Will the Sale of a few assets get our economy on the path to growth and sustainability.
Posted on March 8th, 2017
By Garvin Karunaratne
It is reported that the IMF is recommending the Sale of a few of our Assets- the Colombo Hilton, Lanka Hospitals, Hyatt Hotel and Waters Edge -all to bag $ 1.5 billion to solve today’s economic crisis. What really happens is that this $ 1.5 billion will be paid to our creditors and the country will limp on to the next Armageddon that will come within another few months. This is fact and not fiction. We need this foreign exchange to pay our creditors at the moment . This money that comes in from the IMF gets paid out and we are left in the same state we are in. It is essentially a no win situation, where we raise loans to pay debts and the money gets shunted back to the IMF and other financial institutions of the Developed Countries and simultaneously also gets into our books as an addition to our foreign debt. In the meantime the valuable national assets had been sold . The country is the net loser.
A new development paradigm of growth is essential. The Model of development held up by the IMF and foised on Third World Countries since the Seventies has made all countries bankrupt within four decades.
The IMF Chief is expected to grace our island and it is hoped that she will be able to put our country on the path to growth and sustainability.
To start with one has to understand that Sri Lanka as well as other Third World Countries did have sustainable economies and were not in debt in the Sixties. We had a development infrastructure that enabled us to get into production and had development projects and programmes ; we controlled our foreign exchange and used it in the national interest, limited imports so that we could manage our outgoings with the incoming foreign exchange.
To quote Noble Laureate Professor Jeffery Sachs:
“Western Governments enforced draconian budget policies in Africa in the 1980s and 1990s. The IMF and the World Bank virtually ran the economic policies of the debt ridden continent recommending regimens of budgetary belt tightening known technically as Structural Adjustment Programs. These Programs have little scientific merit and produced even fewer results. By the start of the Twentyfirst century Africa was poorer than in the late 1960s when the IMF and the World Bank had first arrived on the scene, with disease, population growth and environmental degradation spiralling 3out of control. IMF led Austerity has frequently led to riots, coups and the collapse of public services.”(The End of World Poverty)
Sri Lanka’s foreign debt in 1977 was only $ 750 million(That too on projectdevelopment) when it commenced following the Structural Adjustment Program laid out by the IMF. Within four years of following liberalization and free trade, prescribed by the IMF, the foreign debt increased to $ four billion and by 2003 increased to ten billion. Following the prescriptions of the IMF we had to allow the use of foreign exchange freely, allow the import of luxury goods and as the debt increased we had to borrow more and more, purely to service the debt. Today the foreign debt stands at $ 70 billion. This $ 70 billion includes the funds spent to buy weapons to defeat the LTTE insurrection and funds spent on the infrastructure of highways and ports. Throughout this period of four decades Sri Lanka has been trying to follow the path laid by the IMF to the best of its ability.
What went wrong? As stated by the United Nations’ Human Development Report of 1996,
“The stabilization measures of the IMF aimed at reducing both budget deficits and usually involved cutting public spending and increasing interest rates… Although these policies reduced deficits in some countries they often did so at the cost of inducing recession. In short they often balanced budgets by unbalancing people’s lives.”
As stated by Professor Joseph Stiglitz, once the Chief Economist of the World Bank,
“The mistakes of the IMF were sufficiently frequent that they clearly weren’t just an accident.. They chose the models that led to wrong predictions, wrong policies and really negative consequences.” (‘The Hospital that makes you sicker’ in New Internationalist, March 2003).
What happened to these countries that were having sound sustainable economies till the IMF came up with the SAP?
Let us look at the tenets of the Structural Adjustment program which was imposed on our Third World countries which led us to become indebted.
The main tenets of the SAP are to allow the free use of foreign exchange for every citizen to use as they wish- for children to be educated overseas, for luxury travel- even go on cruises, import anything, to be done without any restriction even when the treasury of the country does not have any foreign exchange. The country is expected to get money on loan and if that is not sufficient, sell off State assets to meet the demand. Working on this basis it was inevitable that the country became indebted. This was a total recipe for bankruptcy. It is also noteworthy that the IMF provided loans at low interest and also with grace periods where no payment was required to entice the countries to borrow and get on the path prescribed by them. This meant that the leaders of the country at that time may not be in office when the loans had to get repaid. Later on the IMF increased the interest rate and further on even refused loans.
In addition, the SAP provisions include a high interest regime, in Sri Lanka banks charged an interest rate of about 25% and this made all entrepreneurs give up their enterprises because they could not compete with imports which were freely allowed without any taxes or reduced taxes. The local entrepreneurs found easy earning by depositing the money in bank drafts than in engaging in trade or production.
The local currency, the Rupee was also taken out of the control of the Government. The incoming foreign exchange was to be controlled by supply and demand. A heavy demand was created because foreign exchange was freely allowed and with limited supply the Rupee fell in value- was devalued. When the IMF’s Structural Adjustment was introduced to Sri Lanka in 1977 the Rupee fell in value from Rs. 15.70 to the GBP in 1977 to Rs 35.00 to the GBP in 1978, marking a drop of over 100%, within a few months. Instead of the Government deciding the exchange rate, it was the banks that decided the exchange rate. The banks accepted the foreign exchange , hoarded it and offered it at a higher rate, keeping massive profits. In 2001, “when the Government banks had to pay a large oil bill in foreign currency and the public sector banks did not have sufficient foreign funds to meet it. they had to go to the foreign banks that had hoarded the foreign currency. The foreign banks then increased the price of the foreign exchange they had. This did happen in Sri Lanka on 25/1/2001 when the $ US that was trading around Rs 82.00 was increased to Rs. 100 and Rs. 106.. The profit goes to the foreign bank. The Central Bank was helpless and said, ‘in a free floating regime the market forces determine the exchange rate. The Central Bank does not intervene in the process. The Central Bank has control only over the domestic money supply.’ (.The Island: 17/02/2001)
On 22/02/17 the US $ reached Rs. 154.44, which amounted to a Rs.4.44 increase since November, a 6% increase.(The Island:22/2/2017) . If we continue on the path of the IMF the day is not far off when the Rupee will be devalued by 100%, similar to what happened in 1978. As proved conclusively in my book: How the IMF Sabotaged Third World Development, ” even the foreign exchange earnings of a sovereign country is a commodity exploited to make a profit.”
Thus the foreign debt was created by the IMF through its ridiculous Free Market Neo Liberal Model of allowing borrowing to spend beyond one’s means for luxury goods, luxury travel etc. without matching the expenditure to the incoming foreign exchange, and the abolition of the development infrastructure that Sri Lanka had built up, which led to the reduction of local production and increased imports to take its place.
All Third World countries have become indebted purely because they have followed the Structural Adjustment Programme provisions and it is up to the IMF to kindly consider changing the conditions laid down.
The changes suggested by me in my book: How the IMF Sabotaged Third World Development include:
Countries should control the incoming foreign exchange.. allow for essential imports, Countries should decide the exchange rate…
Countries should not allow the devaluation of their currencies,
Countries should have two budgets, a foreign exchange budget dealing with the disposal of the incoming foreign exchange and a separate local currency budget.. this dual budget system is nothing new… this was how national budgeting was done in every Third World country till the IMF took over.
Countries should commence development planning,
Countries should build up the commercial infrastructure necessary for development,
Countries should impose high tariffs on every item that can be produced locally,
Countries should follow Import Substitution as a policy and establish industries to produce the items that are imported.
Development to be on a dual basis by the Public Sector as well as the Private Sector. Even Professor Jeffery Sachs in his latest book: The Price of Civilization, advocates action by the Public Sector to control and encourage activity by the Private Sector,
Get away from thinking that Foreign Direct Investment is the key to development. FDI should be limited to areas where foreign expertise is needed for development and local expertise is not available. Locals should be offered tax havens and other subsidies for development.
To get out of the woods we have to have a large number of projects and programmes aimed at creating production and incomes.
Finally , Are new funds required for new development programmes? New programmes and projects are essential to bring about development.
There is always a constraint on developing new programs or projects. However it is my experience that savings can be found within approved votes of expenditure to attend to many new projects.
As stated by me: “No new funds are required for development. Every country has a plethora of development programs. What is required is for these existing programs to be re oriented with skills training and entrepreneurial guidance when necessary. Officers have to be re trained and re deployed. In the Youth Self Employment Programme(YSEP) of Bangladesh, a Programme entirely designed and established by me, all Youth Workers became more economists. When machinery has to be imported too no- new allocation is required. The funds earmarked for imports can be utilized to import the machinery instead of importing that item.” It will be interesting to note that the YSEP I designed and implemented in Bangladesh in 1982 with no special allocation, done on savings and redeploying officers, has been carefully worked on by the staff I trained and is today the premier employment creation program in the World. Between 1982 and 2011 this program guided over two million youths to become self employed.
Currently 160,000 youths are guided annually to become self employed.
Sri Lanka as well as other indebted countries have to work on controlling their foreign exchange, restrict imports, develop projects of import substitution to produce national requirements, create production and incomes for its people. There is no other way ahead.
Garvin Karunaratne, Ph.D.(Michigan State University)
Former SLAS, Government Agent, Matara,
Commonwealth Fund Advisor to the Ministry of Labour and Manpower, Bangladesh in 1982, 1983.
Author of : How the IMF Sabotaged Third World Development, 2017
How the IMF and the World Bank Ruined Sri Lanka, 2006