Can we win our Economy?
Posted on October 1st, 2019

By Garvin Karunaratne

It is perhaps the right time to address our economic situation. We are currently deep in debt with some $ 60 billion to repay which we never can. Poverty is on the increase because 51% of the country’s income is earned by the richest 20% of the people.

In 1976 we did not have foreign debt. In 1977 our foreign debt was only $ 750 million.  At the end of 2014, the foreign debt was only $ 42.9 billion. Even in the process of servicing that debt- paying the interest due and the instalments due per year we fall further into debt because we have to borrow dollars at high interest to meet that payment. We have to face a payment of $ 16 billion in the next 4 years to service our foreign debt. We are facing a drop in exports, and an increase in imports. Let us not forget that the massive Gal Oya Development was all done with our funds. This denotes that in the early Fifties we had a sound economy.

It is necessary to understand how did we fall into this predicament in order to find a way out of this mess.

We had a sound economy, though facing some problems till 1977.  There were ups and downs, but we were self-reliant. We often ran into problems like in the mid-Seventies when Minister Kobbekaduwa in the Government of Sirimavo decided to take over all plantations over 50 acres, which crippled the private sector. Fifty acres is not an economically viable extent to run a plantation. We ourselves crippled the private sector. Then came the demise in paddy production It is a landmark achievement to become self-sufficient in paddy while implementing a rice ration scheme- an achievement never reached anywhere.. Premier Dudley devoted all his effort at increasing paddy production and he did succeed. It was unfortunate that the next Government of Premier Sirimavo  de-emphasized agriculture and instead concentrated on small industry and youth employment which had mediocre success. The Divisional Development Programme of 1971-77 provided employment to only 33,271 youths, some of them on a part-time basis. The possible success of this DDC Programme was hindered by the JVP uprising of 1971 which crippled the rural areas for some six months. All development work was at a standstill.

   It also happened that the socialist policies of the 1971-1977 period were not appreciated by the Superpowers who imposed sanctions on us, though very unofficially, which caused problems. Take the bread queues of 1974-1975. This was due to the USA not giving us flour under the PL480 Food Aid scheme on discounted terms, which they were giving us earlier. The Government in the period 1972 to 1976 found it an extremely difficult task to balance the foreign exchange budget due to high increases in import prices. the cost of imported rice increased from Rs.1015 to Rs. 2639 per long ton in 1974. Sugar increased from Rs. 3093 to Rs.5486 per long ton.  Flour prices increased from Rs.  1386 to Rs. 2124. per long ton.(From: How the IMF Ruined Sri Lanka: 2006)

 Britain insisted that we pay in dollars to the tea multinationals for the plantations we took over  and we paid that bill.  Despite all these price increases and payments to be made in foreign exchange, the Government was able to have a positive balance of payments of US $ 58 million  in 1976 and $ 117 million in 1977. The value of the Rupee was maintained at Rs 15.50  to the $ US in October 1977 and the foreign debt was nil in 1976 and only $ 750 million in 1977.  Though there were bread queues and shortages, these statistics speak highly of the economy of the period 1970-1977.

What happened in 1977 for a country that was self reliant and had no debt to become bankrupt?

When the Government of President Jayawardena requested Aid from the International Monetary Fund at the end of 1977, because we could not find finances- due to the fact that the prices of oil were increased threefold, the IMF imposed various conditions that had to be followed. It was the intention of Finance Minister Ronnie de Mel that Sri Lanka will be able to get on its feet based on following the advice of the IMF.

The IMF imposed the Structural Adjustment Programme on Sri lanka as well as other Third World countries that sought financial assistance. The economic theories that had been followed till then had enabled our countries to meet all our expenses and to provide for local development- our countries were making what our people needed and the incoming foreign exchange was carefully handled and allocated with care. Our imports were controlled.  This led to a situation where our countries imported less manufactured goods from the Superpowers.  The inability to sell manufactures crippled the economies of the Superpowers and they came up with an alternative economic system which they imposed on our countries to cripple our economies. This was the Structural Adjustment Programme. It was intended to restructure our economies to make us indebted and make us economically subservient.

This SAP was first made up by the Chicago School of Economics by Professor Milton Friedman and adopted by President  Ronald Regan and Prime Minister Margaret Thatcher and imposed though the IMF on our countries whenever we requested help.  The fundamental premise was for our countries to give up all controls on imports and the use of foreign exchange. We were told to allow all imports and to allow the free use of foreign exchange for foreign travel, for foreign cruises, and to even send people for foreign study(this helped the rich) and when we faced shortages of foreign funds in this process we were given loans. This was aimed both to create sales for the manufactured products of the Superpowers as well as to make the Third World countries indebted so that they can be brought under control- the countries had to get more loans to service the loans they had taken and will have to abide by the Structural Adjustment provisions which will make them further and further indebted, a situation from which they can never recover.

To help this process we were given grace periods of 5 to 10 years when we need not service the loans and our leaders jumped at the idea because they may not be there when the days comes to repay. There were additional clauses that crippled us. We were asked tlo impose high interest rates and Sri Lanka hijacked interest rates to some eighteen percent which meant that banks charged twenty five percent. This put off all our entrepreneurs from manufacturing. They closed down their ventures and instead enjoyed high interest on fixed deposits. While Sri Lanka follows this high interest rate policy even till today India totally rejected it. Today finance is available to people in India at 8 %. Our industries had to get crippled to enable the Superpowers to sell their manufactures.  We have all become colonies once again. We produce raw materials get them exported and then buy the manufactured product from the Superpowers.

During the time when we were sovereign- from the time we became independent till  the time we became appendages of the Superpowers by following the SAP conditions  (at the end of 1977 in Sri Lanka) we had built up a development infrastructure to enable our producers to sell their produce at reasonable rates. We built up the Marketing Department(MD) activities, commenced under Premier DS Senanayake.  There was a vegetable and fruit marketing scheme to buy at high prices from producers- prices higher than what the traders bought. These were brought overnight to the cities and sold at low rates to help city dwellers to buy at low rates. I happened to have been in charge of this scheme and can vouch for its success. Our motto was to keep a margin of 15% while left to the traders they kept 100% or more. That was how we killed two birds with one stone- to provide a high price to the producer as well as to sell at low prices to city folk.  Thereby we controlled inflation. The Marketing Department had a Canning Fctory where fruits were processed into jam and juice.  The MD purchased the total produce of Red Pumpkin, Ash Pumpkin and Pineapple and made them into Golden Melon Jam, Silver Melon Jam, Pineapple Jam and Juice. Our producers became rich and we needed no imports. This was a pain in the neck for the Superpowers who wanted sales for their fruit. They decided that the Govcernment should not have any commercial undertakings. The Marketing Department was scrapped. Its Cannery was privatized.  While we used the Cannery to make Sri Lanka self sufficient in fruit and veg preparations, the privatized cannery runs to make a profit. No wonder we have on our shelves Tomatoe Sauce and Vinegar from the USA, fruit juice from USA and Australia, just to mention a few items.

We also had a Paddy Purchasing Scheme where we purchased paddy at a premium price from genuine producers.  After 1977 this Scheme was altered to purchase from anyone. The traders collected paddy from the farmers and handed over to the Government and benefited from the premium price offered by the people. In the pre 1977 Paddy Purchase Scheme paddy was purchased only from genuine producers on a list prepared by the agricultural overseers/ agrarian services officials. After 1977 the purchases were from anyone and the premium price paid did not serve to help the genuine farmers.

Ronal Regan and Margaret Thatcher directed the IMF, under their control to cripple our economies and make us ‘colonies’ once again and we were the losers. What is sad to realize is that almost all our economists fail to understand the ‘economics’ underlying the Structural Adjustment Programme and its effects. Our Universities are full of qualified economists, but analyzing the Friedman economics is far beyond their comprehension.

How we once do it? We imported chassis instead of coaches and built the chassis into busses and at Ramalana we made all the coaches required for the railways.  In that manner we made a controlled economy. We were self sufficient in all textiles. We imported cars- never luxury models and that was done by import controls. Some think that import controls will lead to chaos. I can assure that there was no chaos. I myself handled small industries and was in charge of allowing foreign exchange to import machinery or an ingredient that was needed for making some item. I can assure anyone that every genuine industrialist was satisfied. 

Way back in  1972 I wanted to establish an import substitution industry. I decided to make crayons and my Planning Officer Vetus Fernando, a raw chemistry graduate,  worked on experiments to find the art of making crayons locked up in the Rahula College school science lab for three long months from six to midnight every evening and did succeed.  I decided that a cooperative should be set up and Coop Crayon was born. I summoned Sumanapala Dahanayake the Member of Parliament for Deniyaya who was also the President of the Morawaka Cooperaive Union and authorized him to use cooperative funds and set up an industry. I had no authority to order the use of cooperative funds but in the national interest we always bend rules. Sumanapala was a maverick who too connived to bend rules for the benefit of the country. It was a handmade crayon like most Chinese products of today.  It was a difficult task to have exact quantities, boil to a certain degree and then pour into glass jars. But it was done, established in some three weeks under the personal direction of katcheri officials who worked day and night to assure the quality, training the youths who were workers. Coop Crayon was easily equal to the qualility of Crayola of today.  We had many problems to surmount and we did it all. We were refused an allocation of foreign exchange by the Ministry of Industries because we were a cooperative and the officials there did not want to bend rules in the national interest. I then approached Harry Guneratne the Controller of Imports who had earmarked dollars to import crayons. It did not take long to convince Harry that by giving us a small allocation he could stop imports. He readily agreed and we sought the approval of his Minister, Illangaratne to do something wrong- in administrative rules to use funds earmarked for imports to be used for manufactures. Minister Illangaratne not only approved it but insisted that we should establish a crayon making factory at Kolonnawa, his electorate.  This detail of how we once did –how the member of parliament Sumanapala Dahanayake slaved to establish Coop Crayon that had islandwide sales within a few months illustrate that we can such feats if called upon again.

. It was the IMF trap of the Structural Adjustment programme that really trapped us and we have now in the few decades from 1978 lost our bearings. The few illustrations of what we did once achieve illustrate that we can win.

Now we come to today. As illustrated though not in great detail we once did it and can do it again

This effort has to get support from the Government in departing from the high interest policy, having controls over imports to ensure that we do not import anything that we can make. For instance we can become self sufficient in all our fruit and fruit juice requirements in one year because we have mangoes and other fruit in plenty. What has to be done is to set up small scale fruit preparation industries and develop an industry. That is a task that can be done in a few months.

This is true of many things we import. The mantra that has to be followed is Import Control and Local manufacture and if we cannot do that we will be doomed for ever.

In addition to all this there has been increased corruption which can be effectively stopped somehow. I can assure that the Members of parliament and ministers till 1973, the year I left were not corrupt. Corruption was not in their veins. They were all fighting with the officers to get development tasks done.. It is my opinion that we can get out of the quagmire of corruption.

However many things have to be done. Economist Sanderatne cries aloud in the Sunday Times that agriculture has got lost.  Why? We have made a few mistakes. Take agricultural extension.

 Let me emphatically state that we have crippled our agricultural exztension service in the Seventies and Eighties. Firstly the World Bank(at the behest fd the Superpowers) decided to cripple our extension service. First they wanted our countries to privatize the Seed Research Stations, which we did.

Then they wanted to cripple the service. In our countries the number of farmers are legion. The only method of working with them to find their needs, provide good seeds etc is through a cooperative network and our countries had built up able cooperatives to muster and enable farmers. The World Bank came up with their Training and Visit System of Extension which they forced on our countries in around 1978. When Our administrators refused the World Bank gave us loans and grants and we readily complied. Giving us a loan or a grant is the bait offered by institutions like the World Bank and the IMF and even by the Superpowers.

Next, during the days of President Premadasa, he promoted all Agricultural Overseers- those who manned agricultural extension at the village level as Grama Niladharis and since then there has been no officer with agricultural training at the village level. For a few years there was no one at the village level and after a few years Niyamakas were appointed. They were not trained nor was any training programme done for them done till today.  The closest trained agricultural officer is at the divisional level and he caters tyo some 4000 to 12,000 farmers. In short the agricultural extension service does not exist at the field level. The problem is that this vacuum is not even understood by the authorities.

Building up the lost agricultural extension system, re establishing the lost Marketing Department activities, building up new programmes, enforcing import controls  etc have all to be done and this is a task that behoves attention by the authorities, even at this late stage.

Garvin Karunaratne

Former GA Matara

Author of:

How the IMF Ruined Sri Lanka, Godages, 2006

How the IMF Sabotaged Third World Development, Kindle/Godages, 2017


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