By Garvin Karunaratne Ph.D.

Dr Koshi Mathai the Resident Representative of the IMF in Sri Lanka has warned Sri Lanka recently regarding Sri LankaƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s attempt to retain the value of the Rupee and further he has stated that not entering into the CEPA with India is detrimental to Sri Lanka.

Dr Mathai has said that using our foreign exchange reserves to boost the value of the Rupee, is non developmental and should not be done.

He opines that the Rupee should be left to the market forces of supply and demand and there should not be any action by our Central Bank, Dr Mathai has to be reminded that it was the IMF itself that ensured that the Structural Adjustment Programme provided the chance for the foreign banks to control our foreign exchange. He should also note that the forces of supply and demand are manipulated by the foreign banks.

In 1977 with the Structural Adjustment Programme being enforced on Sri Lanka the control of foreign exchange went out of the control of the Central Bank to the foreign banks and to the Private Companies.

President Jayawardena meekly submitted and the Rupee was devalued from Rs. `15.00 to Rs 32.00 a Pound in a few months at the end of 1977. That was a devaluation of over a 100%. Thereafter the IMF repeatedly tried to pressurize Sri Lanka to privatize the two State Banks- the Bank of Ceylon and the Peoples Bank but the Government resisted. In many countries the State banks are no more and the foreign banks really control the foreign exchange of the country.

Let us go into detail because no one will believe this. It is really the height of absurdity to even think that the foreign exchange of Sri Lanka is controlled by the foreign banks and the Private companies.

This is the hard truth. Even our celebrated economists fail to get out of the clutches of their text books to understand how the IMF has commenced controlling our economies.

The IMF itself has said

In a free floating regime the exchange rate is determined by the market forces. The Central Bank does not intervene in the process. The Central Bank has control over the domestic money supplyƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦

Let us look at what happened when Sri Lanka free floated the Rupee in 2001. In my own words:

On 25 th January 2001 some Commercial Banks in Sri Lanka sold a $ US at Rs 100.00, while on January 26, it was trading at Rs. 106.00 This was possible because the Central Bank had resorted to free float the Rupee.

It is reported that after the free float, two State banks had to meet a big import bill and because they did not have sufficient funds, had to purchase dollars from other banks. The Governor of the Central Bank ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-attributed the dip on Thursday 25 to a miscalculation by one commercial bank regarding forward dollar purchases for a very large import billƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚(Sunday Observer:Jan28) It is clear that when the Bank that had to meet the large import bill tried to purchase dollars ,the Bank that had foreign funds raised their price, causing this devaluation.

Was not this devaluation a manipulation by the commercial banks, mostly foreign owned? Were they not holding the country to ransom?(How the IMF Ruined Sri Lanka) We are talking in a setting where foreign banks are mushrooming. An Indian Bank is due to come in soon.

The real situation is that the Central Bank no longer controls the foreign exchange that comes in. When foreign exchange comes in each bank purchases the dollars/pounds that are remitted or handed in and issues out local Rupees. The bank that has taken in that foreign exchange uses it to allow importers to import goods and for people to travel abroad and send their children abroad for education etc. That bank fixes the rate of exchange. They also hoard the foreign exchange they have collected. This creates a shortage so that the value of the Rupee is forced down. That is what happened in 2001 when the large import bill had to be paid. The foreign banks fight for the foreign exchange that comes in. This fighting for the foreign exchange has been happening even in 1999.

What happens today is that the Central Bank comes in with its reserves whenever the available foreign exchange is not sufficient and feeds in the foreign money to stabilize the value of the Rupee. This is what has been going on. In July 2011 the Central Bank poured in as much as $ 416.9 million to stabilize the rupee. This is perhaps the only remedy left to Sri Lanka a country that was a casualty in implementing the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s Structural Adjustment Programme. Sri Lanka became indebted because of following the IMF policies. Sri Lanka was not an indebted country in 1977, when President Jayawardena commenced following the IMF dictates.

Dr Mathai advises the Government to stop this practice and allow the Rupee to slide down.

Dr Mathai should instead point out to the IMF the shallowness of the IMF policy of allowing the foreign exchange of a country to be ruled by the foreign banks, the importers and their salesmen. The foreign exchange of any country has to be the prerogative of the country to manage.

Let us see what has happened to a few countries that followed the IMFdictates:

In Turkey the Lira which was at Lira 336 to the Pound in 1983 dropped in value to Lira 2,640,000 by 2007., a drop of 787,000 %. The value of the Lira has now dropped further, to New Lira 2.94 which is equal to Old Lira 2,940,000. This amounts to a drop of 870,000% over the period

1983 to 2011. A few years ago I went on a holiday to Turkey and had a fabulous holiday with a few pounds.

In Ghana, the Cedi had a value of Cedi 5.7 to the Pound in 1983. This has dropped to Cedi 18,950 to the Pound by 2007, a drop of 332.000 %.

The Cedi has been further devalued to New Cedi 2.59, which is equal to Old Cedi 25,900. This amounts to a devaluation of 455,000 % over the years 1983 to 2011.

In Nigeria, Naira 1.1 was the value to the Pound in 1983. By 2007, the Naira had dropped in value to Naira 259 to the Pound by 2007. In 2011 the value was at Naira 248 to the Pound.

Take any country that followed the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s Structural Adjustment Programme and one will find that the countries have had their currencies devalued and their foreign debts increased. Full details are in my books; Success in Development(Godages)2010 and How the IMF Ruined Sri Lanka(Godages)2006

This is the true legacy that the IMF has left for the Third World and that is what will happen to Sri Lanka if it goes down the ignominious path dictated by the IMF.

Let me quote some world authorities to prove that the IMF is on the wrong track. Professor Jeffery Sachs, Noble Laureate on economics states:

ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-Western Governments enforced draconian budget policies in Africa during the 1980s and 1990s. The IMF and the World Bank virtually ran the economic policies of the debt ridden continent recommending regimens of budgetary welt tightening, known technically as Structural Adjustment ProgramsƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦ By the start of the twenty first century Africa was poorer than in the late 1960s when the IMF and the World Bank had first arrived on the scene, ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦..IMF led austerity has frequently led to riots, coups and the collapse of public services.( From Sachs: The End of Poverty)

According to Noble laureate, Professor Joseph Stiglitz, ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-The mistakes of the IMF were sufficiently frequent that they clearly werenƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢t just an accidentƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦ They chose the models that led to wrong predictions , wrong policies and really negative consequences.(From ƒÆ’‚¢ƒ¢-¡‚¬ƒ”¹…”The Hospital that makes you sickerƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢ in New Internationalist, March 2003)

Dr Mathai is also advised to read John PerkinƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s book: Confessions of an Economic Hitman to understand the process by which the IMF, the Superpowers and the multinationals made the Third World countries indebted. Perkins admits that he wrote bogus project reports to make the Government of Equador get loans which when disbursed according to the project proposal, results in the funds getting back to the donor country leaving the country indebted to that extent. This was a part of the Structural Adjustment of the IMF- a deliberate attempt to make countries indebted so that the countries will have to listen to the IMF for the entire future.

Implementing the SAP in Sri Lanka from 1977 have seen local industries close down and imports coming in. Local entrepreneurs had to borrow money from banks at 25% and compete with foreign companies that were getting loans at less than 5 to 6%.

Dr Mathai has also stated that we should imeediately sign up with India on the CEPA Trade Agreement.

To start with let us see what happened to Sri Lanka when President Kumaranatunge signed the earlier Indo Sri Lanka Trade Agreement. I lived in Sri Lanka at that time and saw for myself how our industries gradually ceased to exist due to competition from indian products. Our bureaucrats think in terms of goods being imported and of financial transactions. It went far beyond. When the Indian goods came in there were groups of Indians who also went house to house in Colombo selling the imported goods. I could see them all over and whenever I saw them I would make it a point to speak to them. They spoke in Indian English and the manner of speech, their intonation belied that they were Indians selling their housewares on our soil. I am certain that the Visas they held did not authorise them to engage in trade.

The Sri Lankan Ministers who handled industries were actually unaware that their President would sign such an agreement. I can remember the circumstances because though I left the Administrative Service as far back as 1973, since then I have trailed development in Sri Lanka.

Though not in the Service I followed development- every step of it and can speak with firm authority due to my interdisciplinary academic studies.

The President Chandrika went to India for some other purpose and she was feted and hosted to such an extent that she was cornered to sign this Agreement. To her blockhead she thought it was good for Sri Lanka!

As I wrote in 2001: ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-The India- Sri Lanka Free Market Agreement was one method by which India hijacked our industries.ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚(The Island: 5/9/2001) As a result of this Agreement Indian imports have actually flooded the Sri Lankan market and that sounded the death knell of a number of our industries. The Indian exports to Sri Lanka has increased from $ 510 in 1999 to $ 600 million by 2000 and to $ 3443 million by 2008. On the other hand, exports from Sri Lanka to India were at $ 47 million in 1999, increasing to $ 58 million by 2000 and only to $ 418 million by 2008.

India did not implement the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s Structural Adjustment Programme and its currency had held its value at around Rs 77 to the Pound while our Rupee is at Rs. 175.00 to the Pound.. In fact in 1977 the Sri lankan Rupee had a better value than the Indian Rupee.

If we do sign the CEPA it will sound the death knell of our industries.

Mine is not the voice of a doctrinaire academic. In my 18 yearsƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢ in the Administrative Service of Sri Lanka I was dealing with development and was actively establising industries and commercial ventures. Later I designed and implemented the Youth Self Employment Programme of Bangladesh, a Programme that is yet alive and has bagged as much as 2 million into self employment. The closest to that Programme is the Divisional Development Councils Programme of Sri Lanka in 1970 to 1977 which bagged 32,000 to be employed in 7 years.

Dr Mathai has asked us to export to China and India. I have traveled widely in India but never to China. However, I know about China through friends and relatives living there. Both are highly regulated closed economies though people are told that they are open. It will be easier to sell ice to the Eskimos..

We should not be enticed by various countries. Free Trade Agreements actually help the country that can produce goods and India never lost its production base. We lost the production base. India is primarily concerned with its economy and the manner in which she has run it by shunning all imports and producing everything its population needs should be noted. Go to any city anywhere in India and it will be Indian products. Foreign goods are smuggled in somehow and are available at a very high price. This was the situation in Bangladesh too. These goods are not officially imported. These are smuggled to the market and are sold at a high price. What is important to realize is that in both India and Bangladesh the countries do not incurr their hard earned foreign exchange for these foreign goods These countries have mastered the art of allowing the smuggling in of foreign goods without incurring the countryƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s foreign exchange.

Third World countries have to be smart to find methods of undoing the effects of IMF policies. Sri Lankan economists have totally failed and have allowed Sri Lanka to be taken to the slaughter house.

Sri Lanka has from 1977 been creating employment for people in other countries and that has been the advice of the IMF! At last President Rajapaksa has decided it seems to create local industries and it is reported that the coming 2011 Budget will concentrate on making things locally and for people to buy local. We have to understand that the rich in Sri Lanka buy not at ODEL, but in Singapore, New York and London.Developing our production base is the only hope for our country, but the IMF dictate is that import substitution should be avoided..

What we need today is a strategy from the IMF which will bring employment to our people, alleviate poverty and also not incresae our foreign debt. The IMF policies create the opposite of this. Let us see what the Wall Strreet Journal had to say of the IMF policies:

The IMF Drill is as follows: A ThirdWorld poor country with a pegged currency is working toewards taming its inflation. Instead of a growth formulae it gets the IMFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s old austerity dosage which slows down the economy. The Banks begin to falter in paying their old debts. The IMF recommends yet more medicine- devaluation making the bank predicament and capital flight worse. The currency slumps and the banks(countries) are in real troubleƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚¦ Is this anyway to run an international monetary system?(Feb23,2001)

It is time the IMF wakes up and gives our countries a growth strategy.

Dr Matahi has also to do his homework right.

Garvin Karunaratne, former SLAS, Government Agent, Matara District, Sri Lanka & Commonwealth Fund Advisor to Bangladesh 1981-1983

26 th October 2011