A warning from our Central Bank to a future Government.
Posted on August 21st, 2019

By Garvin Karunaratne

The Senior Deputy Governor of the Central Bank, Nandalal Weerasinghe has warned any new Government: Follow the beaten track or else there will be chaos. (Sri Lanka Risks losing debt market access if future government policy changes” , (AdaDerana:9/8/2019)

I would tend to think that there could have been some substance in this Warning if the last four years, quoted by him,  had any macroeconomic stability. We have today to face an international debt of some $ 60 billion, a good lot of which has been piled up in the last four years because at the end of 2014 the debt stood at 42.9 billion(SundayTimes.lk 23/1/17):. To my thinking, the last four years has been a shambles. Last time I was in Colombo Heinz Vinegar and Heinz Tomato Sauce from the USA was what was available. Our shoemaking industry has almost ceased and shoes from India had taken over. Our local industries have crashed causing unemployment and increased imports. Local industries and with that local employment had almost ceased with the result that our youths have to migrate abroad to find a means of sustenance. Under FDI foreign companies that bring in some investment in foreign currency at the initial stage do trade in local rupees but import all ingredients with our foreign exchange and take away their profits converted to foreign currency. Our experts do not yet understand that we are the net loser.

Our administrative ability is seen in the piles of garbage. We have even failed to dispose of our garbage. Those days a single-handed Sonny Gunawardena,  Assistant Commissioners of Local Government would have sent the inefficient councils packing and sorting out the working of the Councils in their capacity as Special Commissioners. They were very efficient. I am aware that some of them even faced death threats. But they worked undeterred.

It is said that the advice not to change course is for the purpose of being able to obtain finances to pay our debts.

Our experience in the last four and a half years is that  All the king’s horses and all the king’s men have failed to guard the Central Bank which was robbed by its own chieftains, and worse, the chieftains are yet holding the reigns of power, yet enjoying their ill-gotten wealth.

If as suggested by the Central Bank we should not make any change in our economic policies then the question crops up as to why have a new Government, or rather why have elections at all.

A General Election and the Presidential Election are the occasions when the people at large get to indicate, based on their experience as to whether they want the past policies to continue or whether they want a change and from this point of view the Warning from the Central Bank deserves to be ignored.

It has always happened that the people look forward to a new Government for a major change.

Let us hark back to the past elections that heralded a major change.

The 1956 General Election brought in the socialist nationalist Government of Prime Minister SWRD Bandaranayake, which was instrumental in bringing about socialist policies like the Paddy Lands Act and the Sinhalese Only Act, which ushered in an era for the common man. It was unfortunate that he was assassinated in a few years.

The 1965 Government of the UNP Prime Minister Dudley Senanayake concentrated on agricultural development making the country self-sufficient in paddy the staple crop while implementing a rice ration scheme. This was a major achievement.

In 1970 Dr. NM Perera the Minister of Finance said in his Budget Speech 1970:

An entirely new structure for planning is being established (within which) each local authority will be the focus for development planning and plan implementation. Popular participation will be secured through the Divisional Development Council in which the elected organs of the village, the cooperative society, the cultivation committee, the village council will have a planning and coordinating role in the overall development of their area.”

His aim was very clear, to fulfill the aspirations of thousands of young men and women for whom life will lose all meaning unless they can find a place in our society.”.

Though planned with great care this plan received a major set back due to the JVP Uprising of April 1971, when the JVP youths staged a one day take over of the country like Fidel Castro of Cuba. It was then found that the North Korean Embassy was involved and it was closedown. Easily ten thousand youths had to face death.

The Government of Prime Minister Sirima Bandaranayake came up with a major development programme: The Divisional Development Councils Programme which established employment projects providing employment to 33,271 youths.

In 1977 a major change in policy was made by the Jayawardena Government. The  Jayawardena Government embraced with open arms the neoliberal policies as advised by the IMF. The use of foreign exchange was liberalized that enabled rich people to proceed on overseas holidays, send off their children for overseas study, and liberalized imports, meeting the expenditure from the sale of assets by privatization or by raising loans. This inevitably paved the path for the country to become indebted. This process was dictated by  the IMF to help” the Developed Countries as stated in The Report of the Independent South Asian Commission on Poverty Alleviation: Meeting the Challenge:

The industrialised countries for the first time since World War II are in need of markets for their products and services … So they have put into effect the Structural Adjustment Programme (SAP) The main prescription for the SAP is, therefore, a reduction in government expenditure which falls … on the poor. This has often been accompanied by devaluation, increases in the prices of public utilities and import liberalization.

This policy laid down by the IMF in 1978 has been followed till today and has seen the country continuing an import and sell economy. Local production has been totally sacrificed.  Most of the ills the people face today can be traced to this policy of the IMF, imposed on Sri Lanka from 1978 onwards.  

Though the Finance Minister of 1978, Ronnie de Mel said:

Foreign Aid and foreign assistance.. will be necessary to finance this total transformation of our economy… Investment and trade, development and production should be our goals rather than increased doses of aid. Continuous begging for Aid is not good for our national self-respect and is also self-defeating. We should, therefore, stop being a nation of beggars… and place our emphasis on product development, growth, and employment. (Annual Budget Speech: 1978)

However noble the aim, we ended up as beggars within a few years.

In 1978 the Rupee was devalued by 104% and the bank interest rate was increased- entrepreneurs had to get loans at 24% interest. This made many entrepreneurs give up their industries. Imports flooded in.

Cracks in the economy became evident. Even the World Bank queried in 1986:

By 1986, the deterioration of the economy had become evident. The growth rate of the GDP slowed to under4%, unemployment rose to about 17% and gross official reserves declined to less than 2 months’ imports(World Bank: Trends in Developing Economies, 1990)

This was when the foreign debt was at $ 4 billion. Following on these policies by 1989, the foreign debt was at $ 5 billion and gradually increased to  $11.3 billion by  2005,  $ 22.8 billion by 2011, $ 30.6 billion by 2012, $ 42.9 at the end of 2014 and close to $ 60 billion today.

It is seen that elections have brought about major changes and the cry from the Central Bank is not going to stop changes happening.

What is important is to find out whether the changes have made a contribution to the country.

I was once myself personally involved in a major policy change. This happened in Bangladesh when I worked there as the Commonwealth Fund Expert on Youth Development to the Ministry of Labour and Manpower.  The country was taken over in a bloodless coup d’etat in one night when I served there. In a few days the new Minister, Air Vice Marshall Aminul Islam held a meeting to evaluate the training programmes of the Department of Youth Development.  The two Secretaries, Heads of Departments and myself from the Ministry and the Secretary to the Treasury and a few Secretaries to other important ministries were present. The Minister went through the programmes run by the Department and was highly critical. In the end, he ordered me to state the contribution that I could make for Bangladesh.

I recommended that there should be a self-employment creation programme in addition to the training programmes that the Department implemented. At that time the Department trained 40,000 youths a year in a variety of vocations. The Youths should have passed the fifth standard- we never rejected any interested youth- we even taught them to read and write. Literacy classes held for the youths who had forgotten to read and write commenced at night and continued till midnight at the residential training centers. However, without special support, the vast majority of the trained youth continued to be unemployed scraping the barrel for life. I suggested that the trained youth should get further training to establish enterprises and get on their feet as producers. The Secretary to the Treasury, the highest officer in the country strongly objected, stating that a self-employment programme was something that can never be established. He said that the prestigious United Nation’s ILO(International Labour Organization) had tried in the earlier three years to establish a self-employment programme at Tangail in Bangladesh and though they had brought in a number of foreign experts and spent a vast amount of money they had miserably failed. He said that the Government will not undertake another try because the failure of the ILO meant that this could not be done and he added that a self-employment programme had never been established anywhere in the world. I replied that though the ILO had failed I will succeed because I had the experience of establishing many youth enterprises in Sri Lanka for over a dozen years and can assure that I do have the experience,  the ability and the academic qualifications to establish such a programme. I stated that the ILO may have failed but that I can assure success. The Secretary to the Treasury was taken aback. He was the highest official in the land and never expected me to challenge him. Generally, an officer of that rank was in every country held in high esteem and not even a Secretary of another Ministry would contest him. The battle went on with other Secretaries of Ministries also joining him to the effect that I did not have the capacity to do what the ILO failed to do with all their unlimited resources. The arguments went on and they questioned me in detail as to how I proposed to teach economic management to illiterate youths. I replied that I have found it easy to teach illiterate farmers and illiterate youths and have had success in teaching them basic elements of economics. I stated that it was not difficult to teach practicing youths and farmers how to count the cost of inputs, to calculate the cost of labour, building up elements that led to the calculation of profit and loss and the workings of the theory of supply and demand in a basic manner. … I detailed how in earlier projects  I had successfully involved uneducated youths and how we made them think and how they mastered not only skills but also management skills…It was a situation where we as youth workers will work with them while they struggled to become self-employed”.

The grueling arguments between the Secretary to the Treasury and me went on for over two hours with the Hon Minister being a patient listener. Finally, the Minister stopped us arguing and asked as to the number of programmes Bangladesh had to provide self-employment training to youths. The Secretary to the Treasury said there were none. Then the Minister asked for the number of illiterate youths who were unemployed and who had to contend to be scraping the barrel for life. This was the category of youths who were trained by the Youth Ministry in various vocations. The answer was in millions. The Minister without a minute’s hesitation ruled that I would be allowed to establish a self-employment programme in his Ministry of Manpower and Labour, The Youth Development Department was within his Ministry. The Secretary to the Treasury was quick to stump me by stating that  that he will not be providing any funds, to which I replied that I will not need any new funds and will manage with savings from approved training budgets  and needed power to rewrite the remits of all officers to include tasks of training in self-employment. The Minister approved my request.

The rest is history. I was charged with the responsibility to design and implement a self-employment programme and train the staff to continue it after my two-year consultancy was over.  I with the full resources of the Youth Development Department commenced work the very next day, with training the staff in economic management and addressing youths in training centers motivating them to use their knowledge and open up ventures. We promised them a countrywide extension service. Some trainees opened up a few enterprises managed by them, handled by their younger brothers and sisters during the week when they were in training at our training centers during the week. The staff of Deputy Directors of Youth in charge of Districts and the Lecturers of training Centers was full of patriotism to work long hours with no overtime. The Hon Minister too went on inspections to see the youths at work in their small farms and work enterprises- sewing, woodwork, etc.. In around one and a half years I was working with 2000 youths  and of them those that had started at the beginning were successful in drawing net incomes equal to that of a clerical officer in the government service. 

By 1990, 22,626 youths had undertaken self-employment projects and the 3 Residential Training Centers had been increased to  64 Training Centers. By 2011, the Government of Bangladesh reported to the IFAD of the FAO(one of its founders), that two million youths had become self-employed. This Programme continues even today, training 160,000 youths a year and the Department of Youth Development spends 95 % of its work time and resources in training youths to become self-employed, the one and only such programme creating employment in the entire world. This is a design that can be immediately implemented in all vocational training programmes.

It is essential that the working of the government departments and ministries should be evaluated continuously and changed to be more productive and the above changes made would convince anyone that changes have to be made to be better at serving the people.

Having worked in the service of our Government for eighteen years I have had to serve new Governments that changed policies and we had to make changes and show results.

It is up to the Central Bank to act according to the wishes of the newly elected Government.

To my thinking, the major task of the Central Bank is to safeguard the foreign exchange that our country earns. In today’s internet dominated world endless foreign institutions nibble at our foreign exchange. Gone are the days when money is transferred to local banks. Money gets transferred now within a few minutes with little or no records being kept. Institutions like Uber eats, Pick me, and Internet Tourist Hotel Booking Companies trade in local currency but take away profits in our foreign currency where we are the net loser.  Not a dollar comes in but the profits are taken away in our dollars. The Central Bank has its hands full.

Instead of making Warnings to a new Government it is up to the Central Bank to put its house in order and serve the country.

Garvin Karunaratne

Ph.D. Michigan State University

19/08/2019

 The quotes are from my book: How the IMF Ruined Sri Lanka & Alternative Programmes of Success(Chapter 22): Godages:2006

 Author of: How the IMF Sabotaged Third World Development:Kindle/Godages: 2017.

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