{"id":118114,"date":"2021-09-14T23:18:43","date_gmt":"2021-09-15T05:18:43","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=118114"},"modified":"2021-09-14T05:54:48","modified_gmt":"2021-09-14T12:54:48","slug":"wither-the-sri-lankan-economy","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2021\/09\/14\/wither-the-sri-lankan-economy\/","title":{"rendered":"Wither the Sri Lankan Economy"},"content":{"rendered":"

by Garvin Karunaratne <\/em><\/span><\/h2>\n\n\n

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\u00a0 to follow neoliberal policies, negotiate with the IMF and aim at a stable\u00a0 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\u00a0 strategy”(FT 5\/1\/2021).\u00a0 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.\u00a0 In Professor Colombage\u2019s words,\u00a0 it was a severe situation.\u00a0<\/p>\n\n\n\n

Externally, the country\u2019s foreign reserves\nhave fallen to less than $ 3 billion, as against the debt commitments of over $\n6 billion to be settled within the next 12 months, apart from having to meet\nday-to-day import outlays. The banking sector is running short of foreign\nexchange. As a result, the US dollar is traded at around Rs. 230 within the\nbanking circles, despite the Central Bank\u2019s insistence to keep it at Rs. 200\nper dollar. The black-market rate is reported to be high as much as Rs. 260 per\ndollar.\u201d <\/p>\n\n\n\n

Professor Luckshman could only curtail imports\nof non essential items but had no further action taken either to collect all\nthe foreign exchange that entered the country or to get things produced locally\nlike what Premier Sirimavo did when she created a separate Ministry of Plan\nImplementation and head hunted the most eminent economist of the time Professor\nHAdeSGunasekera and came forth with the Divisional Development Councils\nProgramme to create employment and production.  <\/p>\n\n\n\n

It is to be seen how the new Governor Cabral\nwould handle the situation. <\/p>\n\n\n\n

Sri Lanka was till 1977 a country that was not\nin debt.  How did a country that had no\nforeign 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\nmy article: <\/p>\n\n\n\n

Playing poodle to the IMF is not the way ahead<\/strong>
\nPosted on January 12th, 2020 in Lanka Web. <\/h4>\n\n\n\n

It is heartening to note that our new Governor of the Central\nBank had understood that the IMF\u2019s neoliberal economics that we have\nclosely  followed from 1978, has miserably failed.(Sri Lanka\u2019s new chief\nflays Neo Liberalism\u201d: Economy Next 28\/12\/19) <\/p>\n\n\n\n

Following the IMF since 1978- for over four decades, has made us\nbecome a heavily indebted country, a situation from which there is no return.\nMy two books, How the IMF Ruined Sri Lanka and Alternative Programmes of\nSuccess(2006: Godages) and  How the IMF Sabotaged Third World\nDevelopment(Godages & Kindle:2017)  which happen to be the only books\nthat are critical of the IMF\u2019s teachings that also provide details of how\nsalvation can be reached may be of service. In fact my guru, Professor George\nAxinn, Professor of International Development at Michigan State\nUniversity  in his introduction to my 2006 book: How the IMF Ruined Sri\nLanka wrote: It is hoped that this timely book  will enable international\norganizations  to arrest the trend of failures.\u201d <\/p>\n\n\n\n

In detail, in the late Seventies, the IMF took on the new role\nof prescribing the  path to be taken by the Third World countries to run\ntheir economies. This was the Structural Adjustment Program the IMF \nimposed on  every country that sought financial help. In the Early\nSeventies  the Oil Sheiks increased the price of oil threefold and many\ncountries had to flock to the IMF for help. The IMF laid down conditions that\nthe countries had to follow if they are to get financial assistance and\nfollowing the neoliberal policies was insisted on. <\/p>\n\n\n\n

. The IMF was the institution established  by the United\nNations to help and guide all countries in  financial matters and no one\nquestioned what the IMF did. <\/p>\n\n\n\n

Since gaining independence  the Third World Countries had\nto manage their finances. The incoming foreign exchange,  mainly from\nexports, was carefully handled and spent with great care, for essential goods\nand items that were required for national development. I speak through sheer\nexperience. I was once in charge of allocating foreign exchange for small\nindustrialists in Sri Lanka. We registered them after inspection where we\ncarefully looked into what they produced, whether it was required for our\ncountry.  In case their production required any item imported- raw material\nor machinery, an allocation of foreign exchange was allowed. Anyone could apply\nfor foreign exchange for travel or imports. Each case was looked into in detail\nby the Controller of Exchange of the Central Bank. No allocation of foreign\nexchange was made for foreign studies, unless the study could not be done in\nthe country or the study was required for national development. A budget\ndeficit was not heard of. A small deficit in any year had to be covered in the\nnext year. It was a strictly controlled situation because the country had to\nmanage with the foreign exchange it had. We had no other option whatsoever. <\/p>\n\n\n\n

Countries had  two budgets, a Foreign Exchange Budget and a\nLocal Currency Budget. The foreign exchange  budget had to manage all our\nforeign expenditure, within the incoming foreign exchange while the Local\nCurrency Budget was managed with tax collection supplemented by printed local\ncurrency, <\/p>\n\n\n\n

The IMF Model- the Structural Adjustment Programme, liberalized\nthe use of foreign exchange. The IMF  prescribed that  the countries\nshould  allow anyone any amount of foreign exchange  for\neverything-for luxury travel, for importing anything, for foreign studies and\nadvised the countries to raise funds by privatizing State assets and also by\nborrowing foreign exchange if the country could not meet the demand. The IMF\ninitially, gave loans at low interest and even gave periods of grace, when no\nrepayment was charged. This helped the countries, and the leaders did not care\nabout borrowing because they may  not be in charge when the loans have to\nbe repaid. <\/p>\n\n\n\n

Even a small commercial entrepreneur,  a sweets peddler on\nthe street, will know that this Model of extravagant spending, without matching\nthe expenses to what is available is a guaranteed recipe for disaster, but the\nIMF bluffed its way through, by retaining the likes of erudite professionals\nlike Stiglitz and Sachs, with whom no one could ever argue and win. <\/p>\n\n\n\n

The IMF laid down various conditions that had to be followed. <\/p>\n\n\n\n

The conditions laid down were carefully decided to help the\nDeveloped Countries. Paul Volker tells us of how the conditionality was\ndecided.  <\/p>\n\n\n\n

As Chairman of the\nFederal Reserve ,  along with administrative colleagues, major foreign\nCentral Banks and especially the IMF, could arrange stop gap  official\nfinancing and set out appropriate conditions  for the heavily indebted\nborrower countries (determined) out of our common concern about threats \nto the American  and the global banking system\u201d(From Banker to the World)<\/em> <\/p>\n\n\n\n

The funds obtained on loan were actually used to pay the debts\nand because the debts were to the IMF and financial institutions of the\nDeveloped Countries. Thus the foreign exchange that came in was shunted\nback  with profits (the interest), back to the Developed Countries. \nHowever the country\u2019s books recorded the loan as a debt and this is the how the\nforeign debt has ballooned. <\/p>\n\n\n\n

Imports were not to be controlled. <\/p>\n\n\n\n

The incoming foreign exchange was to be collected by the banks\nand to be used for imports and payments. The Government provided a list of\nitems which should not be imported. The banks were to decide the exchange rate\nat which they would buy and sell the foreign exchange that came into the\ncountry. It was no longer to be controlled by the Government. It was supposed\nto be done by the process of supply and demand, but because the relaxed use of\nforeign exchange  caused a great demand, when the supply was inadequate,\nthe local currency was inevitably devalued. Devaluation meant that all exports\nwere discounted to the amount of the devaluation. In 1978 Sri Lanka devalued\nthe Rupee by 101%. (Rs. 15.70 to Rs. 31.50)  This devaluation meant that\nour exports were sold at half price  while we had to pay double-101% more\nfor imports. <\/p>\n\n\n\n

A High interest rate was imposed. This meant that entrepreneurs\nin the country had to obtain loans at  high interest rates. In Sri Lanka,\nwhen this Neo Liberal- Free Trade Model was  enforced, the bank loan rate\nwas raised to  25%. The local entrepreneurs could not compete with the\nimports that came in without paying tariffs or paying low tariffs. The result\nwas that local entrepreneurs gave up  their businesses. Instead they found\neasy money by depositing the money in Fixed Deposits. Imports took the place of\nlocal production and this increased the debt of the country. This was\nadvantageous to the Developed Countries because they found buyers for their\nmanufactures. <\/p>\n\n\n\n

The Private Sector was enthroned as the engine of growth and the\nPublic Sector  activities were constrained. The problem is that the aim of\nthe Private Sector is to gain the maximum profit while the aim of the Public\nSector is the development of the Country. <\/p>\n\n\n\n

The commercial infrastructure that the country had built to\nenable development had to be abolished. This included the  guaranteed\nprice scheme for paddy,  loan schemes to spur production and these had to\nbe abolished. In Sri Lanka this also included the Marketing Department that\noffered high prices for vegetables and fruits and simultaneously conducted\nsales at fair prices to consumers through a network of small shops to avoid\ninflation. The aim of the Marketing Department was to break even and therefore\nkept a margin of around 15% to cover cost of transport and wastage, while the\nPrivate Sector traders kept a margin of 100%. This Scheme helped the\nproducer because a price higher than what was paid by traders was offered to\nproducers. Simultaneously the produce was sold at cheap rates to consumers in\ncities,  at Fair Price Shops. This effectively controlled inflation. \nThe Marketing Department also ran a Cannery that purchased stocks of fruits and\nproduced jam, food preparations  and juice, making the country self\nsufficient thereby saving foreign exchange spent for imports.  There was\nthe Cooperative Wholesale Establishment that purchased essential items abroad\nand sold keeping a low margin to avoid importers charging high prices. <\/p>\n\n\n\n

The Small Industries Department imported cotton yarn for distribution\nto textile makers. It also  guided handloomers to get into production.\nIt  provided expertise for cooperative powerlooms to make fabric. The\nDepartment had a Research Unit at Velona to help the powerlooms. Thus Sri Lanka\nhad a developed textile industry. We were self sufficient in producing all\nour textiles. <\/p>\n\n\n\n

This entire commercial infrastructure necessary for national\ndevelopment was abolished at the instance of the IMF on the grounds that the\nPublic Sector should not deal with commerce. This was inimical for development. <\/p>\n\n\n\n

The IMF recommends that countries should obtain Foreign\ninvestment. Currently the Third World Countries  are bending backwards to\nentice foreigners to invest in Sri Lanka..  Investors come in search of\nprofits. One area of Foreign Investment is Water.  Opening up water\nservices for investors mean that foreign companies come in  establish\nwater storage and purification systems and sell water to the people.\nThey(foreign companies) collect profits for ever. This is the process set up by\nthe IMF  for capital(foreign exchange ) to flow back from the Third\nWorld  to the Developed Countries.  Water services and purification\nsystems are simple well known devices that can be easily set up by local\nentrepreneurs, but the locals are not provided with inducements  like tax\nhaven periods and loans at reasonable interest to get into business. What has\nhappened when foreign investors invest in water is that the local resource of\nwater too has been converted to foreign exchange to flow from Third World\ncountries to the Developed Countries! <\/p>\n\n\n\n

Third World countries have enticed McDonalds,  Pizza Hut\nand such Multinationals to come in. They bring in a small sum of foreign\nexchange initially to establish their business. They  get into local\ntrading in the local currency, but take away the profits in foreign currency\nfor ever without paying any taxes. It amounts to a net loss of our foreign\nreserves. <\/p>\n\n\n\n

Foreign companies getting into trading in local Rupees \u2013 like\nUber etc. also amounts to a net loss of our foreign exchange as though they\ncalculate profits in Rupees they take away their profits in foreign currency.\nOne of the latest inroads is hotel bookings by foreign companies over the\ninternet. Hotel bookings done insist on payment in Rupees to the hotelier, but\nthe internet companies gets fifteen percent of the payment paid to them in\nforeign currency. Again this goes from our reserves. It is sad that our Central\nBank fails to even understand how our foreign reserves are being robbed by\nthese foreign investors. <\/p>\n\n\n\n

Overall all  the economies of the Third World got\nrestructured by the IMF\u2019s Structural Adjustment Programme and foreign exchange\nflowed from the Third World Countries to the Developed Countries. <\/p>\n\n\n\n

Tremendous  funds  were sent out of the Third World\ncountries to the Developed Countries. The debt service alone flowing from\nDeveloping Countries to the Developed Countries amounts to $ 600 billion\nannually. This amounts to five times the Aid budget. The WTO\u2019s  Agreement\non Intellectual Property (TRIPS)  collects $ 60 billion annually. (Jackson\nHickel: \u2018Aid in Reverse: How Poor Countries develop Rich Countries\u2019, in Global\nPolicy(newleftproject.org) <\/p>\n\n\n\n

Thus as far as Third World countries are concerned foreign\ninvestment bore a negative result. <\/p>\n\n\n\n

On the whole every aspect of the IMF\u2019s Structural Adjustment\nProgramme  caused poverty in Third World countries  and created a\nsituation where foreign exchange flowed from the Third World back to the IMF\nand the Developed Countries. <\/p>\n\n\n\n

Milton Friedman  of the Chicago School of Economics, the\nauthor of the Free Trade- Liberalization Neoliberal Model of the IMF died\nrecently having taken all Third World countries and even some European\ncountries to their graves. <\/p>\n\n\n\n

All these countries have followed the Neo Liberal \u2013Free Trade\nModel. This Model also brought riches in billions  from the Third World to\nthe Developed Countries. <\/p>\n\n\n\n

Yet the IMF holds on to this Neo liberal-Free Trade Model, like\nflogging a dead horse. It is upto the IMF to understand their mistake and\nprovide a growth strategy. The single strategy used by the IMF is to impose\nAusterity, which only brings about more poverty in the country. The rich are\nsupported as their life style and mode of living- purchase of luxury cars and\nluxury items, travel, sending their offspring for foreign education and\nholidays all create a flow of foreign exchange from the Third World countries\nto the Developed Countries. <\/p>\n\n\n\n

This is not a Model for Development; instead it is a Model\ndesigned to make the Third World countries indebted , create the flow of\nforeign exchange from the Third World  countries to the Developed\nCountries, in short to make the Third World countries \u2018colonies\u2019 of the\nDeveloped Countries. <\/p>\n\n\n\n

Isn\u2019t it sad that the IMF despite its failures over the past\nfour decades has failed to find an algorithm to bring about growth and\nprosperity. My book: How the IMF Sabotaged Third World Development(Kindle)\ndocuments this story of how the Third World countries were gradually brought\nunder the IMF  control. Their Model of Development actually enriched the\nDeveloped Countries at the cost of Third World Countries. <\/p>\n\n\n\n

As far as economic development  is concerned, the IMF Model\nof Development is not functioning in the interests of the Third World\ncountries. Already the ruler of Ecuador has decided not to pay up  the\nloans, because the loans were non developmental. <\/p>\n\n\n\n

It is upto our leaders to ensure that loans are obtained for\ndevelopment purposes only and not used to provide for luxury living, the import\nof luxury cars and luxury travel all for  the rich. <\/p>\n\n\n\n

It is not surprising that the neoliberal policies imposed on Sri\nLanka by the IMF has resulted in our having accumulated a foreign debt of some\n$ 55 to 60 billion, a debt to service which our country has to pay $ 4.8\nbillion in 2020. <\/p>\n\n\n\n

The solution <\/p>\n\n\n\n

In view of the fact that foreign direct investment has today a\nnegative effect on our foreign resources, the only option available to the\nGovernment is to insist that where the profit comes from trading in the local\ncurrency, the profit cannot be taken away in foreign currency. In the days\nbefore the IMF introduced its Structural Adjustment Programme, the USA had to\ncollect payments for the supply of food under the PL 480 in local currency. .\nThen the USA offered  this money to US agribusiness firms at below market\ninterest.(Wessel & Hantman: Trading the Future) The Government has to\nunderstand the basic fact that  foreign investment brings a negative\nresult to our own foreign reserves in case the investors trade in the local\ncurrency. <\/p>\n\n\n\n

The only path available to the Government is to follow import\nsubstitution, where we ourselves produce what we import and stop imports. We\nsave the foreign exchange spent for imports and also find incomes for workers\nin the process. This has to be done on a massive scale. Our country has a great\ndeal of experience in handling import substitution type of  industries. We\nhand a Marketing Department Cannery that was able to make Sri Lanka self\nsufficient in all food preparations, fruit juice and jam. It would be of interest\nto note that self sufficiency was achieved within three years-1955 to 1958.\nOnce we produced around fifty percent of our Paper requirements. During the\nDivisional Development Councils Programme of Mrs Bandaranayake in 1971-1977 we\nestablished  many successful industries. There was a Paper Making Industry\nestablished in Kotmale, a Mechanised Boat Making Industry was established at\nMatara.  The Crayon Factory established in Morawaka is well known for its\nsuccess. The art of making Crayons was unearthed at the Rahula College Science\nLab at Matara after  three month long experiments under my personal\ndirection. A crayon is a sophisticated product and if we could have produced\ncrayons and successfully marketed it, which we did achieve, we can be dead certain\nof being able to spearhead a programme of import substitution. <\/p>\n\n\n\n

That to me is the only method of economic development available\nto us. <\/p>\n\n\n\n

Over to our new leaders. Hope the message in this Paper reaches\nour leaders. <\/p>\n\n\n\n

Garvin Karunaratne <\/p>\n\n\n\n

Former G.A. Matara <\/p>\n\n\n\n

Author of How the IMF Ruined Sri Lanka & Alternative\nProgrammes of Success(Godages) 2006 & How the IMF Sabotaged Third\nWorld Development(Kindle & Godages)2017 <\/p>\n\n\n\n

13\/01\/2020 <\/p>\n","protected":false},"excerpt":{"rendered":"

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\u00a0 to follow neoliberal policies, negotiate with the IMF and aim at a stable\u00a0 and sustainable economy”(28\/12\/2019). He failed and in January 2021 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[57],"tags":[],"class_list":["post-118114","post","type-post","status-publish","format-standard","hentry","category-by-garvin-karunaratne"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/118114","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=118114"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/118114\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=118114"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=118114"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=118114"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}