Memories: The Economy: How we once did it. A Message for the IMF
Posted on November 7th, 2019

By Garvin Karunaratne , Ph.D. Michigan State University

In the current chaotic situation where our economy has totally floundered, with a massive debt that defies any solution it will be prudent to note that till 1977 our country managed the economy, attending to massive development tasks also,  without falling into debt. I happen to be one of the few alive who played a major part in that economy.

In 1977 the foreign debt was only $ 750 million and that too on projects, not for consumption because at that time loans were obtained only for projects. In fact no less a person than Chandra Maliyadda one of our Permanent Secretaries questions how a country that did not have an international debt at the end of 1976 could have deteriorated to have a massive debt today.

It will interest readers to note that the massive Gal Oya Development Scheme, building a massive tank from scratch, settling 40,000 colonists, building roads, towns  etc were all done on a contact by a foreign firm, with our own funds. This was also done within some three or four years.

Our economy was in good shape till the IMF took over

running our country at the end of 1977 when the new Government of President Jayawardena wanted aid from the IMF. No one ever believes that the IMF took over running our country, but actually the IMF dictated how we should run it. It was an indirect  but a very effective.control.

The variety of policies that were imposed comprised liberalizing the use of foreign exchange(earlier foreign exchange  was very carefully handled- controlled used mainly for essential supplies) taking control of foreign exchange out of the hands of the Government, instead it was to function as decided by the market forces of supply an demand which really meant that it was handled by the banks- mostly foreign- the banks decided the exchange rate,.. a high interest rate policy was to be followed(which meant that local industrialists closed their enterprises,, import tariffs were reduced or abolished, subsidies were to be reduced or abolished and the commercial development infrastructure that existed was to be closed down”.(From How the IMF Sabotages Third World Development

Following this  path of spending foreign exchange that we did not have  for our rich to go on cruises, lavish holidays, to educate their children abroad, to import all luxury items, all done as advised by the IMF,  cost a massive amount and to enable this the IMF even bribed us by giving loans with long grace periods which meant that the leaders who took the loans and enjoyed spending them, were not in power when the loans had to be repaid.  This coersion was essentially a form of corruption to which  the IMF stooped to ruin our countries.

Before 1977 we did manage our economy. Let me detail how it was done. All the foreign exchange we earned from exports and dollars encashed by tourists etc was all pooled and disbursed first to import essential goods. This was done by the Controller of Exchange of the Central Bank.

For industrialists who made items when their manufactures required an import an application had to be made by large industrialis to the Ministry of Industries and by small industrialists to the Department of Small Industries.  In 1970 I was the Deputy Director in the Small Industries Department that controlled the foreign exchange that was given to small industries. I registered all small industrialists when they wanted any item or machinery to be imported this was considered after an inspection. We were very strict but we did ensure that the industrialist did have a licence to import what he needed.  All industrialists were looked after in this manner and one of my readers – Susanta Wijesinghe has stated in a comment to one of my papers that he worked then in the company that made instrument boxes and instruments and they had built up a stock for the full island when the IMF entered Sri Lanka’s economy in 1978. I have seen and used these instruments and have found them satisfactory. Our people were not scounging. Then we did have limousines imported not with  money that we obtained on loans, but sent from abroad by relatives. The country did not charge any taxes and the country benefited.

Let me detail how we did it then. In order to make Sri Lanka sellf sufficient in textiles, the Department had a programme to import cotton yarn, distributed  it to factories, powerlooms and handlooms for producing textiles required.  The Department had a research and training unit that guided all industrialists at Velona in Moratuwa. Powerlooms were obtained from China and established in various districts. I supervised five Powerlooms in Matara. The Divisional Secretaries guided the functioning of these Powerlooms as cooperatives and we were in 1973 totally self sufficient in textiles.  People from the Matara District who had migrated to Britain when they came on holiday came to me when they wanted to buy Hakmana Powerloom suiting because that suiting was better than what they could get in Britain. The handloom sector had some 98,000 handloomers making bespoke sarees, with elegant designs and the ladies wore them- never did they go to Britain, Singapore and Bangkok for any apparel. These functions of the Department of Small Industries were abolished on the advise of the IMF and imports of textiles became the order of the day while our workers who once earned a living went to the scrap heap of unemployment and poverty. That was how the IMF  created poverty.

The manner we did handle the foreign exchange that came   in very carefully and used it firstly to buy the essentials and thereafter to import the requirements of industrialists, and then to consider applicants for foreign travel etc. is perhaps the only  method we have to use  to get out of the mess that we are in today.

It was following the IMF’s advice of  spending foreign exchange liberally, import everything and meet the shortage with loans that brought us to our present predicament of foreign debt.  Today the IMF  has given us a warning Sri Lanka’s economy remains vulnerable to adverse shocks due to its large public debt”(Ada Derana:6/11/2019) The IMF has to be told that it was no other than the IMF itself that advised us to spend foreign exchange freely and liberalize imports and meet the shortage with loans that brought us to this indebtedness. The IMF also has to be told that they bribed our then leaders to follow their advice by giving us loans with long grace periods of no payment..

It is time that the IMF realized that they did something terribly wrong and were the cause of the creation of untold poverty  by advising the Third World countries to follow the economics of Milton Friedman. It is unfortunate that none of you in charge of the IMF today were alive when the Third World countries were developing fast, making ends meet and not falling into debt. It is time that the mandarins in the IMF today do some historical studies and think of providing our countries a ray of hope to get out of the mess which the IMF itself created.

Full details of how the IMF gave us the wrong advice and how Sri lanka was led to the slaughterhouse is the sad story narrated at length in my books: How the IMF Ruined Sri Lanka and Alternative Programmes of Success (Godages:2006) and  How the IMF Sabotaged Third World Development (Kindle/Godages:2017)

Garvin Karunaratne, Ph.D. Michigan State University, M.Phil. University of Edinburh, M.Ed. University of Manchester, M.A. University of Sri Lanka.

Former Government Agent, Matara.District, Sri Lanka


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