By Garvin Karunaratne.

When Prime Minister Sirimavo lost the General Election in Sri Lanka in mid 1977, Sri Lanka did not have a foreign debt. During the time of Sirimavo and earlier, Sri Lanka got foreign loans on projects, where once the development project was completed the production brought about due to the completion of the project enabled the payment of the loan. They were all project loans. In 1975, Sri Lanka/s foreign debt was negligible. Then, the foreign debt, only $ 743 million, $ 75 million at the end of 1976 and at $ 750 million in 1977 were all incurred on projects and never on consumption. Thus we have to differentiate between foreign loans taken for projects, i.e.for development and foreign loans taken for consumption.

When President Jayawardena won the elections in mid 1977 instead of continuing the economy as Sirimavo had done , turned to the IMF for assistance. The IMF readily agreed to grant loans provided the Government relaxes rules re the use of foreign loans, allow anyone to use foreign exchange, relax all import controls, in short use the funds of these loans for consumption- to allow the rich to live in luxury. This was a major deviation from the manner we ran the economy since we achieved independence, when we somehow restricted imports and managed without falling into debt. Even in the 1950-1954 period when we implemented the major Gal Oya Development Programme retaining a US firm to build the tank, paid by us in dollars, we had restrictions in place for all imports. The essence was to manage all foreign expenses with the dollars we had. The rest- all development work running all Ministries etc.was done with printed Rupees.

The Minister of Finance Mr Ronnie de Mel in his Budget Speech of 1978 was over the moon regarding changing the modus operandi in running the economy. :

We cannot go round the World begging for Aid like international beggars for ever. We must get out of this vicious circle of no growth, stagnation and mounting internal and external debt.”

An year later,President Jayawardena was highly taken up and thought of it as a wonderful achievement,. In his words:

We adopted a package of new economic policies which envisaged a sweeping departure from a highly controlled, inward looking welfare oriented economic strategy to a more liberalized, outward looking and growth oriented one. Fundamental to the new economic policy was the adoption of realistic rate for the Sri Lankan Rupee with a view to reducing the price distortions arising from the previous attempts to maintain an over valued currency by means of stringent trade and payments control. The then prevailing multiple exchange system was unified and the Rupee was allowed to float. The resulting trade liberalization was expected to revive domestic industry by freer flows of raw material, spares and machinery by higher capacity utilization and by greater competition which at the same time was expected to provide better export incentives by inducing the import substituting industries to expand outward to export markets.” ( Address to the Federation of Economic Organizations of Japan, 12/09/1979, from Peace Unity and Coexistence by JR Jayawardena,Govt Press, 12,9,1985.)

Creating any production of any sort was totally not possible because, the bulwark of production oriented development tasks by various Government Departments was either totally abolished or sidelined, as dictated by the StructuralAdjustment Poliicy which the IMF forced us to follow-the Department for Development of Agricultural Marketing which purchased vegetables and fruits and ran a successful cannery was totally abolished. Other Departments like Small Industries and many development activities of other Departments were totally curtailed on the grounds that the Private Sector was to be the engine of growth and the officialdom that had attended to development tasks were confined to the barracks- finding some work to attend to.

This process forced on Sri Lanka inevitably caused total disaster as stated by the The World Bank in 1990:

In 1986, the deterioration of the economy had become evident. The growth rate of the GDP slowed to under 4%. Unemployment rose to around 17% and gross official reserves to less than two months’ imports.”(Trends in Developing Econmies:1990.

It is important to note that this utter deterioration had happened within eight years of following the Structural Adjustment provisions!

The foreign debt balooned to $ 1845 million by 1980, to $ 4063 million by 1986, to as much as $ 6723 million by 1993, to $ 9407 million by 1995 and $ 9191 million by 1996.

When Chandrika took over in November 1994, the foreign debt was at $ 9.7 billion and there was no turning back. The Development Infrastructure that been developed from 1948 to 1977 and which had achieved the country becoming self sufficient in paddy, the staple crop and all other development programmes had been either abolished or sidelined and there was no turning back.

Once in around the late Eighties on my trip to Kataragama, at Ambalantota I turned towards my office in 1958 and then my office covering the Southern Province for paddy purchases and rice milling was a part of an integrated complex including a large Lewis Grant Rice Mill, the summun bonum of the day that milled a thousand bushels a day. Over a hundred lorries of paddy were accepted a day. When the Mill was switched on, every Monday morning it will work nonstop till Saturday evening when it was switched off for cleaning and resurfacing the rollers on Sunday. If it stopped otherwise I had to interfere and get it working and I was held personally responsible. The Mill had been abandoned and was in pieces. The land some five acres was apportioned to various departments that had fenced them in and total neglect was the order of the day. The machinery which we doted on and cared for with our lives was in pieces, strewn everywhere. It was a scene that I could never have believed. That was what did happen to all over the island under President Jayawardena’s move to follow the IMF. The development infrastructure was in tatters and there was never a turning back.

The annual foreign exchange deficit is also an important indicator of development. In my words, Sri lanka was a country that could boast of the fact that it held a credit of $ 170 million in its foreign exchange budget of 1977. In less than five years of liberalization the foreign exchange deficit was as much as $ 892 . In 1995 this figure was at $ 997million.”

This increase in foreign exchange deficit happened due to the major changes that were made in the economy from the end of 1977. In 1980 the Minister of Finance boasted

We liberalized the economy and did so effectively and thoroughly.’(Budget Speech:1980)

Both President Jayawardena and Finance Minister Ronnie de Mel were taken for a ride. As the erudite South Asian Commission on Poverty Alleviation commented in 1992:

The Industrial Countries are for the first time since World War II are in need of markets for their produce. So they have put into effect the Structural Adjustment programme… the industrialized countries are pressurizing the reciepients of Structural Adjustment loans to open their economies to goods from them:(From; Meeting the Challenge:1992)

In this process of importing what we could have made the loans we took ended up in the donor countries in some form or other- for holiday travel, for financing their universities etc, while leaving the loans as a debt on Sri Lanka. It was a grand manipulation to make us fall into debt.

Sri Lanka’s foreign debt balooned to $ 11.3 bn by 2005 and the IMF backed out of giving loans. Then we sought finance somehow and even raised funds through issuing International Sovereign Bonds(ISB) at very high interest rates. At the end of 2014 our foreign debt was 42.9 billion and during the Yahapalana 2014 to 2019, as much as $ 12.5 billion of ISBs were taken. Yet none of these funds were utilized to create any production. Instead, they were used for extravagant living. In 2022 the debt had reached $56 billion and today in June the Government talks of foreign debt below $ 50 billion, which is very doubtful. 

To be realistic what we can do and have the immediate ability to do is to find an agloritham of action to get into producing what we import. This too has to be on Government sector programmes because the private sector investors have fairly given up enterprise development due to high interest rates, and are satisfied with parking their capital in banks and enjoying high interest rates.

Thus the only option is to concentrate on import substitution type of programmes, making what the consumer needs. .This will reduce imports and help the country to save foreign exchange.

In the living memory of some of us we can recall the Divisional Development Councils Programme of the days of Prime Minister Sirimavo. It was directed by Professor Haalso deS Gunasekara, the eminent Professor of Economics of the University of Peradeniya and it was successful in training thousands of youths to become scientific farmers and handle livestock. It created employment for 33,300 youths and many new industries like making paper at Kotmale and building motor fishing boats and Crayons at Matara were very successful.

May our leaders consider such an employment cum poverty alleviation programme urgently,

Garvin Karunaratne

former GA Matara.

1 st July 2023