Part 5: Errors of Judgement, IMF, and Potential Solutions to Avoid Bankruptcy -A candid study and an action plan Economic and social development for Sri Lanka
Posted on May 26th, 2023

by Professor Sunil J.  Wimalawansa

Consequences of IMF loans:

Under IMF-imposed policies, Sri Lanka has witnessed the dramatic deterioration of many local industries.  Sri Lanka had sold off its profitable public sector enterprises such as the Tire Corporation, Sugar Corporation, Milk-food Corporation, Air Lanka (which used to be Sri Lanka’s national airline), Ceylon Transport Board, and textile factories at Tulhiriya and Veyangoda.  Due to multiple reasons, the partnership of Air Lanka, Sri Lanka’s national airline with Emirates, miserably failed.  It did not economically affect Emirates, but Sri Lankan airline went down the drain—our assets.

It has been reported that these state-owned enterprises were sold to the local and foreign private sectors for a fraction of their value based on commissions earned.  Subsequently, in many cases, local and foreign owners have sold these valuable assets at large profits, made money, and left the country, leaving behind unpaid loans, wages and bills, and abandoned factories.  So, who did that to Sri Lanka?  Sri Lanka has also seen unreasonable price increases under privatisation.  For example, telephone charges, cooking gas, and gasoline (petrol) prices have increased by over 200-1,000%.  With the inability to service current loans, if other loans are taken, it will make the conditions much worse.

There is some rationale for selling those highly subsidised state-owned enterprises that lose money.  However, selling profitable assets such as the national airline, electricity board, telecom, petroleum corporation, etc., is another scandal.  While people can argue lending from the IMF and World Bank to developing countries further increases the debt burden, curtailing self-sufficiency and making developing countries even poorer in the long run.  It also makes it difficult to sell goods produced in developing countries to the industrialised countries.  

Unfortunately, these policies have resulted in increased debt, decreased local production, increased prices, higher inflation, increased unemployment, and a reduction in the value of the local currency.  It is time to break away from this vicious cycle of stagnation and mounting international debt.  However, open economies propagated by the World Bank and IMF—the West had benefited a handful of countries such as Singapore, Hong Kong, and Ireland. Still, many developing countries have been unable to escape poverty. 

Conversely, a closed economy such as North Korea and Russia are apparent self-inflicted disasters.  However, most developing countries, including Sri Lanka, fall in between and continue to have problems lifting their heads above water.  Sri Lanka must develop methods to attract FDIC and have plans to pay off and get rid of loans speedily.  If opted to seek more loans (with the goal of more pilferage of funds) to pay off existing loans, or in the disguise of projects, it will further increase the debt burden, accumulation of interest payments, pushing to selling of our national assets—classic loan trap (i.e., stupidity).

Fundamental errors made by the Sri Lankan government

The government made several critical policy errors over the past three decades.  One such was abolishing grass-roots-based organisations, such as the Paddy Marketing Board, CWE, Marketing Department, etc., that helped millions of ordinary people.  It eliminated the opportunities for farmers to sell their products at a reasonable price and provided a formal opportunity for private businesspersons to exploit farmers.  These have resulted in further reductions in local production, increased consumer prices, and increased cheap imports.  Due to the pressure from intermediaries and traders (primary beneficiaries), and failure to sell their products at a reasonable price (manipulated by corrupt officials), many farmers have committed suicide over the past few years, adding insult to injury.  Does anyone take responsibility?

 Government must curtail corruption and break up of mentioned monopolies to minimize vicious cycles to protect its citizens.  For example, re-establishing the village-based cooperative organizations and cultivation officer positions that empower local people, enhancing their production (local selling-purchasing-bartering system, which also minimises transportation costs), and improving the supply chain and farmers’ income and living standards.  Bringing farmers out of the poverty trap needs a fool-proof economic revival system.

Adopting outward-looking policies

Without economic success, Sri Lanka will not be able to maintain peace, harmony, unity, and prosperity, or for that matter, national security.  Irrespective of political interferences -settlements, an improved economy will resolve many inherent social unrest and political stability and enhance the economic and social advancement of the country.  Social unrest, however, will disappear once the economy improves and people are not starving.  On the other hand, continuing loan traps, devaluation of rupees, and monetization add to inflation, increase the cost of living, and enhance poverty and misery for most Sri Lankans.

The above-mentioned is another reason the government must focus on sustainable macroeconomic improvements.  The government is not an employment agency for parliamentarians and ministers or a loan agency.  Instead, it must implement beneficial laws to facilitate growth and eliminate unnecessary and outdated regulations.  However, increasing subsidies is not the right approach, which would further increase the local debt burden.  A correct and balanced approach will help individuals and the business community prosper.  An improved economy and job opportunities created by the industries lead to increased governmental revenue, allowing paying off existing loans along the supply chain economics.  Such collective actions will lead to fair and sustainable economic and social advancement.

Compared to the rapidly developing neighbouring countries, the profit margins in most Sri Lankan export industries are small.  Rather than increasing the price of products, which will eventually phase one out of the market, firms should consider decreasing the cost of goods and production costs.  A significant reduction of overall production costs is achievable through reducing the cost of raw material, supply chain and process improvements, and minimising or eliminating non-value chains. 

Prioritising key areas, especially in manufacturing and development, is necessary before moving into less demanding or essential places.  In contrast to China and India, the market within Sri Lanka is petite.  Therefore, the strategic focus should be to produce high-quality goods, mainly branded products, for export to Asia and other foreign markets.

Text Box:  A broader macro-economic vision, incentives for local production (e.g., increase local availability of fertiliser at affordable cost, improve food storage facilities and transportation), and tax holidays to start new businesses and attract foreign investments are also necessary for economic growth.  This is precisely what Ireland successfully did a few years ago with their supply-side policies.  They became the Celtic tiger” quickly because substantial tax cuts for foreign investments led to a massive influx of foreign direct investment.

Although tax cuts stimulate growth (as illustrated in supply chain economics), they must be done cautiously and strategically: not for political reasons, to favour cronies, or to attract votes before an election.  Haphazard major tax cuts will likely increase budget deficits, inflation, job losses, and defaulting loan-interest payments. The above example illustrates the importance of FDIC in developing a country, rather than dependence on international loans that worsen the situation (supply chain economics—Regonomics).  Political uncertainty, weakening and/or unstable local currency, failure to develop infrastructure, outdated laws, and education system, destruction of forestry and the environment (social injustice), and ongoing corruption discourage foreign countries and firms from investing in Sri Lanka. 

Most of these problems can be dealt with relatively quickly with honest/ transparent, forward-looking governance and dedicated strong leadership willing to take bold, candid steps, including extraordinary measures.  Therefore, FDIC will go hand in hand with the honesty of government transparency and less legislative restriction, a lack of which has been a root problem in Sri Lanka and other developing countries.

One should also remember that foreign investors are not interested in developing Sri Lanka or any developing country.  Their sole interest is profits.  Business enterprises and investors will move in to take advantage of tax breaks, cheap labour, perhaps weaker labour laws, and ineffective environmental protection laws (see Truth of Capitalism).  But the government should harness its strength and efficiency to capitalize on these medium-term investments to tie into Sri Lanka’s long-term development plan while proactively minimizing potentially harmful influences and the need for loans.

Effects of globalization

With globalization and the expansion of tourism (especially the lower economic end), adverse social and foreign influences, such as illegal drugs and abusing children, are likely.  Over the past Text Box:  decades, these have increased in the southern coastal region of Sri Lanka.  These were associated with expanding uncontrolled adult entertainment, sexually transmitted diseases, drug abuse, alcoholism, misleading advertisements, unethical or culturally unacceptable programs, gambling, illegal activities, fraudulent businesses, alienating habits and distorting Hela history and Buddhism. 

Inefficient regulatory oversight, irresponsible mass media, and the lack of control of material published continue to harm innocent minds and psyches of children and youth.  These have led to dramatic negative changes in attitudes and mentality of some sectors in Sri Lanka.  The editorial staff of the national news media has direct responsibility to curtail such misinformation, prevent dissemination of harmful information, and safeguard the younger generation, who are the country’s future.  What warrants is not government censorship but self-censorship by the media? 

Despite the above, if these are getting out of control, the government should introduce legislation specifying the contents of all television channels and other mass media—a statute on the truth of advertising.  In addition, an introduction of a mandatory period for educational and patriotic programs on television, a limit on the duration and content of advertising, and elimination of untruthful advertising and false propaganda would be helpful to curtail s negative influences.  It might become necessary to enforce legislation with significant monetary damages and provisions to revoke media licenses if they repeat offences, but n must protect from political abuse.

For the past two decades, with the semi-Westernization of cities and suburban regions, there has been a significant increase in the sex-trade and adult entertainment, abuse of women and children, illegal drugs and alcoholism, expansion of casinos and gambling facilities, and other forms of underworld activities.  In addition, violence has seriously impacted the youth across the country, some of which politicians patronise.  In parallel, divorces, underage marriages, spousal and child abuse, illegal abortions, drug addiction, and other sins have also become commonplace.  If this trend and unsafe environment continue, would foreign investors continue to invest in Sri Lanka?  Such was seldom heard of in Sri Lanka four decades ago.  Why now?

Understandably, some of these are known as adverse outcomes of globalization.  The government is responsible for curtailing this vicious cycle of negative social and economic disruption and its repercussions.  These weaknesses led to the deterioration of the health of the country’s workforce with increased absenteeism and sickness, imposed an extra burden on healthcare and industry output, and caused an impact on the national security and economy.

What should be done?

Sri Lankan should not depend on loans or handouts to develop the economy: instead, it needs to expand the FDIC and endogenous development and associated exports to strengthen foreign reserves.  Following the tsunami disaster, the government of Sri Lanka had the golden opportunity to appeal to the West for debt cancellation or favourable restructuring of its existing loans (debt forgiveness or moratorium); but it failed to take this opportunity.

Instead of obtaining further loans, the government should negotiate to decrease or eliminate trade barriers, acquire favourable export status, and get preferential market access in industrialized countries.  Even though these may not immediately impact debt relief, the gains from the increased trade to Sri Lanka would substantially reduce the trade gap and facilitate a sustainable economy in the long run.  The government’s approach of dependence, begging for loans, and handouts is not the right approach for Sri Lanka.

The state must provide honest governance, a ‘safe capital’ environment, enforceable contracts, honour intellectual property rights, and incentivize foreign companies to invest in Sri Lanka.  It must market its new economic policies honestly to the world.  In contrast, selling a country and its assets is like selling soap or salt—one in water ends up with nothing.  All politicians, especially the President, Finance Minister, and Central Bank governors, must proactively engage to provide wide international publicity for the country’s new economic plan and incentives to attract FDIC.  The efforts have been haphazard and unconvincing to date, including from the Bureau of Investment (BOI).

To attract business, the government should offer incentives, like Ms. Ruth Richardson, the former Finance Minister of New Zealand, successfully did on her every visit to a foreign country.  We need to learn from these examples and act appropriately.  Every Sri Lankan politician or diplomat on each foreign trip must make at least one favourable trade deal for the country; otherwise, they should not be allowed to engage in similar travel in the future, representing Sri Lanka.  Does this happen now?  Instead, most foreign travels by ministers using taxpayer funds have become personal/family trade trips, including for prime ministers.

The BOI is the government organization that should champion foreign investments in Sri Lanka.  The BOI authorizes tax benefits—tax holidays, easing imports and exports, and allocating land to foreign investors in Sri Lanka.  However, the negative attitude of the leaders of this organization is hampering progress.  To achieve significant improvement, the BOI needs to have transparent leadership dedicated to the cause without taking bribery and commissions. 

Buercrtic delays should be eliminated

Politicians and senior bureaucrats in Sri Lanka have not been adhering to ethics and the fundamentals of a booming economy.  They have not come to grips with what needs to be done to develop and strengthen the economy.  To minimize social unrest, unethical and forceful religious conversions by I-NGOs and disparaging the main religions in Sri Lanka must be stopped.  Legal measures should be introduced with punitive punishments to prevent exploiting the innocent, children, women, and the poor.  Government must avoid the destruction of the rural economic base and cultural heritage, environmental destruction and deforestation, and converting our cities and urban communities into slums.

Flooding the local market with poor quality, cheap gimmickry imports from China and Taiwan, and food from India will hinder the local production of goods. Failure to curtail these would prevent local farmers from selling their products competitively.  Given their already low margins, local farmers and producers risk their enterprises and will likely go out of business.  Therefore, unwanted and unauthorized imports need to be restricted: if they arrive, either these should be returned or released slowly and systematically to minimise the harm to the local market.

In addition to Western markets, Sri Lanka should make tight alliances with emerging new economies in the Asian region, including India and China.  It is likely that within the next two to three decades, global power and capital markets will shift from the West (i.e., USA and Europe) to Asia, and US dollars may not remain the globally dominant currency.  Asian developments have begun to threaten the Western world, which has controlled global affairs and the world’s economy for two centuries.  This new Asian economic power block should open their markets, especially for developing countries helping each other.  Sri Lanka must be at the forefront of this new economic revolution and embrace the comparative advantages of these newly emerging economic opportunities.

Part six encompasses overcoming the stagnant GDP— reforming subsidies, energy, and taxes.  

Leave a Reply

You must be logged in to post a comment.



Copyright © 2024 All Rights Reserved. Powered by Wordpress