Is sale of family silver remedy for our economic ills?

By Dr. Garvin Karunaratne-March 9, 2017, 12:00 pm

The International Monetary Fund (IMF) is reported to have recommended the sale of some of our national assets such as Colombo Hilton, Lanka Hospitals, Hyatt Hotel and Waters Edge, to raise USD 1.5 billion to solve today’s economic crisis. What really happens is that this USD 1.5 billion will be paid to our creditors and the country will face another crisis before long. When funds from the IMF run out and we will be back to square one. It is essentially a no win situation, where we raise loans to pay debts and the money goes back to the IMF and other international financial institutions.

A new development paradigm of growth is essential. The model of development held up by the IMF and foisted on the developing world since the 1970s has made all countries bankrupt within four decades.

The IMF Chief is expected to visit Sri Lanka and it is hoped that she will be able to put our country on the path to growth and sustainability.

One has to understand that Sri Lanka as well as other developing countries did have sustainable economies and were not in debt in the 1960s. We had a development infrastructure that enabled us to implement large scale projects; we controlled our foreign exchange and used it in the national interest, limited imports so that we could manage our reserves.

To quote Noble Laureate Professor Jeffery Sachs:

"Western Governments enforced draconian budget policies in Africa in the 1980s and 1990s. The IMF and the World Bank virtually ran the economic policies of the debt ridden continent recommending regimens of budgetary belt tightening known technically as Structural Adjustment Programs. These Programs have little scientific merit and produced even fewer results. By the start of the 21st Century Africa was poorer than in the late 1960s when the IMF and the World Bank had first arrived on the scene, with disease, population growth and environmental degradation spiraling out of control. IMF led Austerity has frequently led to riots, coups and the collapse of public services."(The End of World Poverty)

Sri Lanka’s foreign debt in 1977 was only USD 750 million, that, too, on development projects. After it had started following the Structural Adjustment Program laid out by the IMF within four years of following economic liberalisation and free trade, prescribed by the IMF, the foreign debt increased to USD 4 billion and by 2003 it had increased to 10 billion. Following the prescriptions of the IMF we had to allow the use of foreign exchange freely, allow the import of luxury goods and as the debt increased we had to borrow more and more to service the debt. Today, the foreign debt stands at USD 70 billion including the funds for weapons to defeat terrorism and money spent on infrastructural development projects. Throughout these four decades, Sri Lanka has been trying to follow the path laid by the IMF to the best of its ability.

What went wrong? The United Nations’ Human Development Report of 1996 says:

"The stabilization measures of the IMF aimed at reducing both budget deficits and usually involved cutting public spending and increasing interest rates… Although these policies reduced deficits in some countries they often did so at the cost of inducing recession. In short, they often balanced budgets by unbalancing people’s lives."

Prof. Joseph Stiglitz, once the Chief Economist of the World Bank has said:

"The mistakes of the IMF were sufficiently frequent that they clearly weren’t just an accident.. They chose the models that led to wrong predictions, wrong policies and really negative consequences." (‘The Hospital that makes you sicker’ in New Internationalist, March 2003).

What happened to these countries that were having sound, sustainable economies prior to the introduction of the IMF’s SAP?

Let us look at the tenets of the Structural Adjustment Program, which was imposed on the developing world.

The main tenets of the SAP are the free use of foreign exchange for every citizen without any restrictions even when the Treasury of the country does not have any foreign exchange. A country is expected to get money on loan and if that is not sufficient, it has to sell off national assets to raise funds. Working on this basis, it is inevitable that the country gets caught in a death trap. This was a sure recipe for bankruptcy! It is also noteworthy that the IMF provides loans at low interest and also with grace periods to encourage countries to borrow and follow its SAP.

In addition, the SAP provisions include a high interest regime. In Sri Lanka banks charged an interest rate of about 25% and this discouraged investment because local entrepreneurs could not compete with imports which were freely allowed without any taxes or reduced taxes. They tended to deposit their earnings.

The rupee was also freed from government control. The incoming foreign exchange was to be controlled by supply and demand. A heavy demand was created because foreign exchange was freely allowed and with limited supply the rupee tumbled. When the IMF’s Structural Adjustment was introduced here in 1977 the rupee fell in value from Rs. 15.70 to the GBP in 1977 to Rs 35.00 to the GBP in 1978, marking a drop of over 100%, within a few months. It was the banks that decided the exchange rate. The banks accepted the foreign exchange, hoarded it and offered it at higher rates.

On 22/02/17 the USD reached Rs. 154.44, which amounted to a Rs.4.44 increase since November. (The Island of 22/2/2017) . If we continue on the path recommended the IMF the day may not be far off when the rupee devalues by 100% as in 1978.

Sri Lanka as well as other countries stuck in debt have to work on controlling their foreign exchange, restrict imports, develop projects of import substitution to produce national requirements and create production and incomes for its people. There is no other way.

(The writer is former SLAS, Government Agent, Matara, Commonwealth Fund Advisor to the Ministry of Labour and Manpower, Bangladesh in 1982, 1983. He is the author of How the IMF Sabotaged Third World Development, 2017 and How the IMF and the World Bank Ruined Sri Lanka, 2006