by Garvin Karunaratne

In view of the fact that our foreign debt has increased from $ 56 billion, when President Gotabhaya ceded power to President Ranil Wickremasinghe, to as much as $96.5 billion by 30 the June 2023- a staggering increase  of some 70% in fifteen months, it is necessary to step back to see how this has happened.

 My Earlier paper: The way Forward, from the Island of 7/1/2022 is a worthwhile read because the Paper tells us what changes need to be done to bring about economic development, to end the economic meltdown of today. .  

Published 11 months ago on 2022/01/7 in The Island

By DR. Garvin Karunaratne

Sri Lanka’s economy finds itself in a situation where one wonders whether the government has allowed it to drift. Perhaps, studying how countries have suffered and faced similar crises in the past may offer us some ideas. In 1997 the economies of Asian giants Malaysia, Indonesia, Thailand, South Korea crashed. 

In 1995, the World Bank said that Thailand was the world’s fastest growing economy.

Of Thailand, Phongpaichit and Baker says, in 1996, export growth slumped from over 29% to zero. The stock market lost two thirds of its value. The country was battered by speculators into a sharp depreciation – the biggest finance company collapsed. Two thirds of all finance firms were suspended. The IMF was called in to arrange the largest ever bail out”. (Thailand’s Boom and Bust. [1998] Phongpaichit and Baker).

Of all countries whose economies crashed, Malaysia stands out as the one country that emerged victorious. Other countries had to beg for assistance from the World Bank and the IMF. Indonesia was bailed out with a loan of $ 43 billion, South Korea with a bail out of $ 56 billion, and Thailand with a loan package of $ 17 billion. They were all loans that enabled the countries to survive for the moment and pay later. As a result, their foreign debt increased exponentially.

The financial upheaval in Indonesia saw the fall of its leader Suharto. Nicholas Kristof, Jakarta correspondent for The New York Times, wrote of what happened to Suharto, the President of Indonesia: “What overthrew Suharto was not a guerrilla insurgency, but a conspiracy of far more subversives – capitalism, markets and globalisation; Suharto’s sleuths never figured how to handcuff them” (Herald International Tribune).

It has to be understood that Sri Lanka today has been held hostage by international capitalism working through its agent, the International Monetary Fund. There was one country that did not go begging for aid—Malaysia. Mahatir Muhammed, the legendary Prime Minister, took charge of the economy, collected all the dollars from all banks. As I have said previously, Mahatir Muhammed declared war with the IMF by doing the exact opposite of the IMF advice. He did not go on bended knees to the IMF. Instead he effectively controlled the economy of his own country. He imposed strict controls on the use of foreign exchange. He did not allow anyone to spend the money on the import of unnecessary goods. He clamped severe restrictions on the use of foreign exchange. This even went to the extreme of stopping foreign exchange for Malaysians studying abroad. There was mayhem in student circles in the UK. Some students took leave of study and went back. Others were compelled to work as waiters and kitchen hands and pay themselves” (Karunaratne:How the IMF Ruined Sri Lanka & Alternative Programmes of Success [2006]. Pg 238).

In 1958 Mahatir even stopped foreign investors from taking away money.

In Mahatir Muhammed’s own opinion, Any country at all which says it cannot control its banks and its banking system – they are not fit to be governments and they should either resign or be overthrown” (Daily News. February 1, 1999).

Malaysia was the one and only country to get out of the East Asian Foreign Currency Crisis. Even today the Sri Lankan Government does not collect the dollars that come in. The bulk of the dollars are collected by private and foreign banks and private money changers, who are allowed to fix their own buying and selling rates. The private dealers collect dollars or rupees within minutes, while it takes at least half an hour of form filling and passport checking at State banks. That is how the government went bankrupt. State banks collect only a fraction of the dollars that come into the country.

A funny thing happened on 2 January, 2001, two decades ago. Our two State banks, Bank of Ceylon and People’s Bank, did not have enough dollars to pay a large oil bill, and they went hat in hand to foreign banks in Colombo. Those that had collected dollars raised the price to Rs 106, when the rate had been Rs 85, and the two State Banks were forced to buy at the higher price. The rupee was devalued overnight.

The Central Bank, when questioned, said that it had control over only the domestic rupee (The Island of 17 February 2001).

In other words, the private banks collect dollars that come in, and sell them as they like, even today the banks and private dealers fix their own rates. What all this indicates is that even today our government does not control the foreign exchange that comes in. Naturally, today we are facing the music of not having dollars to pay for essential imports.

What can be done? The Governor of the Central Bank Ajith Nivard Cabraal has ruled out the possibility of going to the IMF. Because the IMF will insist on devaluing the rupee, increasing interest rates, privatising state commercial ventures, drawing further loans and living on them, like what we did in the past.

Our leaders are quick to declare that they will pay loan instalments due next year, amounting to four to five billion dollars. Do we need to service and pay any loan outstanding to the IMF and the World Bank, as we have done everything they have asked and we are now facing a crisis due to their wrong advice?

Are we yet collecting all the dollars that come in? No. We allow private and foreign banks, and private dealers to collect, fix rates and sell as they like. This, they have done for decades from November 1977, and at least now we have to collect all dollars that come in like what was done before we embraced neoliberalism in 1977. Are we yet being fooled by foreign investors who trade in the local rupee, calculate profits in rupees, but take away profits in US dollars?

Are we not yet being fooled by foreign travel agencies that book hotel stay, get the hotel to collect in local rupees, but get paid by invoices in dollars going out of our reserves? Hotel bookings by foreigners have to be made in dollars.

Before President Jayewardene foolishly submitted to neoliberalism and started living on loans, we had a closed economy. Then, we had two budgets: a local rupee budget that attended to all development work. We had a separate foreign budget with the dollars we collected from imports. Then we spent the dollars we had, first on essentials, and if we had anything left, we gave small allocations to import cars and electrical items. We never dispensed funds for foreign travel unless it was necessary for our country. Nor did we allocate any foreign funds for students to study abroad. Should we not revert to that system?

How we managed our finances from Independence till President Jayewardene started licking the boots of the IMF is of importance. The fundamental fact is that at the end of 1977 Sri Lanka did not have a foreign debt.

As much as we have had to restrict imports, let us have a programme to produce locally all what we import. Not long ago we had the Divisional Development Councils Programme (DDCP) of 1970-1977, when we made seafaring fishing boats (at Matara), Crayons equal to the Crayola of today (at Matara), paper made out of waste Paper (at Nuwara-Eliya – Kotmale), agricultural farms (in every District) and many more, all done with local rupees, all carried out by local staff. We can easily do it again in months. That will also provide incomes and employment to the unemployed.

Perhaps, a rethinking of priorities and a firm resolve to go ahead is what is required today.

Garvin Karunaratne, former G.A.Matara