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