SriLanka’s  International Debt.
Posted on March 15th, 2019

By Garvin Karunarathe

Economist Uswatta Aratchi  criticises the role played by the Chinese in his Paper:Capital Cheap in Chong Guo and expensive in Sri Lanka”(The Island 20/2/19)

If not for the support Sri Lanka received from China with the provision of weapons, all on loans, we could never have defeated the LTTE.

It is true that China has financed many projects.  It was a time when Sri Lanka was heavily indebted and it was very difficult to find funds. Of our international loans,  loans from China amounted to only 2% in 2008,  and 2013 while in 2017 it amounted to 9%.

Regarding loans it is important to note that there is  a major difference between getting loans for projects and getting loans to feed the luxury appetite of the rich- foreign travel, import of luxuries, expenses for study abroad, – free use of foreign exchange. In loans for projects,  the projects remain- an asset, while in the case of loans for consumption the funds are meant to serve the appetite of the rich, the funds are spent overseas,  for air travel- luxury hotel stay abroad, for luxury imports- mainly from the Superpower countries and the money obtained on loans at high interest goes back in some form or other back to the donor countries, leaving our country in debt. It is my opinion that obtaining loans for projects can be justified while loans to feed the appetite of the super rich who earn over a million rupees a month- a minority- less than 5 % of our population cannot be justified.

Gone are the days when Sri lanka had funds of its own for projects. We had funds of our own to build the Gal Oya Project- that was in the early Fifties.

Many countries have funded projects for us. The Victoria Dam was a gift from the British. The BMICH was a gift from the Chinese. The loans on the Hambantota Sea Port and the Mattala Airport can be justified as these are assets that carry a value even within the few years up to date. . They are in a category with the Mahaweli and the Colonies. Prime Minister D.S. Senanayake was severely heckled and criticized in the State Council for his colonization schemes.  Prime Minister Mahinda Rajapaksa despite his petty mistakes  stands out as one of our very few Prime Ministers/ Presidents  that had a vision for Sri Lanka. His achievements easily outweigh his mistakes.

Our country was not an indebted country when it was handed over to President Jayawardena in 1977. It was in debt only to the extent of $ 750 million and that too on projects. Chandra Maliyadda, a former Permanent Secretary has questioned how a country that did not have a foreign debt in 1976, became heavily indebted so soon.. Then the IMF and World Bank did not allow any loans for consumption purposes.  They changed their methods in 1978 and gave us loans freely even with long grace periods, for consumption purposes in order to make us indebted.

Till 1977 Sri Lanka somehow managed its economy without falling into debt.  This was done by controlling the foreign exchange that comes in and carefully spending it first for essentials and for development purposes. There were import controls and restrictions on the use of foreign exchange. Many today think of import controls as authoritarian. However I happened to be one of the administrative officers that handled-rather controlled the issue of foreign exchange for small industrialists in 1970/71. Any small industrialist who required foreign exchange to import any ingredient that was required for an  industry to manufacture any useful product had to submit an application to the Small Industries Department. I had a staff of inspectors who would inspect to find out whether the applicant was a genuine manufacturer and an allocation was made. I can assure that every genuine applicant was given a suitable allocation. We were never authoritarian. Instead we helped small industrialists.

It was the IMF that played the role of the Pied Piper of Hamelin and took Sri Lanka for a ride  when President Jayawardena went asking for Aid. We were made to believe  by the IMF and the World Bank that we would be on the path to prosperity. In fact our Minister of Finance, my good friend Ronnie de Mel stated in his Budget Speech of 1978, that we cannot go round the world begging for aid like international beggars. We must get out of this vicious circle  of no growth, stagnation and mounting internal and external debt.” As advised by the IMF,  the entire development infrastructure that we had before the IMF came on the scene,  the Marketing Department’s Cannery, which ushered in self sufficiency in fruit juice etc., its Vegetable Purchasing and Sales Scheme that ensured high prices to producers and low prices to city consumers,  the Small Industries Department with its handloomers and powerlooms that brought self sufficiency in textiles, the Agricultural Programme with its Seed Farms were all  abolished or privatized”(From How the IMF Sabotaged Third World Development. We liberalized the use of foreign exchange and we got loans from the IMF at interest to fund this spending spree. The IMF in order to entice us even gave long grace periods when we need not pay to make us accept their loans. This ploy of the IMF.  instead of bringing us to prosperity, made us an indebted country.  The World Bank itself admitted that By 1986, the deterioration of the economy had become evident. The growth rate of the GDP slowed to under 4%,unemployment increased to 17% and foreign reserves  declined to less than 2 months’ imports.(Page 496, Trends in Developing Economies)Quoted from my book: How the IMF Ruined Sri Lanka,P.75)

In 1986 the foreign debt was at $ US 4063 million. Following on the path af the Structural Adjustment Programme of the IMF Sri Lanka gradually increased its foreign debt in the process of borrowing loans to fund the luxury appetite of the rich. The international debt today stands at around $ 60 billon.

It would be found on any analysis of the loans taken that easily the major part well over 50% has been used to ensure luxury living for the rich. The amount spent for projects like the Mahaweli, Mattala Airport and the Hambantota seaport plus the foreign exchange spent to obtain weapons to fight the LTTE are easily less than 50% of our debt.  Our country is facing a foreign debt because we lived beyond our earnings as advised by the IMF.

The problem today is that our economists as well as those at the Central Bank yet continue to implement the provisions of the Structural Adjustment Programme of the IMF which takes us further and further into debt.

Even our celebrated economists who worked for the World Bank, the IMF and such allied institutes yet fail to discern between loans for projects and loans taken to satisfy the luxury appetite of the rich. I can see top range limousines on the Colombo roads far more than  in London. The only one economist from that category that understood the wrong doings of the IMF happened to be John Perkins, who unable to bear up his own misdeeds wrote a book: Confessions of an Economic Hitman, published in 2004.   Perkins confesses that he designed development projects with false statistics to be funded with massive loans and the projects  were designed to fail, with the loaned funds reaching back to the donors in some form or other for expert contracts, import of machinery, travel and commissions,  leaving the country with a failed project, while simultaneously saddling the country with a debt. Even today many projects are afoot in Sri Lanka, establishing the  Kantale Sugar and Avissawella Plywood” Type factories that can never find the raw material and will have to be closed down in a few years leaving the country with a massive debt.  A read of John Perkins’ book is a must to understand how our international debt was built up.

It is important to note that our economists yet fail to understand the ills of the Neoliberal Structural Adjustment Programme foisted on our Third World countries in 1978 and yet continue to advise our countries to continue with obtaining loans to service the loans. While servicing the loans is something that is mandatory, what has to be done today is to plan and provide for  massive import substitution type of industries to make what we import and to have import controls.

Our economists know to critique but not to remedy. My book, Microenterprise Development: A Strategy for Poverty Alleviation and  Employment Creation in the Third World: The Way out of the World Bank and IMF Stranglehold, published in 1997(Sarasavi) happens to be the first complete critique of the IMF policies, with an alternative model of self reliant development to be followed. .

Today,  unknown to our economists, the neoliberal Structural Adjustment Programme  is being pursued by the IMF on our country through various means by which foreign exchange is being spirited away from our coffers to the Developed Countries. It was some eight to ten years ago that on the advice of the IMF we allowed local currency account  holders to be allowed withdrawals of foreign exchange abroad, with some restrictions like withdrawing only a few hundred pounds a day and meeting this with foreign exchange from our coffers.

A further method is  Foreign Direct Investment (FDI)which our countries are forced to pursue on the pretext that it is developmental, on IMF advice, and brings in foreign exchange to our country.. Under this scheme a Multinational comes in with a small investment and establishes a venture- be it  in pizza, burgers, ice cream etc, trades in the local currency while importing everything with our foreign exchange and repatriates the profits also from our foreign exchange. Please calculate and we are the net loser in foreign exchange. Another method is for the investment to put up a hydro plant provide power to locals, charge them local Rupees and repatriate  profits in our foreign exchange. Here our local water is turned into foreign exchange going out to the investors, mainly from Developed Countries.

The latest is a very smart-method: the internet has taken over hotel bookings- where payment is made to the hotel in local currency, but the hotelier is charged 15% commission for the booking that has to be paid in our foreign exchange. Tourists cash foreign exchange not at banks where endless forms have to be  filled and questions asked but at Private Foreign Currency Exchange Dealers, within minutes, with no questions asked, where the incoming foreign exchange does not get into our exchequer. Into the fray is yet another international taxi firm, trading in the local rupee but repatriating profits via our foreign exchange. By these various methods the earnings of US Multinationals in 2007 from overseas trade  outlets amounted to $ 99.1 billion. From Africa the earnings netted $ 6.1 billion while from Asia it was $ 22.2 billion.(Tax Foundation:26/4/2011, Quoted in How the IMF Sabotaged Third World Development.)

There are many gogley balls being bowled at us by the IMF and the World Bank to make us further indebted. Take the $ 125 million loan for smart agriculture in Sri Lanka(World bank approvesUS $ 125 m. for smart agriculture in Sri Lanka”:Daily News:11/3/19) where we are offered a grace period of 12 years and a maturity period of 27 years, all to get some small changes done in agricultural development, which we can easily get done with our present staff without any aid.  We are being coaxed and pushed to become further indebted. In the Seventies, the IMF crippled our agricultural extension system by introducing the Training & Visit System by offering loans and grants. “The T & V was financed under IDA Credit whre funds are brought in under foreign aid  to meet the salaries of local officers. IDA Crdit has a grace period of 10 years so that the Government that takes the loan need not worry about repayment. “(From Karunaratne: Administering Rural Development in the Third World:1983) This T&V loan was in the late Seventies when we were hardly indebted. Making us indebted was done in a shrewd manner and the total responsibility falls on the IMF and the World Bank.

While all the above methods are used to pillage our foreign exchange, we find an easy scapegoat in President Mahinda Rajapaksa’s project loans to explain the increase in our foreign debt. There were two  projects- the Conference Hall and the Stadium, more done for prestige. The rest are assets even today and do hold the potential to usher in development for the backward South. Development requires close action on a long term basis and for this the entire development infrastructure that we once had has to be brought back. There is no other way to bring about development. The Marketing Department’s Cannery alone could have developed the lives of all Dry Zone peasants that includes Hambantota and Moneragala in the South. This Cannery made Sri Lanka self sufficient in all fruit juice and food preparations and we were building up pineapple exports  when the IMF dictate privatized the Cannery. I worked as an Assistant Commissioner in the Marketing Department and speak from sheer experience.

We have to fight our cause to understand and counter  the new methods employed by the IMF and its Multinationals to take away foreign exchange when the payment is received or trading is done in the in local currency. The only method is to control our foreign exchange, which right we ceded to the market forces in 1978. We have to restrict outflows of foreign exchange and also have import controls.

We have also to make a massive effort at import substitution industries and bring employment and incomes to our people instead of concentrating on importing what we can make and keep the poor happy with welfare handouts like Samurdhi. The Saying goes- Do not provide fish to the people. Instead teach them to fish.

We do have administrators at hand that can  easily tackle this task. They get paid and are under utilized today. Once in the Seventies when these administrators were put to work one administrator- the AGA at Kotmale,  produced paper  out of waste paper. The paddy straw which now go to waste can be turned into Paper and we can be self sufficient in all our paper requirements. This can be done in two to three years.  We once produced all the textiles we needed. That was done by the Small Industries Departnment with the Government Agents and the AGAa.  In Matara under my direction we struggled for three months in the evenings locked up in the Rahula Collage science lab and my Planning Officer, a chemistry graduate found the art of making crayons equal to the best of the West; the Crayola and we set up a factory within three weeks and sold Coop Crayon islandwide till it was stopped by the policies of President Jayaswardena. These are only a few instances. Many administrators established small projects which were sustainable and found employment opportunities for the youth.  A mechanized boatyard making 40 foot deep sea boats was also established in Matara, mind you all done within three months. The boats sent our fishermen in boats on the seas to fish. That boatyard was stopped and yet we import fish and youths are unemployed today.

I may also add how I designed and implemented the Youth Self Employment Programme of Bangladesh,  merely by altering the remit of all Vocational Training Institutes to include the task of motivating youths who were being trained to make something for sale or get into production. Every youth was guided in the manufacture and  marketing.  This was a grand success and today this Youth Self Employment Programme has guided two million youths to become self employed by 2011. It is an on going programme run by the Ministry of Youth where 95% of the time of youth workers is spent to guide the youth to develop their abilities to  become entrepreneurs. It is easily the premier employment creation programme one can find, a task which the ILO failed to do in Bangladesh in the preceeding three years(1978-1981).

This detail of achievement is necessary to prove that all my suggestions are practical. Most economists only speak from theory- most of them have never established a single project in their lives.  That is the type of doctranaire economists that hog our institutions. If they had an inch of wisdom the IMF could not have decimated our countries to their severe indebtedness of today.

To tackle this task we also need  a different breed of economists- economists who go beyond Keynes and  Adam Smith. Today all Third World Countries have  their economies restructured through IMF economics of Professor Milton Friedman.

We need economic thinkers to get us out of the mire to which the IMF pushed all Third World countries. . It is hoped that our  Central Bank and our   professors of economics at our prestigious universities will put on their  thinking cap for the cause of our Motherland.

Garvin Karunaratne. Ph.D. Michigan State University

Author of

How the IMF Ruined Sri Lanka & Alternate Programmes of Success(Godages,2006)\

How the IMF Sabotaged Third World Development(Godges/Kindle,2017)

15 th March 2019

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