The Sri Lankan Economy in the Doldrums-All due to following the IMF.
Posted on December 21st, 2023
By Garvin Karunaratne Ph.D. Michigan State University Former SLAS, Government Agent, Matara
In the Seventies, the IMF took on the new role of prescribing the path to be taken by the Third World countries to run their economies. This was the Structural Adjustment Program the IMF foisted on every country that sought financial help. President Ronald Regan and Prime Minister Margaret Thatcher under the advice of Professor Milton Friedman of the Chicago School of Economics built up the Structural Adjustment Programme and the task of introducing it to the Third World countries was entrusted to the IMF.
In the Early Seventies, the Oil Sheiks increased the price of oil threefold and many countries had to flock to the IMF for help. The IMF was the institution established by the United Nations to help and guide all countries in financial matters.
Since gaining independence the Third World Countries had to manage their finances. The incoming foreign exchange, mainly from exports, was carefully collected and spent with great care, firstly for essential goods and items that were required for national development. I speak through sheer experience. I was in 1970, in charge of allocating foreign exchange for small industrialists in Sri Lanka. We registered them after inspection where we carefully looked into what they produced, and whether it was required for our country. In case their production required any item imported- raw material or machinery, an allocation of foreign exchange was allowed. We were extremely strict and one SLAS officer was sacked for making a fraudulent allocation. Anyone could apply for foreign exchange for travel or imports. Each case was looked into in detail by the Controller of Exchange of the Central Bank. No allocation of foreign exchange was made for foreign studies unless the study could not be done in the country or the study was required for national development. A budget deficit was not heard of. It was a strictly controlled situation because the country had to manage with the foreign exchange it could collect. We had no other option whatsoever.
Countries had two budgets, a Foreign Exchange Budget and a Local Currency Budget. The foreign exchange budget had to manage all our foreign expenditure, within the incoming foreign exchange while the Local Currency Budget was managed with tax collection supplemented by printed local currency
The IMF Model- the Structural Adjustment Programme, liberalized the use of foreign exchange. The IMF prescribed that the countries should allow anyone any amount of foreign exchange for everything luxury travel, for importing anything, for foreign studies, and advised the countries to borrow foreign exchange if the country could not meet the demand. The IMF initially, gave loans at low interest and even gave periods of grace, when no repayment was charged. This helped the countries to meet the additional demand, and the leaders did not care about borrowing because they may not be in charge when the loans had to be repaid. President Jayawardena who agreed to our following this method is responsible for starting a process that will eventually make our country bankrupt. All succeeding Presidents have followed this method and have gradually increased the foreign debt. When President Gotabhaya left our foreign debt was $ 56 billion. I am dead certain that today the foreign debt has increased to over $ 60 or even $ 70 billion as we are yet borrowing to live- like getting in foreign oil giants to come and sell oil and petrol and we will of course be indebted to them. It is unfortunate that our leaders do not have the brains to understand basic facts.
Treasury Secretary Mahinda Siriwardena says of our financial crisis: At the root of this crisis are long-standing structural weaknesses in Sri Lanka’s economy.”(FT:19/12/23). The structural weakness was created at the end of 1977, when Sri Lanka agreed to follow the IMF”s Structural Adjustment and commenced allowing people to use foreign exchange freely and met this with loans. Before that, there was no structural weakness as we spent the foreign currency we collected.
Even a small commercial entrepreneur, a sweets peddler on the street, will know that this Model of extravagant spending, without matching the expenses to what is available is a guaranteed recipe for disaster, but the IMF bluffed its way through, by retaining the likes of erudite professionals like Joseph Stiglitz and Jeffery Sachs, with whom no one could ever argue and win.
The IMF laid down various conditions that had to be followed.
The conditions laid down were carefully decided to help the Developed Countries. Paul Volker tells us of how the conditionality was decided. As Chairman of the Federal Reserve, along with administrative colleagues, major foreign Central Banks and especially the IMF, could arrange stop gap official financing and set out appropriate conditions for the heavily indebted borrower countries (determined) out of our common concern about threats to the American and the global banking system”(From Banker to the World)(From my book:How the IMF Sabotaged Third World Development:Kindle/Godages)
The funds obtained on loan was actually used to pay the debts and because the debts were to the IMF and financial institutions of the Developed Countries the foreign exchange that came in was shunted back with profits (the interest), back to the Developed Countries. However the country’s books recorded the loan as a debt and this is the how the foreign debt has ballooned.
Imports were not to be controlled. We even imported Kiri Ala this year!
The incoming foreign exchange was to be collected by the banks and disbursed to applicants. The banks were to decide the exchange rate at which they would buy and sell the foreign exchange that came into the country. It was no longer to be controlled by the Government. It was supposed to be done by the process of supply and demand, but because the relaxed use of foreign exchange caused a great demand and when the supply was short, the local currency was inevitably devalued. Devaluation meant that all exports were discounted to the amount of the devaluation. In 1978 Sri Lanka devalued the Rupee by 101%. (Rs. 15.70 to Rs. 31.50) Devaluation also meant that the Country had to pay 101% more for imports. In 1978 our Rupee was valued at Rs 15.70 to the Sterling Pound. Today(2023) the value of the pound is Rs 401.. Over the period 1978 to today(2023).Our Rupee has been devalued from Rs 15.70 to Rs 401. This extent of massive devaluation tells us the poverty that has beset Sri Lanka purely by following the IMF’s Structural Adjustment.
A High-interest rate was enforced. This meant that entrepreneurs in the country had to obtain loans at high-interest rates. In Sri Lanka, when this Neo-Liberal- Free Trade Model was enforced, the bank loan rate was raised to 25%. The local entrepreneurs could not compete with the imports that came in without paying tariffs or paying low tariffs. The result was that local entrepreneurs gave up their businesses. Instead, they found easy money by depositing the money in Fixed Deposits. Imports took the place of local production and this increased the debt of the country. This was advantageous to the Developed Countries because they found buyers for their manufactures.
The Private Sector was enthroned as the engine of growth and the Public Sector activities were abolished. The problem is that the aim of the Private Sector is to gain the maximum profit while the aim of the Public Sector is the development of the Country. It is the activities of the public sector that created development and with this one shot the IMF has effectively banned future development. Naturally, the last real development program Sri Lanka had was the Divisional Development Councils Programme of 1970 to 1977, where I myself played a cardinal role as the Government Agent of the Matara District. . Since then we have not had a single development programme. I have been telling this again and again. It is up to the IMF to insist that Sri Lanka have a new development programme to make what we need.
Every country had built up a commercial infrastructure to enable development. This included guaranteed prices for producers, subsidies for producers, and loan schemes to spur production and these had to be abolished. In Sri Lanka, this included the Marketing Department that offered high prices for vegetables and fruits and simultaneously conducted sales at fair prices to consumers through a network of small shops in he City of Colombo to avoid inflation. The aim of the Marketing Department was to break even and therefore kept a margin of around 15% to cover cost of transport and wastage, while the Private Sector traders kept a margin of 100%. It also ran a Cannery that purchased stocks of fruits and produced jam, food preparations and juice, making the country self sufficient achieved within three years(1956 to 1959).thereby saving foreign exchange spent for imports. There was the Cooperative Wholesale Establishment that purchased essential items abroad and sold keeping a low margin to avoid importers charging high prices. The Small Industries Department had a Textile Department that imported cotton yarn and guided handloomers to get into production. It also provided expertise for cooperative powerlooms to make fabric. We achieved self sufficiency in making textiles. Thus Sri Lanka had a developed textile industry. This entire commercial infrastructure necessary for national development was abolished at the instance of the IMF on the grounds that the Public Sector should not deal with commerce. This was inimical for development..
The IMF advised us to obtain Foreign Investment. Currently the Third World Countries are bending backwards to entice foreigners to invest in Sri Lanka.. . One area of Foreign Investment is Water. In Ghana, Opening up water services for investors mean that foreign companies come in, establish water storage and purification systems and sell water to the people. They(foreign companies) collect profits for ever. This is the process set up by the IMF for capital(foreign exchange ) to flow back from the Third World to the Developed Countries. Five miles on the Gampola Nuwara Eliya Road a foreign investor is building a small hydro scheme.
Water services and purification systems are simple well known devices that can be easily set up by local entrepreneurs, but the locals are not provided with inducements like tax haven periods and loans at reasonable interest to get into business.” What has happened when foreign investors invest in water is that the local resource of water too has been converted to foreign exchange to flow from Sri Lanka to the Developed Countries!
Third World countries have enticed McDonalds, Pizza Hut and such Multinationals to come in. They bring in a small sum of foreign exchange initially, get into local trading and take away the profits for ever in our dollars, without paying any taxes. Local entrepreneurs are not offered the tax free havens and at the moment bank interest is at high interest.
Overall all the economies of the Third World got restructured and foreign exchange flowed from the Third World Countries to the Developed Countries.
Tremendous funds were sent out of the Third World countries to the Developed Countries. The debt service alone flowing from Developing Countries to the Developed Countries amounts to $ 600 billion annually. This amounts to five times the Aid budget. The WTO’s Agreement on Intellectual Property (TRIPS) collects $ 60 billion annually. (Jackson Hickel: ‘Aid in Reverse: How Poor Countries develop Rich Countries’, in Global Policy(newleftproject.org)
The IMF when confronted with the fact that following their Model of Development meant that the countries became indebted and could no longer continue to exist, came up with the Heavily Indebted Poor Counties Initiative (HIPC), by which they wrote off some debt, but also compelled the countries to open their economies further for exploitation by investors. When the IMF forgave the foreign debt of Ghana the new conditionality enforced the privatization of water services and opening up of agriculture for foreign companies. Though Ghana was given a reprieve of $ 4 billion in 2006, the liberal economy without exchange controls and free imports meant that by 2011 the foreign debt had ballooned to $ 13.4 billion.”
Thus as far as Third World countries are concerned foreign investment bore a negative result.
On the whole every aspect of the IMF Model caused poverty in Third World countries and created a situation where foreign exchange flowed from the Third World back to the IMF and the Developed Countries.
Yet the IMF holds on to this Neo liberal-Free Trade Model, because the aim of the IMF is to make our countries indebted. It is upto the IMF to understand their mistake and provide a growth strategy. The single strategy used by the IMF is to impose Austerity, which only brings about a transfer of riches from the poor in that country to the rich. The rich are supported as their life style and mode of living- purchase of luxury cars and luxury items, travel, sending their offspring for foreign education and holidays all create a flow of foreign exchange from the Third World countries to the Developed Countries.
This is not a Model for Development; instead it is a Model designed to make the Third World countries indebted , create the flow of foreign exchange from the Third World countries to the Developed Countries, in short to make the Third World countries ‘colonies’ of the Developed Countries.
Isn’t it sad that the IMF despite its failures over the past four decades has failed to find an algorithm to bring about growth and prosperity. My book: How the IMF’s Structural Adjustment Destroyed Sri Lanka(2022) and my earlier three books documents this story of how the Third World countries were gradually brought under the IMF control. Their Neoliberal Model of Development actually enriched the Developed Countries at the cost of Third World Countries.
It is upto our leaders to ensure that loans are obtained for development purposes only and not used to provide for luxury living, the import of luxury cars and luxury travel all for the rich.
Following the IMF Model of Development will soon take Third World countries to their grave.
The IMF has to admit that their Neoliberal Model of Development has totally failed. The IMF should actively search for a development paradigm that will bring about growth, incomes to the people and alleviate their poverty. Let me hope that while giving Sri Lanka the $ 3 billion tranche the IMF will also insist that Sri Lanka will immediately advise the Government to implement a production creation cum poverty alleviation programme like the DDCP Programme of 1970-77.
It is high time that the IMF realizes that their Structural Adjustment Programme actually structures Third World economies to become more indebted, to become bankrupt and also creates poverty. Is it not sad that IMF experts fail to understand this basic fact. My four books critiquing the IMF and the World Bank prove this fact to the hilt.
It is also sad that none of our Universities teach, research and study how the IMF has actually ruined all Third World countries by making them indebted. It is hoped that at least one of our Universities will teach, research and actually build up a new paradigm for development.
Garvin Karunaratne, Ph.D. Michigan State University
Former SLAS, Government Agent, Matara, garvin_karunaratne@hotmail.com
21/12/2023
Author of
Microenterprise Development..The way out of the IMF Stranglehold, Sarasavi 1997
How the IMF Ruined Sri Lanka and Alternate Programmes of Success, Godages, 2006
How the IMF Sabotaged Third World Development, Godages/Kindle 2017
How the IMF’s Structural Adjustment Destroyed Sri Lanka., Godages , 2022