The Economic Woes of today(2021) go back to 1977, when we followed the neoliberal policies laid down by the IMF
Posted on December 4th, 2021

By Garvin Karunaratne  

The IMF has successfully taken Sri Lanka to its grave.  

In 1976, Sri Lanka did not owe a single dollar to anyone. In 1977 Sri Lanka held SDR 170 million in its foreign exchange budget. That was the last year we held a credit. Since then it is not a credit but a foreign debt.  

Today, five decades later, the banks hold no dollars and importers are finding it difficult to obtain dollars from their banks. The dollar shortage has created a shortage of goods of all types and with the Government easing control of prices, the sky is the limit even for essential food. Bakery owners have voiced that they cannot obtain flour etc. The earnings of people have not increased and therefore  people will be unable to buy essential supplies. I am sad to be aware that many families have to depend on one meal a day. Pauperization is very severe.  

The causes for the present  situation go back to a decision Sri Lankan leaders made five decades ago. President Jayawardena and my close friend, Ronnie de Mel, the Minister of Finance were fooled by the IMF.  

When President Jayawardena sought the help of the IMF in 1977, the IMF insisted that funds would be given only on the condition that the country would follow the Structural Adjustment Programme provisions. The provisions laid down were that Sri Lanka had to liberalize the spending of foreign exchange- allow those who could afford- the rich to spend dollars as they wished,  free imports without any restrictions and the IMF readily provided dollar loans. The foreign funds loaned to us was in this process, shunted back to the donors- the Developed Countries, fattening their banks with profits,  leaving the debt saddling our country. The IMF even provided grace periods where the loan instalments and interest need not be paid- the IMF actually ‘bribed’ the then leaders as they could freely spend and leave the burden of repayment to their successors! That is truly what the IMF did! 

The IMF also laid down that the Public Sector should not attend to any commercial tasks. With this dictate the Government had to call off all public sector work on development. It was the Public Sector that brought about development   To mention a few-the Marketing Department activities- its Cannery that made Sri Lanka self sufficient in all fruit preparations was closed down and imports took its place. The Vegetable & Fruit Purchasing & Sales Scheme that assured high prices to producers and also made available goods at low prices to consumers was abolished.  The textile manufacturing units – 96,000 handloomers, powerlooms and textile mills were privatized or abolished and a country that produced all its textiles came to import instead.  In the pre 1977 period we never imported a single rail carriage or bus or lorry. We imported the chassis and built them ourselves. Local enterprises closed down because the bank interest rate was jacked up to 25%, which made enterprises uneconomical to run. I am not exaggerating as I was a key administrator attending to development tasks in the pre 1977 era, working in the Marketing Department, in the Agrarian Services and in Small Industry. .  

Going on this path the foreign debt increased to $ 6 billion  by 1994, when the UNP rule ended. There was no going back because Sri Lanka had abolished or crippled the infrastructure  that had ushered in develoment. Stalwart administrators who brought  

about development were confined to the barracks. . There was unemployment and poverty.  

The foreign debt increased to $ 20 billion by 2009, to $ 30 billion by 2012, to $ 42.9 billion by the end of 2014. 

Following the IMF advice the foreign debt is at $ 56 billion today to service which  the country has to find $ 4.8 billion a year. The country does not earn that amount and is forced to obtain foreign loans to service the debt, which means that the debt is immediately increased by another $4.8 billion. Upto now Sri Lanka has paid up its dues but the day is not far when it will be forced to default and tell the IMF that we have gone on the path you told us to follow and have lived on loans and this is why we have built up the foreign debt. It was your wrong advice that led us to this predicament. 

The IMF has been told again and again that their structural adjustment provisions only serves any country that follows it to become further indebted.  

In 1992, in an  address to the South Asian Forum at the University of London I happened to point out that foreign aid, if accepted in a non-developmental manner… can lead to a situation of  chronic debt, widespread poverty” .I pointed out that a country that did not owe a single dollar in 1976 had a foreign debt of $ 5 billion by 1989, with high unemployment due to flooding the country with imports, allowing the rich to spend dollars, that the country did not have and totally dismantling the administrative infrastructure we had to bring about development. This warning went unheeded.  

In 1997, my book: Microenterprise Development:… The Way Out of the World Bank & IMF Stranglehold, the first book to criticize the IMF, detailing how Sri lanka got into debt  playing poodle to the IMF,  was published by Sarasavi. It proved that the IMF was taking Sri Lanka to its grave. This  documents a presentation by me to the economic dons at Peradeniya, my first and last assignment as a Visiting Lecturer! To them,  I was talking nonsense. Till now(2021) our economic dons have sidetracked teaching the neoliberal economics of the IMF that has taken Sri Lanka to its grave. It is time that our President rules that our premier universities should undertake detailed studies into the predicament that Sri Lanka’s economy  faces today and find remedies. .  

In 2000, the foreign debt was $ 9 billion, definitely on the increase. In 2006, I have proved that the IMF ruined Sri Lanka’s economy in my book: How the IMF Ruined Sri Lanka & Alternative Programmes of Success(Godages). George Axinn, Assistant Dean of International  Studies at Michigan State University, in his Foreword stated: It is hoped that this timely book will enable international organizations  to arrest the trend of failures.” 

Not an outsider  like me, but authoritative capitalist sources like the Wall Street Journal and the Economist have also been pointing out that the IMF’s advice to our countries was actually taking poor countries  more into debt and ushering poverty and destitution…  

The Wall Street Journal of 22/2/2001 comments: 

The IMF drill is as follows: A Third World poor country  with a pegged currency is working towards taming its inflation.  . Instead of a growth formulae it gets the IMF’s old austerity dosage which slows down the economy. The Banks begin to falter in paying their old debts. The IMF  recommends yet more medicine- devaluation,  making the bank predicament and capital flight worse. The currency slumps and the banks are now in real trouble… Is this anyway to run an international monetary system?” 

This warning by the Wall Street Journal was in 2001, when Sri Lanka’s debt was around  $ 9 billion. The IMF went on heedless.  

The Economist, the epitome of capitalist journals hauled the IMF over the coals in 2002: 

Over the years these institutes- the IMF and the World Bank have often handed poor advice and squandered many billions of dollars on loans that helped Governments to postpone necessary economic and political reform…. The World Bank has achieved little for its $ 500 billion loans during the past half century, besides saddling very poor countries with huge debts  that should now, mostly be forgiven”(The Economist: 18/24, May 2002) 

Two decades have passed since this warning was made by the Economist.  

In fact President Nestor Kirchner of Argentina in his address at the United  

Nations General Assembly on 21/9/2004, said: 

An urgent tough  and structural redesign of the IMF is needed to prevent  crisis and help solutions. The IMF must change that direction it took from being a lender for development to a creditor demanding priviledges”  

The immediate reply he got  from the seven  superpowers  was a firm warning  that Argentina had to come to  an immediate debt restructuring agreement with creditors and President Kirchner was forced to abide. Nestor Kirchner and the next President Christina Kirchner fully paid the dues to the IMF and subjected people to austerity. Christina Kirchner was defeated by Mauricio Macri who followed the IMF policies in 2015 and  was rewarded by loans of $ 44 and $ 57 billion, the latter obtained even without Parliamentary approval.  Mauricio Macri was defeated in the 2019 elections but his successor had to agree to repay the loans taken by Maurico Macri later on in 2022 and 2023. 

In short the IMF actually ruins the economies of Third World countries. My 2017 book: How the IMF Sabotaged Third World Development  documents how the Third World countries that had self reliant economies and were not in debt were made indebted.  

In fact FullSpate says:  

these two agencies have become two of the strongest proponents of today’s form of globalization process whereby all the countries of the world are forced  to open their markets, thereby maximising  the opportunities for the largest  and most powerful companies  in the world. This means an  insistence upon free markets that disregard the consequences for local communities  and their traditional ways of life. The poor African countries  that previously subsidized  agricultural activities  in remote rural areas When they needed help from the IMF  they were forced to stop these subsidies  and let the local markets operate without  government intervention.”  

This also encapsulates what has happened to Sri Lanka today. Sri Lanka has allowed the  rich to spend foreign money  it did not have and has been living on loans given by the IMF and its associated creditors since 1977. Since 1977 Sri Lanka  has been ruled entirely by the IMF dictates and in the process has run up a debt of $ 56 billion, to service which in 2021 the Government had to obtain  $ 4.8 billion on loan. 

Already the leaders have said that they would not default on debt payments. The next payment of some $ 4.8  billion will be due in 2022 and the crucial question that crops up is as to whether it is morally right  for further loans to be raised to pay up the next of $ 4 to $5 billion and to place the burden on the people- for them to go through austerity, when the fault lies with the IMF and not with the people.  

Certain Cabinet Ministers have suggested that the Government should go to the IMF for funds but this has been shot down by the majority of Cabinet Ministers who had said that the IMF will insist on the Government following further restrictions, which will be non developmental. Minister Cabral had rightly stated that if we seek the help of the IMF they will insist on increasing interest rates, depreciate the Rupee, reduce public servants, sell State Assets, curtail pensions, which action are not necessary”(CeylonToday:26/11/2021) This will take the country further down to destitution.  

I have had to point out that since 1977, the Government has failed to control its foreign  exchange. The Central Bank voiced that it does control only the local Rupee. The Central Bank was actually forced to make this statement when on 25/1/2001, the two State banks- the Peoples Bank and the Bank of Ceylon had to pay a large oil bill and their collection of dollars was insufficient. They had to go hat in hand to the foreign banks that had collected dollars and strangely that foreign bank had increased the price of dollars to as much as Rs 106 to the dollar when the price had been only Rs 86.00.that morning The State banks had no alternative other than to buy the dollars at the higher price. This caused an immediate devaluation. 

Getting back to today, it is important to note that even today the Government gets into the Treasury only the foreign funds collected by the Bank of Ceylon and the Peoples Bank which is only a fraction of the foreign exchange that comes in.  The dollars collected by other banks and the private exchange dealers do not get to the Government Treasury. Instead the other banks and private dealers fix their own rates of purchase and sale prices. Importers are said to be  buying dollars at rates like Rs 275 to the dollar! The Government instead of collecting all the dollars that come in,  allows the banks and private dealers to collect the dollars sell them, profiteering as they wish, and go begging for foreign fund from Bangladesh- from the Middle East and Minister Basil is on the run to beg from India. 

What can be done? We have to step back to the time before we started following the IMF- that was from the day we became independent- from 1948 till the IMF took charge at the end of 1976. We were not a country in debt to anyone. We carefully collected all dollars coming in to the Treasury and did not have banks and private currency dealers collecting dollars, fixing their own rates of exchange, and making profits as they please.  We did allocate dollars for essentials first and thereafter made small allocations to import non essentials but useful items life fridges, cars etc. No dollars   were   given for foreign studies. This was how we managed and that is essentially the blue print we have to follow to get out of the current quagmire.   

It was the IMF that advised us to spend and live on loans and the IMF has to take the blame and as advised by the Economist decide to forgive the debts we owe.  

The country had two budgets- a foreign exchange budget  and a Rupee budget.  The foreign exchange  budget was entirely fed by dollars which we carefully collected from exports and tourists etc. The Rupee budget was fed from taxes and printed Rupees.  

I happened to be in the thick of the administration in the pre 1977 period as a high ranking officer of the Administrative Service. Once in 1970 I was in charge of allocating foreign exchange to small industrialists  and every small industrialist was given an allocation to import items that were required for manufacturing what the country needed. Small Industries were highly developed and our country produced all its textiles. When I was the Government Agent, some Divisional Secretaries had to manage powerlooms.  They were adept at it and our Hakmana Poowerloom suiting was even sought by people from London, UK. 

What has to be done: Collect all the dollars and handle the totality of development.  

Instead of importing consumer goods that are today in short supply, we should be making them. In 1971, my officers slaved for three months from six to midnight closeted in the science lab at Rahula College, to find the recipe to make crayons and Member of Parliament Sumanapala Dahanayake, in his capacity as the President of the Morawaka Cooperatives,  under my personal supervision,  established Coop Crayon in two weeks working on a 24 hour a day basis. Coop Crayon was equal in quality to the Reeves crayons and my blood boils today when I see Crayola Crayons on sale in Sri Lanka!. That Coop Crayon became  the flagship industry of the Divisional Development Councils Programme, of 1970-1977. 

 The country has administrators and politicians who can undertake this task, bringing incomes to the people and making what the country needs. It will usher in an economic revival which is eagerly awaited today. It is a task that can be accomplished.  

I can vouch for success, as I did establish the Youth Self Employment Programme of Bangladesh, a task which the ILO had failed earlier,  within nineteen months as the Commonwealth Fund Consultant to the Ministry of Labour and Manpower, and also trained Bangladeshi youth directors and youth workers in economics and extension methods to manage after my two year consultancy ended. This Programme is  today the premier employment creation programme the world has known, having guided three million youths to become self employed.  Bangladesh does not dance to the tune of the IMF! 

Garvin Karunaratne, Ph.D. Michigan State University,  

5 th December 2021 

Author of: 

Microenterprise Development..The Way Out  of the IMF and the World Bank and IMF Stranglehold(Sarasavi:1997) 

How the IMF Ruined Sri lanka & Alternative Programs of Success(Godages:2006) 

How the IMF Sabotaged Third World Development(Godages/Kindle:2017) 

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