Sri Lankan Economy has floundered. Is there a way ahead?
Posted on December 26th, 2021

By Garvin Karunaratne 

The economy of Sri Lanka has come to a situation where the Government has allowed it to freewheel, without any controls. Going on this path It is  purely a matter of time-  for the economy to totally crash. The Aim in writing this Paper is to find a solution to the present mayhem where we do not have funds even to pay for essentials.  

Perhaps how countries have suffered and faced similar crisis in the past may offer us ideas. 

In 1997 The Asian Giants- Malaysia, Indonesia, Thailand,  Southern Korea all crashed.  

 In 1995, the World Bank had said that Thailand was the world’s  fastest growing economy. 

 Of Thailand,   in 1996, export growth slumped  from over 29% to zero. The stock market lost two thirds of its value.  The country was battered by speculators into a sharp depreciation- the biggest finance company collapsed. Two thirds of all finance firms were suspended. The IMF was called in to arrange the largest ever bail out”.( From Thailand Boom and Bust by Phongpaichit and Baker).  

Of all countries that had crashed economies, Malaysia stands out as the one country that emerged victorious. Other countries had to beg for assistance from the World Bank and the IMF. Indonesia was bailed out with a loan of $ 43 billion,  South Korea with a bail out of $ 56 billion and Thailand with a loan package of $ 17 billion. They were all loans that enabled the countries to survive for the moment and pay later- their foreign debt increased. 

The financial upheaval in Indonesia saw  the fall of its leader Suharto Nicholas Kristof, Jakarta correspondent of the NEW York Times aptly wrote of what happened to Suharto, the Prime Minister of Indonesia: 

What overthrew Suharto was not a guerrilla insurgency,  but a conspiracy of far more subversives- capitalism, markets and globalization; Suharto’s  sleuths never figured how to handcuff them

(Herald International Tribune) 

It has to be understood that Sri Lanka today has been held hostage by international capitalism working through its agent, the International Monetary Fund. 

There was one country that did not go begging for Aid. That was Malaysia.  Mahatir Muhammed the Prime Minister took charge of the economy, collected all the dollars from all the banks. In my words, Mahatir Muhammed declared war with the IMF by doing the exact opposite of the IMF advice. He did not go on bended knees to the IMF. Instead he effectively controlled the economy of his own country. He imposed strict controls on the use of foreign exchange. He did not allow anyone to  spend the money on the import of unnecessary goods. He clamped severe restrictions on the use of foreign exchange. This even went to the extreme of stopping foreign  exchange for Malaysians studying abroad.  There was mayhem in student  circles in the UK.  Some students took leave of studies and went back. Others were compelled to work as waiters and kitchen hands  and pay themselves”(How the IMF Ruined Sri Lanka: 2006:page 238)   In 1958  Mahatir even stopped foreign investors from taking away money.  

In the opinion of Mahatir Muhammed,  

Any country at all which says it cannot control its banks and its banking system- they are not fit to be governments and they should either resign or be overthrown”. (Daily 1/2/1999) 

Malaysia was  the one and only country to get out of the East Asian Foreign Currency Crisis. 

Let us relate  what Mahatir Muhammed did to our present situation.  

Even today the Sri Lankan Government does not collect the dollars that come in. The bulk of the dollars are collected  by the private and foreign banks  and the private money changers who are allowed to fix their own rates to buy and sell. The private dealers collect  dollars or rupees within minutes, while the State banks take at least half an hour of form filling and passport checking. . That is how the government is bankrupt.  The State Banks collect only a fraction of the dollars that come in.  

A funny thing did happen on 2/1/2001- a day, two decades ago. Our two State banks the Bank of Ceylon and the Peoples Bank did not have sufficient dollars to pay a large oil bill and they went hat in hand to the private foreign banks in Colombo. The foreign bank that had collected dollars raised the price to Rs 106, when the rate had been Rs 85 and the two State Banks were forced to buy at the higher price. The Rupee was devalued immediately.  

The Central Bank when questioned admitted that the Central Bank has control over the domestic Rupee(The Island: 17/2/2001) 

In other words the private banks collect dollars that come in and sell it as they like, fix their own rates and this has gone on and even today the banks and private dealers fix their own rates. 

What all this indicates is that even today our Government does not control the foreign exchange that comes in.   Naturally we are today facing the music of not having dollars to pay for essential imports. 

What can be done? The Governor of the Central Bank Minister Cabral has ruled out going to the IMF. Because the IMF will insist on devaluing the Rupee, increase interest rates, privatize State commercial ventures, draw further loans and live on them like what we did in the past. He is right. 

Our leaders jump up and state that we will pay what we owe  next year- some $ 4 to 5 billion to service the foreign debt we owe. It is time for moot thinking whether we need to service and pay any loan outstanding to the IMF and the World Bank purely because we have done everything they have said and we are now facing a crisis due to their wrong advice. 

We have to find out, question ourselves: 

Are we yet collecting all the dollars that come in? No. We allow the private and foreign banks and private dealers to collect, fix rates and sell as they like.   This they have done for decades from November 1977, and at least now we have to collect all dollars that come in like what was done before we embraced neoliberalism in 1977. 

Are we yet being fooled by foreign investors who trade in the local Rupee,  calculate profits in the Rupee but take away profits in dollars from our reserves.  

Are we not yet being fooled by foreign tourist booking agencies that book hotel stay, get the hotel to collect in local Rupees but get paid by invoices in dollars going out of our reserves. Hotel bookings from foreigners has to be collected in dollars.  

Before President Jayawardena foolishly  submitted to neoliberalism and started living on loans, we had a closed economy that was totally controlled. Then we had two budgets a local Rupee budget that attended to all development work. We had a separate foreign budget run with the dollars we collected from imports etc.  Then we spent the dollars we had firstly for essentials and if we had extra we gave small allocations to import cars and fridges etc. We never gave funds for  foreign travel unless it was necessary for our country, Nor did we allocate any foreign funds for students to study abroad. Do we not have to get to this system even now.   

Perhaps how we managed our finances from the day we achieved independence  till President Jayawardena started ,licking the boots of  the IMF is of importance. The fundamental fact is that at the end of 1977 Sri Lanka did not have a foreign debt. 

As much as we have had to restrict imports let us have a programme to make all what we imported. Not long ago we had the Divisional Development Councils Programme(DDCP) of 1970-1977 when we made sea going fishing boats(at Matara), even Crayons equal to the Crayola of today(at Matara), even paper made out of waste Paper(at Nuwara Eliya- Kotmale) agricultural farms ( in every District)and many more,  all done with local Rupees,  all done by local staff. We can easily do it again in months.  That will also provide incomes and employment to the unemployed.  

The Government cannot allow the banks to rule any longer by allowing dollars to whom they prefer. The Government has no alternative but to collect all dollars that come in and spend first for essentials- there should be no kero queues and no milk food  queues. Price controls are inevitable. Essentials first. There will be no money to feed foreign universities and the foreign universities  have even jacked up the fees to bolster their funds It is all a plan to increase the debt burden of poor countries. 

Perhaps a re think of priorities and a firm resolve to go ahead is what is required today. 

Garvin Karunaratne
Author of How the IMF Ruined Sri Lanka , Godages 2006~
How the IMF Sabotaged Third World Development, 2017


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