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How has COVID-19 impacted Sri Lanka, and how could emergency, universal lifecycle transfers help?

13/11/2020

Unsplash/Robin Noguier/ Young Sri Lankan girl

By Antonio Bubbico and Louise Moreira Daniels

The world is facing one of the worst humanitarian crises of modern times. Whilst these are uncertain times, there are unfortunate certainties: when facing any shock – be it a natural disaster, or economic, social, and political disruption – vulnerable groups of the population suffer the most.

As an immediate response to the initial, huge economic shock caused by the pandemic, governments and central banks in high-income countries transferred liquidity to households and enterprises. Similarly, governments in emerging economies have adopted policies to mitigate the crisis in the short run, but economic policies find limited fiscal space. This fiscal and monetary response has reached 10 per cent of global Gross Domestic Product (GDP), as assessed by the United Nations Development Programme (UNDP). However, the COVID-19 crisis is becoming so severe that much more needs to be done. Now is the time to design a global strategy for the stable recovery of households and economies in the medium to long term. A fiscal stimulus package should be actioned to enable countries to lower the depth of their recession and help them to recover more quickly.

The work being done in Sri Lanka to estimate impacts of the crisis as well as of social protection responses to it might be revealing. Development Pathways has been supporting UNICEF Sri Lanka to assess the coverage and effectiveness of existing social protection measures. This analysis serves as a basis for an ex-ante assessment of new policy proposals. The Sri Lankan government widely recognises the critical contribution that social protection policies offer to the economic recovery of the country. The challenge now is to make sure that the measures are effective, their implementation is optimised, and adequate financing is available for them.

Sri Lanka put in place a social protection response to COVID-19 remarkably quickly, and reached a majority of the population with emergency cash transfers. Yet, many people missed out on support due to the current design of Sri Lanka’s social protection system, which was already failing to reach much of the vulnerable population even before this crisis. 

Figure 1: Representation of Sri Lanka’s social protection system
Source: authors’ elaboration utilising HIES 2016 data

As Figure 1 illustrates, to a large extent, Sri Lanka has a dualistic system of social protection which offers benefits to both the richer members of society and the poorest, yet misses out the majority of the population in the middle (the so-called missing middle). Those at the top can access civil service pensions or, if they are formal economy employees, they can receive one-off retirement benefits from Provident Funds while the poorest members of society are offered poverty-targeted social assistance programmes.

Sri Lanka offers free, universal basic health care (as well as free, universal education), but has yet to establish a social protection floor that guarantees all members of society access to a basic level of income security across the lifecycle. When countries do not build an effective lifecycle system, and instead, focus on providing poverty-targeted social assistance, those living on middle incomes tend to be excluded from support which means that countries are much less able to respond to a large crisis like COVID-19.

The Government of Sri Lanka quickly recognised the need to protect families during the crisis and provide the economy with a fiscal stimulus and implemented a welcome package of support. The Government’s emergency support comprised two main components: expanding existing social assistance schemes and developing an innovative parallel programme of emergency support for informal economy workers. We estimate that the benefits reached 69 per cent of the population, as direct and indirect benefits recipients. Still, challenges remain, mainly because the channels of support, namely the existing social protection programmes, have high exclusion errors. A high proportion of intended recipients are not reached by the main social assistance schemes (Samurdhi and the Senior Citizens’ and Disability Allowances). The high rate of exclusion errors found in Sri Lanka reflects the norm across all poverty-targeted social protection programmes in low- and middle-income countries globally. In a recent paper, we estimated that around 58 per cent of households who were meant to receive Samurdhi were excluded from the programme. A similar exclusion error has been found for the Senior Citizens’ Allowance. By using social assistance schemes with such significant targeting errors to respond to the COVID-19 crisis, it is inevitable that a high proportion of people will be excluded, despite the Government’s best intentions. Moreover, the Government provided payments for only two months. While these transfers served to alleviate some of the enormous difficulties many face, they are insufficient for contributing to a robust recovery of the economy.

A feasible option for Sri Lanka would be to establish a system of emergency, universal lifecycle transfers for children, older people, and people with disabilities for at least six months.

This policy would be an administratively simple (given the clear and easily verifiable selection criteria) and effective means of providing support to the vast majority of Sri Lankan households. Such a scheme would reach 86 per cent of the population, either directly or indirectly as members of recipient households (Figure 2). The lifecycle schemes would offer support to all children, older people, persons with disabilities and single-parent households. The households missing out would comprise of those with only working-age adults without disabilities, who are likely to be less vulnerable.

Figure 2: Recipient households of current Government measures for COVID-19 support compared to a lifecycle approach, across the wealth distribution in Sri Lanka
Source: authors’ elaboration utilising HIES 2016 data

Under a scenario in which the crisis lasts for six months, the Sri Lankan economy would face severe reductions, making it imperative to implement a substantive stimulus package

Governments’ social protection responses can have a powerful impact on the degree of the economic shocks countries experience. Under a very pessimistic scenario and the crisis lasting six months, we estimate GDP will have decreased 22 per cent in 2020, compared to the situation without COVID-19, if the Government does not provide additional income support to households. Furthermore, simulations show a substantial negative impact of the pandemic on investments, employment, and consumption (Figure 3). The emergency response provided by the Government (5.7 million transfers of LKR5,000 for two months) will lessen this reduction. However, GDP would still reduce significantly by 19.1 per cent, as well as other aspects of the wider economy. 

Our simulations further show that, if lifecycle social security benefits were implemented permanently, this could significantly enhance economic growth in the long-term (Figure 4).

Investing in lifecycle schemes could lead to a rapid recovery of the Sri Lankan economy.  Being sustained by lifecycle social security benefits, the GDP would reach the same level that it would have reached without COVID-19 (and without additional transfers) by 2028, after which the economy will grow faster as a result of annual investments in a comprehensive social security system that guarantees the incomes of households. Under a proposed lifecycle approach, GDP would still decrease by 13.9 per cent, but this represents significant mitigation in the economic slowdown (Figure 4).

Figure 3: Simulated impacts of the pandemic (pessimistic scenario without additional income support by Government) on selected indicators under a situation when the COVID-19 crisis lasts for six months in Sri Lanka
Source: authors’ elaboration based on a CGE model

Widening the scope of existing social protection policies and implementing new measures, such as the regular inclusive lifecycle transfers, are necessary to reduce the short-term impact of the crisis, and guarantee the economic recovery in the medium- and long-term.  Our estimates demonstrate the need for Sri Lanka to establish a modern social protection system based on everyone’s right and ability to access social protection as required, similar to the systems found in high-income countries, which have been a core component of their successful economic growth.

Importantly, this proposal is in line with current global thinking within the International Monetary Fund, the World Bank and the United Nations. The benefits of the inclusive lifecycle schemes would trigger a virtuous cycle of sustainable socio-economic development, providing a major stimulus to the economy, protecting human rights, reducing the risk of domestic violence, helping keep individuals food-secure and well-nourished, and reduce the likelihood of social discontent while also strengthening trust and social cohesion.

Investments in social protection as a stimulus package during the COVID-19 crisis inevitably raises the question of how it will be paid.

Given the current state of Sri Lanka’s national finances, funding a fiscal stimulus will not be easy. Nonetheless, the imperative to minimise the current recession and facilitate a rapid economic recovery means that Sri Lanka cannot afford not to expand its fiscal response to the crisis. This makes it much more important to invest in the right response, one that will provide tangible returns. Due to the risk of falling into a deeper recession, countries cannot afford to underinvest in stimulus packages. A range of countries have made significant investments in social security during the crisis, ranging between five per cent and 20 per cent of GDP in stimulus packages. Whereas this level of investment is challenging in the context of lower and middle-income countries, including in Sri Lanka, where government revenue is limited, investing in a social protection stimulus package can reduce losses in government revenue more rapidly. As the economy contracts, tax revenues  fall. However, suppose a stimulus package enables the economy to recover more quickly. In that case, tax revenues subsequently recover faster, and through the continuous investment in social security, the economy will grow at a faster rate than it did before the COVID-19 crisis, which in turn has the potential to lead to further growth in tax revenues. Moreover, while gross national debt may rise initially due to a large cash injection, a larger stimulus package will reduce debt in the long run thanks to the rapid economic growth (Figure 5).

The time to strengthen the social protection system that offers high quality and universal lifecycle transfers is now.

They are likely to be highly popular and reinforce the national social contract (that crises threaten). The research is in; an adequate social protection response could not only save lives and livelihoods but help kickstart an economic recovery and continued higher growth. Identifying the means to move this agenda forward is imperative, including through support of multi-laterals, bi-laterals, and even commercial creditors through debt relief alternatives, as proposed by UNICEF’s Executive Director and Chief executive of Save the Children UK. We must change the “could” to the “will”.     

Figure 4: Simulated impacts of social protection transfers (both current Government response and six months of emergency lifecycle transfers and a continuing annual programme of investment in lifecycle social protection) on GDP under a situation when the COVID-19 crisis lasts for six months in Sri Lanka
Source: authors’ elaboration based on a CGE model.
Figure 5: Diagram outlining how a fiscal stimulus will reduce the depth of recession and enable a quicker recovery.
Source: authors’ elaboration

The is a joint blog written by Antonio Bubbico, a Senior Economist at Development Pathways and Louise Moreira Daniels, Chief of Social Policy at UNICEF Sri Lanka.

Read more like this:

PublicationTackling the COVID-19 economic crisis in Sri Lanka: Providing universal, lifecycle social protection transfers to protect lives and bolster economic recovery

PublicationAddressing the COVID-19 economic crisis in Asia through social protection

PublicationEmergency Universal Child Benefits: Addressing the Social and Economic Consequences of the COVID-19 Crisis in South Asia

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