by Garvin Karunaratne
Our Central Bank Governor Professor Luckshman is due to leave on 14 th September. Is important to note that when he assumed duties at the end of 2019 he vowed to follow neoliberal policies, negotiate with the IMF and aim at a stable and sustainable economy”(28/12/2019). He failed and in January 2021 decided that he will move away from an import oriented market economy towards a production oriented strategy”(FT 5/1/2021). The economy of Sri Lanka went into a tail spin due to the fact that Sri Lanka was in debt to the tune of $ 56 billion with a service payment of $ 4 to 5 billion a year, exacerbated due to the Covid epidemic which erased the incomes our economy derived from the Middle East Workers and Tourism. In Professor Colombage’s words, it was a severe situation.
Externally, the country’s foreign reserves
have fallen to less than $ 3 billion, as against the debt commitments of over $
6 billion to be settled within the next 12 months, apart from having to meet
day-to-day import outlays. The banking sector is running short of foreign
exchange. As a result, the US dollar is traded at around Rs. 230 within the
banking circles, despite the Central Bank’s insistence to keep it at Rs. 200
per dollar. The black-market rate is reported to be high as much as Rs. 260 per
dollar.”
Professor Luckshman could only curtail imports
of non essential items but had no further action taken either to collect all
the foreign exchange that entered the country or to get things produced locally
like what Premier Sirimavo did when she created a separate Ministry of Plan
Implementation and head hunted the most eminent economist of the time Professor
HAdeSGunasekera and came forth with the Divisional Development Councils
Programme to create employment and production.
It is to be seen how the new Governor Cabral
would handle the situation.
Sri Lanka was till 1977 a country that was not
in debt. How did a country that had no
foreign debt degenerate to have a foreign debt of $ 56 billion, within the five decades 1978 to today. Perhaps this long story is best detailed in
my article:
Playing poodle to the IMF is not the way ahead
Posted on January 12th, 2020 in Lanka Web.
It is heartening to note that our new Governor of the Central
Bank had understood that the IMF’s neoliberal economics that we have
closely followed from 1978, has miserably failed.(Sri Lanka’s new chief
flays Neo Liberalism”: Economy Next 28/12/19)
Following the IMF since 1978- for over four decades, has made us
become a heavily indebted country, a situation from which there is no return.
My two books, How the IMF Ruined Sri Lanka and Alternative Programmes of
Success(2006: Godages) and How the IMF Sabotaged Third World
Development(Godages & Kindle:2017) which happen to be the only books
that are critical of the IMF’s teachings that also provide details of how
salvation can be reached may be of service. In fact my guru, Professor George
Axinn, Professor of International Development at Michigan State
University in his introduction to my 2006 book: How the IMF Ruined Sri
Lanka wrote: It is hoped that this timely book will enable international
organizations to arrest the trend of failures.”
In detail, in the late 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
imposed on every country that sought financial help. 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 laid down conditions that
the countries had to follow if they are to get financial assistance and
following the neoliberal policies was insisted on.
. The IMF was the institution established by the United
Nations to help and guide all countries in financial matters and no one
questioned what the IMF did.
Since gaining independence the Third World Countries had
to manage their finances. The incoming foreign exchange, mainly from
exports, was carefully handled and spent with great care, for essential goods
and items that were required for national development. I speak through sheer
experience. I was once 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, 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. 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. A small deficit in any year had to be covered in the
next year. It was a strictly controlled situation because the country had to
manage with the foreign exchange it had. 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-for luxury travel, for importing anything, for foreign studies and
advised the countries to raise funds by privatizing State assets and also by
borrowing 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, and the leaders did not care
about borrowing because they may not be in charge when the loans have to
be repaid.
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 Stiglitz and 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)
The funds obtained on loan were actually used to pay the debts
and because the debts were to the IMF and financial institutions of the
Developed Countries. Thus 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.
The incoming foreign exchange was to be collected by the banks
and to be used for imports and payments. The Government provided a list of
items which should not be imported. 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, when the supply was inadequate,
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) This devaluation meant that
our exports were sold at half price while we had to pay double-101% more
for imports.
A High interest rate was imposed. 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 constrained. 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.
The commercial infrastructure that the country had built to
enable development had to be abolished. This included the guaranteed
price scheme for paddy, loan schemes to spur production and these had to
be abolished. In Sri Lanka this also 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 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%. This Scheme helped the
producer because a price higher than what was paid by traders was offered to
producers. Simultaneously the produce was sold at cheap rates to consumers in
cities, at Fair Price Shops. This effectively controlled inflation.
The Marketing Department also ran a Cannery that purchased stocks of fruits and
produced jam, food preparations and juice, making the country self
sufficient 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 imported cotton yarn for distribution
to textile makers. It also guided handloomers to get into production.
It provided expertise for cooperative powerlooms to make fabric. The
Department had a Research Unit at Velona to help the powerlooms. Thus Sri Lanka
had a developed textile industry. We were self sufficient in producing all
our textiles.
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 recommends that countries should obtain Foreign
investment. Currently the Third World Countries are bending backwards to
entice foreigners to invest in Sri Lanka.. Investors come in search of
profits. One area of Foreign Investment is Water. 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. 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 Third World
countries 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 to establish their business. They get into local
trading in the local currency, but take away the profits in foreign currency
for ever without paying any taxes. It amounts to a net loss of our foreign
reserves.
Foreign companies getting into trading in local Rupees – like
Uber etc. also amounts to a net loss of our foreign exchange as though they
calculate profits in Rupees they take away their profits in foreign currency.
One of the latest inroads is hotel bookings by foreign companies over the
internet. Hotel bookings done insist on payment in Rupees to the hotelier, but
the internet companies gets fifteen percent of the payment paid to them in
foreign currency. Again this goes from our reserves. It is sad that our Central
Bank fails to even understand how our foreign reserves are being robbed by
these foreign investors.
Overall all the economies of the Third World got
restructured by the IMF’s Structural Adjustment Programme 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)
Thus as far as Third World countries are concerned foreign
investment bore a negative result.
On the whole every aspect of the IMF’s Structural Adjustment
Programme 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.
Milton Friedman of the Chicago School of Economics, the
author of the Free Trade- Liberalization Neoliberal Model of the IMF died
recently having taken all Third World countries and even some European
countries to their graves.
All these countries have followed the Neo Liberal –Free Trade
Model. This Model also brought riches in billions from the Third World to
the Developed Countries.
Yet the IMF holds on to this Neo liberal-Free Trade Model, like
flogging a dead horse. 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 more poverty in the country. 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 Sabotaged Third World Development(Kindle)
documents this story of how the Third World countries were gradually brought
under the IMF control. Their Model of Development actually enriched the
Developed Countries at the cost of Third World Countries.
As far as economic development is concerned, the IMF Model
of Development is not functioning in the interests of the Third World
countries. Already the ruler of Ecuador has decided not to pay up the
loans, because the loans were non developmental.
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.
It is not surprising that the neoliberal policies imposed on Sri
Lanka by the IMF has resulted in our having accumulated a foreign debt of some
$ 55 to 60 billion, a debt to service which our country has to pay $ 4.8
billion in 2020.
The solution
In view of the fact that foreign direct investment has today a
negative effect on our foreign resources, the only option available to the
Government is to insist that where the profit comes from trading in the local
currency, the profit cannot be taken away in foreign currency. In the days
before the IMF introduced its Structural Adjustment Programme, the USA had to
collect payments for the supply of food under the PL 480 in local currency. .
Then the USA offered this money to US agribusiness firms at below market
interest.(Wessel & Hantman: Trading the Future) The Government has to
understand the basic fact that foreign investment brings a negative
result to our own foreign reserves in case the investors trade in the local
currency.
The only path available to the Government is to follow import
substitution, where we ourselves produce what we import and stop imports. We
save the foreign exchange spent for imports and also find incomes for workers
in the process. This has to be done on a massive scale. Our country has a great
deal of experience in handling import substitution type of industries. We
hand a Marketing Department Cannery that was able to make Sri Lanka self
sufficient in all food preparations, fruit juice and jam. It would be of interest
to note that self sufficiency was achieved within three years-1955 to 1958.
Once we produced around fifty percent of our Paper requirements. During the
Divisional Development Councils Programme of Mrs Bandaranayake in 1971-1977 we
established many successful industries. There was a Paper Making Industry
established in Kotmale, a Mechanised Boat Making Industry was established at
Matara. The Crayon Factory established in Morawaka is well known for its
success. The art of making Crayons was unearthed at the Rahula College Science
Lab at Matara after three month long experiments under my personal
direction. A crayon is a sophisticated product and if we could have produced
crayons and successfully marketed it, which we did achieve, we can be dead certain
of being able to spearhead a programme of import substitution.
That to me is the only method of economic development available
to us.
Over to our new leaders. Hope the message in this Paper reaches
our leaders.
Garvin Karunaratne
Former G.A. Matara
Author of How the IMF Ruined Sri Lanka & Alternative
Programmes of Success(Godages) 2006 & How the IMF Sabotaged Third
World Development(Kindle & Godages)2017
13/01/2020
