ICRA Lanka says that there is a great deal of uncertainty surrounding how COVID crisis will evolve in the next few months and hence the economic overall outlook remains gloomy.

ICRA Lanka does not expect the activities in the real economy to improve significantly in April. “Both short and long-term interest rates are likely to remain low.

Further the depreciation of rupee is likely as forecasted by the forward rates. Inflation is likely to edge up as a supply disruption may force prices to go up.”

In March the manufacturing and services sectors underwent a record contraction as the country went into a lockdown. The tourism industry grounded to halt as travel restrictions were imposed. Trade sector was also affected due to import restrictions and exchange rate depreciation.

Rising fears and global economic shutdown due to the economic impact of COVID-19 drove the global stock markets off the cliff in March. CSE crashed several times during the month and ASPI lost about 18% on a M-o-M basis.

Significant deterioration in value was observed in Transportation, Consumer Durables & Apparel, Telco, and Insurance sector shares.

Continued capital flight triggered the rupee to depreciate by about 4% and lose over USD 400 million reserves. The CBSL took several measures to slow down the worsening external position. As investors were rushing to exit, the SLISB prices plummeted.

The CBSL absorbed close to Rs 55 billion from the money markets through repos as the call market rates were tending towards 7%. However, following the policy rate cut towards mid-month, the call rates stumbled 30 bps.

Rupee depreciated by about 4% in March and it accelerated in the last 2 weeks of the month due to capital flight. Outstanding forward volume was seen rising over the weeks as importers rushed to counter further depreciation.

Further depreciation is likely in the month ahead as forecasted by the forward rates.

The reserve position also deteriorated by USD 422 million. The CBSL took several measures to slow down the worsening external position (i.e. suspending importation of vehicles and non-essential goods, and suspending purchase of SLISBs by banks).

Agriculture production in January fell as production of commercial crops (i.e. tea, rubber, and coconut) fell across the board. Manufacturing sector continued its slow expansion in February mainly due to the slowdown in new orders and employment.

Services sector expansion in February was at its lowest level since May last year. In March services PMI contracted significantly recording the lowest index value since May 2015.

The tourism industry grounded to a halt as travel restrictions were imposed. Trade sector was also affected due to import restrictions and exchange rate depreciation. In addition, the disruption to delivery and distribution channels also affected the trade sector.