.
The immediate recovery efforts came in strongly
Over the past two weeks we have already seen rebuilding of infrastructure and initial compensation spending, faster and more comprehensive than what Sri Lanka would have seen in any previous occasion. Donations and grants, both official and personal, and even immediate support for the cleaning and clearing came in strongly from the less affected areas of the country. While transportation and logistic concerns aren’t fully resolved yet and will take time, most roads have opened, limiting further long-drawn disruption to economic activity. The immediate spike in food prices we saw has since settled down. All this is indeed heartening!
Why do we say that Sri Lanka has the strength to face this?
In every other natural disaster that we have faced in the recent few decades, Sri Lanka was grappling with twin deficits; a deficit on the government’s primary fiscal account as well as on the external current account. It is not the case now. Sri Lanka has recorded twin surpluses in the last two years and will still likely do so this year. Government’s rupee cash buffers are stronger than ever before, at a mark of approximately Rs 1.5 trillion. Gross foreign reserves have overall improved, but equally or more importantly, private sector foreign reserves held both domestically and outside of the country are at a strong net positive level. Inflation remains manageable and has risen very slowly even though there has been some level of currency depreciation. Despite many claiming that growth is temporary, we have recorded between 4 - 5.4% real GDP growth (YoY%) over seven consecutive quarters. This is the strength that we have been talking about and what is now coming to our aid in this time of disaster.
Sri Lanka will undoubtably require significant government spending for recovery efforts and even the fact that such spending has been announced gives a message of confidence. The ability to do so without a need to print money or worry about inflation is no small consideration given our past economic tightness. Foreign currency held by the private sector can also be brought in to finance some of the immediate import needs, especially for food and construction material and will be further supported by the varied grants and inflows that are already coming in or have been promised.
Final thoughts
There is of course much left to be done, both in terms of the immediate rebuilding and recovery from the vast impacts of Cyclone Ditwah as well as the structural changes in the economy that will push us towards a continued strong growth pathway. Lives of those affected and their close ones will be painfully hard as they grapple with the emotional and physical strains the disaster left as it swept over their houses, business places and future dreams. Yet, the swiftness with which relief is being administered and recovery is underway gives a sense of confidence, which we would not have felt a few years ago. There will be many reforms that are still needed and inefficiencies to deal with. We believe that there is no perfect answer to every question that comes along the way, but our economy is at the strongest we’ve seen for decades and we believe that this will carry us a long way.