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Asian Tribune is published by E-LANKA MEDIA(PVT)Ltd. Vol. 20 No. 108

The World Bank Warns Sri Lanka: Where will the World Bank & the IMF take us.

By Garvin Karunaratne, former G.A. Matara

In the last few weeks the World Bank and the Asian Development Bank have warned the Sri Lankan Government to get on track. Earlier the IMF had expressed concern. They all require the government to further follow the Structural Adjustment Policies they had laid down, to stop expanding the public sector, to further increase interest rates, to reduce the budget deficit, to privatize public assets, to further liberalize and deregulate. These two Brettonwood Institutions yet fail to grasp the basic fact that it is none other than they themselves who created the problems that the Third World countries face today.

Let me not quote my own words. I happen to be the lone Asian voice that has pointed out that it is the IMF and the World Bank that are to blame for the failure of the Third World governments. The IMF and the World Bank blame the Governments for being corrupt. Corruption is a separate problem which has implications for development but the evidence is that the IMF has not provided a growth strategy on which the Countries can develop.

Let me quote some world famous authorities. As far back as 2001, the Wall Street Journal stated in a very definite manner:

“ The IMF Drill is as follows: A Third World poor country with its pegged currency is working towards taming its inflation. Instead of growth formulae it gets the IMF’s old austerity dosage which slows down the economy. The banks begin to falter in paying their old debts. The IMF recommends yet more medicine- devaluation making the Bank predicament and capital flight worse. The currency slumps and the banks are now in real trouble….. Is this anyway to run an international monetary system”.(Feb22,2001)

The United Nations itself wrote in its authoritative 1996 Human Development Report: “ 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.”

To get down to world famous professionals:

Professor Joseph Stiglitz states that “ 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.”(New Internationalist, March 2003)

Professor Jeffery Sachs states especially of what the IMF did to African countries:

“Western governments enforced draconian budget policies in Africa during the 1980s and the 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 had little scientific merit and produced even fewer results. By the start of the twenty first 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 Poverty)

In 1994 the World Bank published a book Adjustment in Africa,> singing praises of the Structural Adjustment Program policies. It took a while for the African economists, unfunded and ill equipped as they are to fight the World Bank and the IMF. . Nevertheless their ideas emerged in African Voices on Structural Adjustment in 2003. In the words of Professor Charles C. Soludo of the University of Nigeria and Thandika Mkandawire, the Executive Secretary of the Council for the Development of Social Science Research in Africa,(CODESRIA): “After over a decade of acrimonious debates and tons of evaluation reports there is an increasing convergence of views that Structural Adjustment Programs have not worked and as designed it is grossly defective as a policy package for addressing the problems of under development in the region.”.

Let us look at basic facts. The Third World countries were not indebted in the early Seventies. Then the countries were allowed to manage their own budgets according to their own concepts of development, allowed to fix the values of their own currencies and encouraged to have development projects and programs of their own which were helped and partly funded by foreign aid. Then the World Bank provided loans to further production targets- the criteria was that the loans should fund programs that will create production, where the newly created production would be amply sufficient to repay both the capital re-payments and the interest. The Third World countries were progressing fast. They concentrated on import substitution type of industries, livestock and agricultural development where employment was created in the process of producing what the country wanted. In the next step there was export promotion. The success of the Third World countries meant that the Western Developed Countries could no longer find markets for their manufactures. There was unemployment, stagnation and low growth in the Developed Countries. The remedy was simple. The development in the Third World had to be sabotaged.

Firstly, the USA came up with a package to sell its extra stocks of wheat. This was the PL 480 Program whereby the USA provided wheat at low rates to countries in need. Couched as a humanitarian gesture the wheat did help at times of disaster but was continued later as the Third World leaders found it easier to get food that way than resort to develop their own production. This happened because the wheat was granted at low rates- and at times free of charge. This had the effect of reducing the prices of cereals in the countries. Further people got used to eating wheat products- they got caught in the Bread Trap.. Mexico a wheat exporter even became a wheat importer. The USA and Europe found a good market for the excess wheat they produced. As sequence money flowed from the Third World countries back to the Developed Countries as payments for wheat.

That was not enough. The development of the Third World countries had to be stopped. This took on in different ways. Beginning in the 1970s the World Bank started playing a different tune when the Third World countries asked for loans. The World Bank under Robert McNamara commenced giving loans for anything- even for consumption. Hitherto they had given loans only for production oriented projects. The result was that the Third World countries that had so far managed their foreign exchange budgets need no more produce; instead they borrowed for non productive projects and the debts piled up. Once the countries were indebted, the World Bank and the IMF came up with the Structural Adjustment Programme which recommended that the countries should obey free trade, deregulate, liberalize the use of foreign exchange, follow high interest rates, privatize their assets- so that the enterprises will be open to the private sector- including the multinationals, reduce the public sector and instead depend on the private sector. Following free trade and liberalization helped the Developed Countries to sell their manufactures, to get at the resources of the Countries for exploitation and also for their multinationals to enter into trade and in all these methods money flowed from the Third World to the Developed Countries. This was the mantra for development preached by the IMF and the World Bank and the countries had to swallow if they wanted funds from the IMF and the international community. Note the Countries were heavily in debt and had to follow the IMF dictate.

The result was that the countries were opened up for manufactures from the Developed Countries, the local entrepreneurs closed down their enterprises as they could no longer compete when they paid high interest on their loans- as much as 20 to 25%. The result was high prices as the goods came in at the prices prevalent in the Developed Countries. Their trade was opened up for the multinationals and Pizza Huts, MacDonalds and KFC sprang up siphoning off retail sale profits that should really accrue to the locals, with the result that profits flowed from the Third World to the Developed Countries. The assets of the Third World were prize, opened for development by investors from the Developed Countries who came in on tax holidays. Noritake came to Sri Lanka and established a porcelain factory using local clay deposits. They came on a tax holiday and paid no tax to the country. When the tax holiday was over the tax holiday period was extended. Now it is reported that the clay deposits are nearing depletion. In the meantime though no taxes were paid to Sri Lanka the Government of Japan charged taxes and when the porcelain-ware was sold in the USA and Europe those countries also charged taxes. Sri Lanka got only employment for its work force and nothing whatever for the clay deposit- the asset that was used. In short the multinational exploited the local asset and the asset provided profits for the foreign countries in the form of taxes and in the form of profits for the foreign shareholders. That was the type of development sold to the Third World countries.

The essence of governing a country lies in managing the economy and an essential part of the economy is its international dealings- the foreign exchange that flows out and flows in. The transactions in the country are done in its own currency while international transactions have to be done in a foreign currency. The Countries have to find foreign exchange by getting paid for exports and obtaining money from its workers abroad, money from visiting tourists etc. . All this foreign exchange that comes in has to be used to buy the necessities that the countries need from abroad and to fund remittances abroad. The Countries had to carefully regulate the use of the collected foreign exchange. The countries had to draw up priorities for using the foreign exchange earned.

Let me tell how Sri Lanka managed during the Sixties and Seventies till 1977. Firstly the country had to pay for food imports, medicines and other essentials and thereafter money was allocated for non-essential imports. No foreign exchange was allocated for travel abroad unless it was proved that such travel was necessary for the country. Foreign exchange was not allowed for foreign education unless that education was not available in the country.. In this priority list luxury items came last. When I applied to import a car from the UK in 1970, though it was a non luxury Morris Oxford, the Exchange Control Department of the Central Bank went through every detail of how my wife and I had earned foreign money during our stay. The governments managed to meet the foreign expenses through carefully deciding what to pay for in foreign exchange. All this was done through regulating the use of foreign exchange. The Structural Adjustment Programme totally deregulated the use of foreign exchange.

Deregulation and the Liberalization in using foreign exchange would not pose a problem if the Country had vast resources of foreign currency. The problem is that all Third World Countries cannot find sufficient foreign exchange for their needs and that was why a system of regulation was enforced. When the use of foreign exchange was liberalized and deregulated there is a great demand for foreign exchange and the Country will not be able to find foreign exchange to meet that demand. The remedy advised by the IMF was to sell off the assets of the Country or to obtain loans and meet the demand. This led to a situation where prime assets were sold to find a one off payment and the money was fed into the system. This led to an increase in the indebtedness of the Country and also reduced the taxes the country earned as the asset that was sold off paid taxes earlier. And further deficit budgeting became the order of the day. The last years when Sri Lanka balanced its foreign budget was in the 1970- 1977 Sirimavo Days. Today following the IMF dictates we have a budget deficit of around a billion dollars every year.

In the next stage the IMF advised countries to free float their currencies which meant that the countries no longer controlled their currencies. The currencies were supposed to find their own correct level through the process of supply and demand. Till then it was the Countries that decided the value of their own currency. In enforcing free floating, what was unsaid and kept hidden is the fact that foreign exchange when it comes to a country is kept at the bank that collects it from the person who brings it in and the bank has the right to hoard that money and create a shortage and bid the price upwards when another bank that needs the money to pay a bill in foreign exchange wants funds.( as happened in January 2001: details included later) The next step is to abolish the local banks and allow the foreign banks to step in. That is why the IMF has ganged in to abolish the Bank of Ceylon and the Peoples Bank which we have so far resisted.

When the Turkish Lira was free floated the value of the Turkish Lira fell by 36%. When the Sri Lanka Rupee was free floated the Rupee fell by 25%. An interesting thing happened immediately after the Sri Lankan Rupee was free floated in January 2001. A Government Bank had to pay a large oil bill and the two government banks did not have sufficient foreign exchange to pay the bill. The government bank then went to the foreign banks which bided the price of dollars upwards- the public bank had to buy the foreign exchange from the private banks at the higher rate demanded and the Rupee lost its value from Rs. 85 to the dollar to Rs 105.. The fact remains that when a local currency is free floated the banks are in sole charge of the foreign exchange that comes into the country the bank can hoard the foreign exchange it gets and can create a shortage forcing the price of the foreign exchange to go higher. Though many fail even to believe it this is the process whereby our Rupee is losing its value today. By now over fifty percent of countries have had to free float their currencies and over the past two years the USA has been insisting that China should free float its yen but the Chinese are not that gullible.

It is sad that the Central Banks of the Third World countries have failed to understand that once the currency is free floated and the value of the local currency is reduced the prices of every export items is automatically reduced and simultaneously the price we have to pay for imports increase. In short the currency of a country is itself reduced to become a commodity manipulated by foreign banks to make money. This is also causing the cost of living to escalate as most consumer goods are imported. Mahatir Muhammed the former PrimeMinister of Malaysia has said that any county that does not control its foreign exchange is not fit to rule. This is a true statement.

Let us look at what the Government of Sri Lanka has done to arrest the currency falling. When the Rupee fell 25% in value after the Rupee was free floated in January 2001, the Rupee was stabilized by the government feeding into the suppy and demand system the sums of $ 25 million from the AirLanka privatization and another $ 25 million from an ADB loan meant for private enterprise development. (How the IMF Ruined Sri Lanka, p.113.) That was far back in 2001.

Today everyone is worried that the Rupee is sliding in value and it is around 113.5 to the dollar. Its fall has been cushioned by feeding in funds. In May 2007 $ 50.6 million, in June 2007 $ 29.9 million, in July 2007- $ 50 million and in August $ 105 million were put in to prop up the exchange rate (LBO: 17 th September 2007) Despite the fact that as much as $ 236 was poured in the value of the Rupee keeps sliding. This is the growth strategy of the IMF which we yet follow today. We do not have the foreign exchange to support the sliding Rupee for ever.

A comparison with what has happened to other countries that did follow the IMF dictates will illustrate where we are heading. Turkey found its Lira dropping from 336 Lira to the pound in 1983 to 2,640,000 Lira to the Pound in 2007- a drop of 787,000%. Ghana had its currency falling from 5.7 Cedi to the Pound in 1983 to 18,950 Cedi to the pound in 2007 making a drop of 332,000 %.. This is true of other countries like Bolivia, Nigeria, Tanzania which all followed the IMF dictates. All of these are not decrepit banana republic type of countries. I have been to Turkey and have travelled everywhere. It is a vibrant country with infrastructure and ample resources, far more than what Sri Lanka can boast of, Turkey fell entirely by following the IMF prescriptions.

Major changes in economic policy are required to save Sri Lanka’s economy.

1. We have to get away from allowing the banks to determine the value of our currency. In other words we have to get away from free floating our Rupee and fix the currency exchange rate ourselves.

2. We have to regulate the use of foreign exchange, have a system of restricting the use of foreign expenses.

3. The foreign exchange that comes to our country belongs to the country and not to the banks. Though we have two public banks, the foreign banks call the shots because they can hoard the foreign currency they collect and bid the price of the foreign currency upwards when a bill has to be paid. This has to end.

4. Corruption has to be stopped. This can easily be done because corruption is a malaise that came to Sri Lanka in the post 1977 era. I can vouch for the fact that none of the politicians in Kegalla District in 1969 and none of the politicians in Matara District in 1972 were corrupt.

The present predicament is the Legacy that our present Government inherited from the earlier rulers since 1977 when they commenced following the IMF Pied Piper.

To sum up: Since 1977 Sri Lanka has seen the value of its currency sliding down. The Rupee held a value of Rs. 15.7 to the pound and Rs 8.00 to the dollar in 1977 before we entered the IMF’s Structural Adjustment Programme. Today the pound is at Rs. 230.00 and the dollar is at Rs.113.5. This marks a devaluation rate of 1364% in the case of the pound sterling and 1320% in the case of the dollar. Our foreign debt has increased from $ 750 million to $ 10,000. Before 1977 we balanced the foreign exchange budget, now we have a gap of $ 1,000 to meet which we have to beg, borrow and steal. All this was due to our following the path told by the IMF. Even today we follow the same path.

Our leaders are kindly requested to ponder as to whether we can expect any other result because we have not made a single change in economic policy. Our present effort to become self sufficient in food, gamaneguma and wap magula can only succeed if we control our foreign exchange, save the value of the Rupee by deciding on its value ourselves, and change the IMF teachings to enable real growth. A change in economic policy is a must.

Garvin Karunaratne: former Government Agent, Matara District, Sri Lanka and Author of How the IMF Ruined Sri Lanka & Alternative Programs of Success (Godages)

- Asian Tribune -

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