Who made  Sri Lanka indebted? Was it President Rajapaksa ?
Posted on December 20th, 2014

By Garvin Karunaratne

It is a fact that Sri Lanka is an indebted country today and party leaders who are with the Common Candidate make a meal of it putting the entire blame of the economy on President Mahinda Rajapaksa.

As Chanda Maliyadde,  former Permanent Secretary, Ministry of Plan Implementation says,

At the end of 1976, the total outstanding Aid to IMF/IBRD was only  $ 75 million.” (The Island 25/6/13).  He has rightly questioned how the foreign debt increased five hundred times. By the time Sri Lanka was handed over by Premier Sirimavo to President Jayawardena in late 1977, Sri Lanka had a foreign debt of only $ 750 million, all on project development where the projects at maturity would have brought about an income.

Before the UNP came into power no loans were used to finance luxury living.

How did Sri Lanka become indebted?

In nostalgia I hark back to a Paper I delivered at the South Asia Forum at the University of London on 18 th October 1992,  under the caption: ‘ How Foreign Aid under the IMF Tutelage Ruined Sri Lanka’s economy in the period 1977 to 1990.  The UNP of President Jayawardena ruled from 1978 to January 1989 and President Premadasa ruled from 1989 to 1993.

At that Seminar in 1992, Our Minister Nimal Siripala de Silva, then in the opposition   and I  criticized the manner in which the UNP had made Sri Lanka indebted.  This Paper is included in my book:How the IMF Ruined Sri Lanka…, Godages, 2006.

I am including a few quotations from that paper which will illustrate how the economy of the country was ruined during that period.

The major change that took place  in 1978 was the change from a controlled economy to an open and liberal economy.  Earlier Sri Lanka controlled the foreign exchange that came in and  allocated in the nation’s interest. Allocations for foreign education was allowed only if such courses were not available in Sri Lanka.  The writer in 1968 had the occasion to ask  Premier Dudley Senanayake why he allowed foreign exchange for foreign study for the children of Mrs Sirimavo Bandaranayake.. He answered that it was the only request made by a former Prime Minister to which he felt like agreeing.

The liberal use of foreign exchange took the following form:

The Jayawardena Government was extremely liberal in allowing foreign exchange for  foreign travel. While earlier any citizen had to prove  that the use of foreign exchange was essential, after 1978 anyone could obtain foreign exchange for travel… The Government had boasted that it was able to relax exchange controls  up to Rs. One million per family unit on emigration. The Government also offered students foreign exchange and tution fees for foreign University study. The fact that all this was funded by foreign loans at high interest is not mentioned.”

Imports were allowed  on a liberal basis while earlier the Controller of Foreign Exchange at the Central Bank carefully allowed all imports. The result was a flood of luxury items.

The consequence  was bankruptcy as expressed by the World Bank in 1990;

By 1986 the deterioration of the economy  had become evident. The growth rate of the GDP slowed to under 4%, unemployment rose to  about 17% and gross official reserves declined  to less than 2 months’ imports”( World Bank: Trends in Developing Economies, 1990)

Opening the doors for the liberal use of foreign exchange for travel, foreign education, for luxury travel from 1977  and meeting this with foreign loans did make Sri Lanka indebted.

This has been the scenario up to today. It is this rotten process of forcing the governments of the Third World to relax all regulations and meet the deficit with foreign exchange borrowed from the World Bank and IMF  and other sources that caused this indebtedness.

Since the Eighties the country was unable to meet  the servicing of these loans and further loans had to be obtained for that purpose.

The IMF and the World Bank played a further trick by offering loans at low interest to entice our countries. In the Nineties they IMF and the World Bank increased their interest rates and Sri Lanka has had to borrow at high interest purely to service the loans drawn earlier

In the early days, the World Bank even approved loans with grace  periods , i.e. a period during which no interest or capital repayment had to be paid. Generally the unpaid interest was added to the outstanding capital. I commented on this type of loan in my  1992 Paper:

: It can be considered morally wrong  for any Government that has been elected  for a term of 5 or 6 years to take any loans with a grace period beyond their legitimate incumbency, because the burden of repayment  will fall on a future government that did not contract and obtain the loan. In fact the Central Bank Annual Report of 1978 admits that, the debt service burden would register an increasing trend in the near future with the completion of the grace periods of past loans.”(page 47)

What happened was that loans were accepted with long grace periods where the UNP Government was not saddled with any repayment. It was left for future Governments to pay up.

Thus the path to the indebtedness of Sri lanka  was created by the Government of President Jayawardena. There is no doubt whatsoever.

 

The Utilization of  Foreign  Loans for Development

As pointed out by me in 1992,

Foreign Aid if handled  prudently can help a country to muster its own development potential can serve as an engine of growth to develop its resources its industries and agriculture.”(pg.43

The Mahaweli Programme of President Jayawardena falls into this category.  Unfortunately we messed up in the Mahaweli Programme because, the original plan  was to provide water to almost a million acres on the basis that an acre required only 5 acre feet of water. This was in a situation where on Government Farms  the water used was as low as  1.6 acre feet. However when the Programme got under way it was found that the farmers used as much as 10 acre feet of water to cultivatre one acre  which reduced the possible acreage by half. to around 500,000 acres.   The fact that we had disbanded our agricultural extension system that once worked with farmers’ participation  at cultivation  committees is to blame.

The expenditure incurred for arms and armaments which had to be obtained from outside, mainly from China also fall into this category. Many chastise China’s funding our countrry but the fact remains that if not for the weapons and armaments provided by China we would never have defeated the LTTE.

President Rajapaksa has also spent foreign loans to develop the infrastructure of highways. Many are very critical of this expenditure but compare this use of foreign exchange to getting imports and having luxury travel and other expenses which invariably send back the foreign exchange we have borrowed back to the Donor Countries because it is from those countries that we have to import luxury goods and all air lines and other cruise vessels all are from the Developed Countries.

The Mattala Airport, the Hambantota Port are developments which can pave the way for the development of the most backward district in the island. I served in Hambantota and it had no housing, no water supply, no shops. We bathed either in the sea or by the water pipes on the main street in the dead of night. There was a queue for that too in 1958!.

This network of highways is essential for tourism development and it is up to our leaders  to provide for that. I have traveled in many countries-France, Spain, Greece,  India, Thailand, Malaysia where I rent a car at the Airports and get lost in the hinterland travelling . Sri Lanka has yet to go ahead with car rentals at Airports. Till I came across Kings Car Rentals at Battaramulla the car rentals fleeced me. Go to Thailand and car rental kiosks at the main airport entice you with a range of cars. We have to make that development possible. Perhaps Sri lanka is the  only country  I know where a foreigner cannot drive  with a UK Car licence. Sri Lanka insists on UK drivers obtaining another driving licence which takes a full day. This is inimical for motor tourism.  Toursim requires hotels at reasonable rates, which cannot be found in Sri lanka. These area areas that require immediate attention.  Our publicity for tourism fail to use our natural resources like sunrise at Siri pada and Pidurutalagala. Many tourists to Hawaii travel purely to see sunrise at Haliekala.

The highways are the focus for development.  I have pointed out in many  of my earlier papers how small children were trailing behind my car to sell a few ,mangoes and such produce. Having worked in the Marketing Department for many years I am aware of the production of vegetables and fruits and can make a firm statement that due to the lack of a Government Cannery( which we had in the Marketing Department) approximate half the crop of mangoes, avacadoes, pineapples, tomatoes, red pumpkin etc.  are wasted.  The Government has to open Canneries in various producer areas canning pineapples in Gampaha, making fruit juice out of melon in Tissamaharama, Dambulla, and other Dry Zone areas. Farmers at Hanguranketa, the home for tomatoes cannot sell half their crop and we spend our borrowed foreign exchange to import tomatoes sauce all the way from the USA. Till 1978 we had MD tomatoe sausce.

The highways which have emerged have to be put to good use and  action is overdueThe army put the  highways to good use by buying vegetables in the producer areas and having lorry sales in the cities recently.

It is no longer my slogging on partly academised winding  roads studded with pot holes on circuits visiting the districts.  The fact that one can visit districts quickly enables  effective administration. When the Divisional Development Councils Programme was implemented the Permanent Secretary Professor Hade S Gunasekera was even provided with a helicopter to get the Programme going. Now  with the highways  no helicopters are necessary.

Thus  the highways and facilities like the Port and Airport though costly have to be properly used to bring about the effective marketing of rural produce. Let me hope for the day when Tomatoes Sauce and  Fruit Preparations made out of mangoes in Tissamaharama are  air freighted at Mattala. Today vegetables are air freighted at Katunayake everyday.  The rural areas have to be activised into production.  The banana area is  in Godakawela and Rambukkana. Tissamaharama and Kataragame are mango areas, while Tomatoe  grows a plenty in Hanguranketa.

The provision of highways is the first part of development. The second part is its use to bring about production in the rural areas, which has yet to become the task of President .Rajapaksa.

Thus the use of foreign exchange for development tasks  is what has to be done. This brings about development unlike the case of using the foreign exchange to import  luxury items, unnecessary foreign travel and cruises etc which has caused the indebtedness of our country all due to following the IMF policies by the UNP leadership.

The fact remains that by the time the UNP handed over the country the country was so indebted and with loans on grace periods maturing, the debt service had to be met by drawing further loans which increased our indebtedness in leaps and bounds.

The path ahead is by devoting more time and energy for the second phase for establishing fruit canneries, developing industries in rural areas using the intricate highways etc. for effective marketing and tourist development.

Let me hope that President Rajapaksa will handle this mantle that can help us to alleviate rural poverty.  He is essentially our only hope.

Garvin Karunaratne

Former Government Agent, Matara District

16 th December 2014

13 Responses to “Who made  Sri Lanka indebted? Was it President Rajapaksa ?”

  1. Lorenzo Says:

    A very timely article.

    FOREIGN DEBT

    1977 – RUPEES 7 BILLION
    1994 – RUPEES 400 BILLION
    2001 – RUPEES 600 BILLION
    2004 – RUPEES 900 BILLION
    2005 – RUPEES 1 TRILLION
    2014 – RUPEES 3.8 TRILLION

    Source: tradingeconomics quoting central bank of SL.

    Make up your own mind.

    The lending source (WB/IMF) changed to China and bonds but its the same thing – LOANS.

  2. Lorenzo Says:

    SL’s total government debt (local and foreign) is now $52 BILLION.

    Every SL is indebted to the tune of $2,500. A 4 member household is indebted to the tune of $10,000.

    With an average household income of only $4,300 a year and very little savings, I have no idea how we are going to repay those massive loans.

    The Government’s foreign debt servicing is estimated to be US$ 6.9 BILLION a year. Education less than $2 billion. Defence less than $2 billion. Lets keep borrowing!

  3. Vimutti Says:

    Lorenzo Says:
    December 21st, 2014 at 2:22 am

    Nearly ALL of this debt is secured. Toll booths on the new expressway pay for the cost of building the expressway (just like in other countries). You say they are not used much now, but I have personally witnessed a HUGE increase in use in the Southern Expressway, in that I could not even find a parking place at one of the rest stops on a recent trip about a month ago. These rest stops accommodate several HUNDRED persons, so this really was a surprise. I actually had to wait in line for nearly 30 minutes to get some rice and curry, and this was one of the smaller ques, as most travellers were opting for Western food at the various eateries at the rest stop.

    Hydroelectric dams are secured by revenue generated by electricity. The costs of developing ports are secured by port fees, and again based on personal experience I can say these port fees are relatively high even compared to a developed country.

    Any country trying to grow MUST go into debt initially. The problem is Maithripala and his clueless JHU sidekick, don’t have the educational background to understand how substantial economic development occurs around the world. The key is securing the loans with ‘development-oriented revenue’, which is exactly what MR has done, and never fall for the IMF (US backed) trick of accepting strings attached to the loans that force you to do things that are harmful to the long-term health of your economy and wealth of the majority of your citizens (e.g., privatization). MR actually turned down an IMF loan recently because of the onerous strings attached to the loan.

  4. veddah Says:

    I like Lorenzo ‘s figures. It illustrates the sri lanka ‘ s indebtedness. What we would like to see is a similar comparison with a “developed ” country like Sweden?

  5. Independent Says:

    Lorenzo,
    When I plotted your figures, 1997 to 2004 there is uniform increase approximately 25 times every year until 2004 and then suddenly gradient sky rocketed to 300 times a year by 2014.
    Our GDP has grown 3 times during this period ( 2004-2014).

  6. Independent Says:

    Sorry, not 25 times but 25 billion per year and 300 billion per year for the two periods. GDP growth is approximately 30 billion per year since 2004 . We borrowed 10 times more than the growth increase.

  7. Nimal Says:

    Courruption began from the time of(MRS) SWRD’ time where likes of R.E.Jayatilleke was forced to resign and T.B.Illagarane was caught taking Rs 25,000.There were several cartoons on that.
    Since those innocent times the politicians have up the stakes where Mahavali project was used to take kickbacks where the politicians concerned invested the loot in places like Australia and UK.
    Now it had evolved to a higher level of murder, strangling the media freedom. controlling the police and the judiciary in some cases of importing dugs.
    Next regime will be even worse. In our warped democracy the people have no say, hardly anything be done to improve the decorating situation.
    Vimutti@
    Debt is good as long as a feasibility study is done and it is cost effective. But what I saw was waste, the steps that the government should take is not taken. People wants many things done for them but the politicians are not listening, but they carry on regardless. I am glad UK is not allowing the graduates to stay after their studies and these graduates must go back and make their countries a better place for all.

  8. Nimal Says:

    Sorry I meant the deteriorating situation…

  9. Vimutti Says:

    Nimal Says:
    December 21st, 2014 at 8:54 am

    Nimal,

    The people that approve the loans from Ex-Im Bank in China, Japan, and Asian Development Bank are some the best at due diligence in the world, and simply would not approve a loan (especially billion dollar loans) if the kind of waste suggested by the opposition were actually occurring. These are world class econ development professionals that are scrutinizing every loan very carefully to make sure they don’t lose any money.

    The biggest threat to paying back this debt is changing governments to international lightweights like Maithripala that really don’t have the background in economic development to make sound decisions on behalf of Sri Lanka.

  10. Vimutti Says:

    Nimal Says:
    December 21st, 2014 at 8:54 am

    It is also very stupid to accuse the Asian international lending community of gross incompetence for not spotting waste and corruption like the opposition is doing, as this makes these countries less inclined to lend any more money to Sri Lanka in the future.

    What the opposition is not getting is you can’t make up this Asian money with US and UK dollars. The US doesn’t even invest that much in Israel, who receives the most US foreign aid and has the most powerful lobby in Washington, so how are you going to convince the US Congress who doesn’t give a frick about Sri Lanka to put up several billion dollars in development money in this country? And we already discussed the IMF US scam, which is never about just getting the money back, and is always about INTERNAL MEDDLING in the politics and economic systems and currency valuation of the countries they target to benefit wealthy Americans who want to buy privatized government assets at pennies on the dollar.

    If you really do not understand how economic development ‘really’ works, or doesn’t work around the world, you really should stay silent, because the more we hear from Maithripala and his crew suggests that they are willing to have Sri Lanka commit economic suicide on behalf of their neo-colonist masters in the US and the UK.

  11. NeelaMahaYoda Says:

    Veddha

    You cannot compare Sweden with Sri Lanka. Sweden is a developed country it is well known for its high quality steel, paper and automobiles
    One of the hallmarks of the Nordic countries is the combination of large area and small number of people living there with the lowest population density in the world. The considerable wealth of these countries is easily distributable among the sparse population. This means that the population has very high GDP (gross domestic product) per capita. For these countries is relatively easy to satisfy their own needs and at the same time to export high quality goods and services.

  12. Lorenzo Says:

    NMY is correct we cannot compare with a developed country. Japan’s govt. debt/GDP is 250%!!! Ours is only 75%.

    Independent and others,

    The WORST part is DEBT SERVICING.

    The Government’s foreign debt servicing is estimated to be US$ 6.9 BILLION a year. (source: Rabobank)

    Our exports are only $12 billion a year!!!! More than half going out again JUST to service the debt ($6.9 BILLION)!!

    Mind you this is ONLY FOREIGN DEBT. Local debt of another $20 billion must be repaid with interest. So the total debt servicing a year should be around $10 BILLION A YEAR (at least).

    Paying $10 BILLION a year is UNAFFORDABLE as a nation.

    There is no point now blaming one another. TOO LATE. We ALL have to come out of the debt trap.

  13. Vimutti Says:

    Lorenzo Says:
    December 21st, 2014 at 1:34 pm

    Lorenzo,

    These loans have DIFFERENT maturity dates and grace periods, and you are treating them as if they are all the same. Some have 6 years maturity and one year grace period (period in which no payments are due) and some have 20 years maturity and 3-4 years grace period. The debt service payments per years are MUCH LOWER for the longer term maturity loans. And as stated earlier, nearly all of these loans have their own built-in source of repayment – toll booths for roads, electricity revenue for dams and coal power plants, port fees for port development, landing fees and passenger taxes for airports, etc.

    To suggest that the average Sri Lankan is going to have to cover these loans out of their own pocket is a BLATANT LIE to try to ‘scare up’ votes! It really is shameful, and the fact that so-called ‘Buddhists’ are part of these lies to Sri Lankan people gives Buddhism a big black eye.

    I remember Ross Perot in the 1992 US presidential race tried this tactic of scaring up votes by pointing to US debt and debt service, and although he fooled many people and got 18% of the vote (and remember he was spending BILLIONS on daily TV ad 30-minute infomercials in every town in the US) , MOST people just weren’t interested in this issue as much as they were their own issues.

    This is true in Sri Lanka as well. If Ranil takes away the rice subsidies and other food subsidies like UNP has done in the past, the cost of food goes WAY UP, and this is a much more important issue for the voter than the arithmetic of debt servicing. If Dudley CASINO KING Sirisena, Maithripala’s brother, has it his way and puts casinos in every village, gambling, alcoholism, prostitution, and drug abuse in Sri Lanka go WAY UP, and this is a much more important issue for the average Sri Lankan than how the debt is serviced.

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