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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Thursday, July 13, 2006

Destabilization of Sri Lanka’s economy

The Island: 13/07/2006" by Dr. Garvin Karunaratne. Formerly of SLAS

These are the days when the World Bank and the IMF demand that the Third World follow the Structural Adjustment Programme provisions, which simply mean the death of local production, dependence on imports; unemployment for the our people; the liberal use of foreign exchange far beyond what we have; paving the way for a situation where we have a foreign exchange deficit of almost one billion dollars a year to be bridged either through privatisation (the sale of assets like the hen that lays eggs) or by further borrowing leading our country to become further indebted and throwing us to the wolves of the international community in a bigger way. It has also happened that the foreign banks are ruling the foreign exchange situation of our country, after the ill-advised free float introduced in January 2001. The Central Bank can only control the local currency.

On his last visit to Sri Lanka Mahatir Muhammed said that if a country cannot control its foreign exchange it is not fit to rule itself. The mandarins at the Central Bank fail to yet understand that if they want to control the economy they must first control our foreign exchange. There is no need for the Central Bank to have regional offices in districts when their main task is to do as the IMF and the international community say. I hope the new Governor of the Central Bank has the courage to take the bull by the horns without grovelling before it.

Sri Lanka is a country that has, as a popular saying goes, fallen from the frying pan into the fire. The celebrated Mahinda Chintanaya that boldly laid down the proper self-reliant method, the only process for the redemption of our country from indebtedness, poverty and deprivation to which the country was led under the UNP rule after 1977, is daily receding to the background under the dictates of the international community and the IMF.

The international community, which offers $ 4.5 billion ensures that we will spend it in such a manner that it will go back to the developed countries with interest. The entire mechanism of aid is engineered in such a manner that riches by way of interest, services and trade flow from the Third World to the developed countries. Look at the multinational eateries which have come to be venerated in this country. They rake our rupees and send them back to their respective countries. So are the investors. They come on tax holidays and send their profits back. Though they do not pay any taxes to Sri Lanka, their profits get taxed in the developed country. What an ingenious way to exploit the world!

What is happening today under the very Mahinda Chintanaya is very revealing. The shops are full of all types of imports. Many items that can easily be manufactured locally are being imported. Gone are the days when the government decided what we should import. I have had first hand experience with industries as a state official. We assessed the capacities of the local industries, registered them and gave foreign exchange allocations to import what was necessary––items that we could not make locally.

Now we allow businessmen to import whatever they feel like so that they can make a fast buck. In these days of economic liberalisation what is imported is not in the interests of the country. It is a question of how much profit one can make from it. If one looks around one will see the rusty car parts imported from Japan and Singapore. We have solved their dumping problem by purchasing their "garbage".

At the Katunayake Airport, there was a BMW 500 series offered in a raffle draw. A ticket is $ 250 but when I inquired I was told to pay Rs. 27,000 for a ticket. Why are we importing cars with foreign exchange and selling them for local currency? Who benefits? It is the car dealers and the salesmen and the rich in the country. The national debt increases. The government should encourage our expatriates to send cars as gifts because then we get the cars without incurring our hard earned foreign exchange.

Have we forgotten that George Bush the President, the President of the United States of America imposed a tariff of 30 per cent on imports of steel to save the US Steel industry. Why did we reduce the tariff on imported paper making our Embilipitiya Paper industry go out of business? These are the areas where we have to make decisions in the interests of the country.

We import food easily spending over 50 billion rupees every year. Of this, we can easily produce everything except wheat products for which we have to spend less than ten billion. We can also produce almost overnight many small scale industrial goods. We can easily resurrect the brass industry––making door locks, hinges etc. Let me reminisce of what I did myself.

Under the Divisional Development Councils Programme we established a Crayon Making Factory at Deniyaya in 1982 and till the UNP liberalisation procedures forced its closure in 1978 it produced around a fifth of Sri Lanka’s crayons, saving valuable foreign exchange and also creating employment for local youths. This industry saved over 95 per cent of what was spent on the import of crayons. The only imports were dyes and thanks to my colleague Harry Guneratne, the Controller of Imports, he had the vision to allow us an allocation to import dyes with the funds earmarked for the import of crayons. He immediately reaped a foreign exchange saving of 95 per cent. The process of manufacture was finalised in the school laboratory at Rahula College, Matara, done by school teachers and the Kachcheri staff. The industry was commercially viable in six months. Isn’t this what we have to do both to save our foreign exchange and create employment?

I designed and implemented the Youth Self Employment Programme of Bangladesh in 1982, a Programme that now trains 160,000 a year to become commercially viable entrepreneurs and has so far during the past 23 years had in its fold over a million self employed––easily the premier employment creation programme that anyone can find anywhere.

This was done in a very simple manner without the creation of any new department, just by adding the subject of entrepreneureship to vocational training, where the trainees were taught to draft their own projects to become self-employed. Every trainee who joined the programme to become self-employed, even by making a dress (dressmaking students), or by producing milk (livestock students), producing eggs (poultry students) producing a furniture item (carpentry students), was taught costing and marketing through a practical approach. The lecturers at the training institutes could not wash their hands of the trainees after they passed out. The teachers had to guide the trainees to be successful in the ventures. The training institutes could not close their doors after study hours. Instead the doors were kept open to enable the trainees to use the machinery to make something for sale. No new staff was required. The existing staff was entrusted with the task of enabling the trainees to utilise what they learnt.

In Sri Lanka, we have fully fleged departments with staff that must be made to either deliver or depart. I wanted to buy a quality rambutan plant, and it was not available either at the Colombo 7, the Nittambuwa or the Gannoruwa sales depots. Some of the depots are not economically viable at all. Take the Coconut Development Board offices. They are full of clerks for documentation purposes. There are no coconut saplings for sale! One has to travel all the way to the Walpita Farm to see someone really working. What has happened is that over the years every government took a short cut to generating employment by expanding the staff. We have a host of Grama Nilaradhis, most of them are trained in agriculture. They do very little by way of public service. During my days at Kegalle, the Grama Sevakas were required to work and they organised mass voluntary work campaigns that built roads, culverts etc. to develop the infrastructural facilities at the grass roots level. Some Grama Sevakas were more efficient than the then Divisional Revenue Officers. Take the Land Development settlements. We have hordes of officers who should be required to work with the people on land settlements. There should be long term plans to plant coconut and such long time crops while simultaneously there should be cultivation of vegetables etc. The marketing has to get organised. The World Bank and the IMF only know how to mislead the Third World countries and to ruin their economic development because it is then that the developed countries can sell their products at massive profits. It is they who destroyed the infrastructure of marketing in Sri Lanka comprising the Department for the Development of Marketing , the Paddy Marketing Board and the network of cooperatives that worked as their purchasing agents, which had been painstakingly built over decades.

In my days in Bangladesh, when working on the Youth Self Employment Programme, we stayed away from both the IMF and the World Bank. They dictated to the Livestock Department, the Agricultural Department and the Cottage Industries Department. The Ministry of Youth worked parallel to all these departments using their services at the district level, unhindered by the dictates of the IMF. It is necessary to put up resistance to the IMF and the World Bank. I challenge those two institutions to show, if they could, any programme or project anywhere in the world, which can match the Youth Self Employment Programme of Bangladesh.

In fact, the ILO tried hard in Bangladesh in the three years before 1982 to establish a self employment programme but in vain.

As Mahatir Muhammed proved during the East Asian Economic Crisis on 1997, listen to and follow the IMF and any country is doomed to failure. Control the intake of foreign exchange, allocate the foreign exchange according to national needs and not according to the needs of the rich in the country and bring about local production and that is the only way to success.

Sri Lanka sold her right of handling her own foreign exchange, when she free floated the rupee in 2001 according to the dictates of the IMF. Luckily, we have the two Banks the People’s Bank and the Bank of Ceylon to handle the foreign exchange that they get. The foreign banks are allowed to hoard the foreign exchange they collect and they can manipulate the prices. Didn’t the foreign banks in Sri Lanka hoard the foreign exchange they had collected and bid the price upwards when the public banks did not have sufficient foreign exchange to pay a petroleum bill on 25 th January 2001, when the value of the Rupee fell from Rs. 85 to the dollar to Rs. 106 to the dollar?


What the Government did to correct the situation was interesting. It found $ 25 million from the privatisation proceeds of Air Lanka and another $ 25 million from a loan secured from the Asian Development Bank and fed it into the system to enable the rupee to acquire stability (The Sunday Times,March 6, 2001). After the free float of the rupee the government cannot intervene.

The Central Bank has said, "In a free floating regime, the market forces determine the exchange rate. The Central Bank does not intervene in the process. The Central Bank has control over the domestic money supply."(The Island Feb. 17,2001).

As a child, I read The Emperor in New Clothes. All the courtiers and the mandarins dared not say that the Emperor was stark naked. They had to admire the new clothes for fear of incurring the wrath of the Emperor. All it took to tell the Emperor he was naked was the courage of a small boy.

Those mandarins who claim that the free float of the Rupee has been a success must get their heads examined. In fact, no less a person than the Deputy Managing Director of the IMF, Shigemitsu Sugisaki misled us when he commended Sri Lanka for adopting the floating regime. He said that "the authorities adopted a floating exchange rate regime on 23 rd January 2001 and the Rupee has since stabilised". (The Daily News April 23, 2001). He had to sing hosanna for the IMF as otherwise he would have been sent packing like Professor Joseph Stiglitz, the Chief Economist of the World Bank, who pointed out that the advice of the IMF to Indonesia to combat the 1997 East Asian Financial Crisis would bear negative results.

Free Floating is in the interest of the developed countries, because that enables the foreign banks to bid the local currency down by creating a scarcity of foreign exchange. Currently, the US is waging a war of sorts with China to get the Yuan free floated, but the Chinese have resisted.

What has happened to Turkey is an eye opener to us. When the Lira was free floated on February 22, 2001 the Lira immediately dropped 32 per cent in value, leading to a capital flight that briefly sent interest upto 5000 per cent overnight. What happened to the Turiskish Lira is of crucial importance to Sri Lanka. When I went to Turkey in 2005, I was given 2,300,000 Lira for a sterling pound. It is of great interest to note that the value of a Lira had been 330 to a sterling pound in 1983.

What happened was that Turkey got loans on a massive scale for the development of its roads, airports, etc. and this has ended in the country being overly indebted, with the foreign banks causing bidding wars and the IMF manipulating the process from behind the scenes. We in Sri Lanka have just signed a contract to have a dozen fly overs in Colombo. I am told that we are planning a toll road to Kandy. An engineer once proved that the loss of production caused by the use of developed land for the southern motorway is enormous and can never be repaid.

I have travelled on the motorways in Turkey and Mexico. Both are countries where the foreign debt ballooned due to expenditure on motorways and infrastructure. The motorways are empty because the locals cannot afford to buy the petrol to run their cars. Turkey is a country that is far more developed and resourceful than Sri Lanka. If the fate that befell Turkey to devalue its currency from Lira 330 in 1983 to Lira 2,300,000 in 2005, is to fall to Sri Lanka, which is bound to happen, as we continue on the path dictated by the IMF to grab loans and spend on unproductive projects, then there is the risk of our rupee being devalued to such an extent that Rs. 1,352,800 will go for one sterling pound.


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