Learning to get our economy back on track

By GARVIN KARUNARATNE Ph.D.

The editorial of The Island on Sri Lanka’s Independence Day says it all: “The challenge before us is to retrace our steps, figure out where we took wrong turns, and forge ahead in the right direction, as many other nations have already done. Easier said than done, but there seems to be no other way.”

The problem is that even to retrace our footsteps, there is no consensus among the learned. Addressing the 10 th annual conference of the Sri Lanka Forum of University economists, on 27 January, 2022, Professor Premachandra Atukorale has said that “it is impossible to heavily rely on import and exchange controls, without compromising on a massive economic collapse and social upheaval.”

Perhaps, it may be useful to recall how Sri Lanka managed its economy, in deciding how we can retrace our footsteps to the days when we did not have food queues and social upheaval, all the while handling development very successfully.

In February, 1968, I was posted as the Additional Government Agent of Kegalle District. I worked there for two years. I knew of no queues for any essential food during that period. In fact, I was in charge of providing essential food – as the Deputy Food Controller for the District. At that time every area was covered with a cooperative society, and, in each division, there were Cooperative Unions that were equipped with stores and lorries; and on a clockwork basis all essential food was distributed through the cooperatives. This included a measure of rice per person per week, entirely free, under the Rice Ration Scheme, which was done away by President Jayawardena, in 1978.

Then there was a major Department at work – the Food Commissioner’s Department, managed at the helm by a senior civil servant, a department that had very large stores full of rice and flour, and also attended to imports, when necessary. At the district level, there was an Assistant Food Controller who worked directly under me, and it was our duty to see that food was always available, without any interruption. Importing essentials, like dhal, chillies, etc., was handled by the CWE, because depending on the private sector has proved unreliable – the private sector has profit as its aim, service to the people comes next.

Kegalle District included the electorates of Prime Minister Dudley Senanayake, Minister NH Karunaratne, Deputy Ministers Imbulana, Vimala Kannangara, Beligammana and Dr NM Perera of the Opposition. There was never a delay in providing essential food – and that included rice, lentils, chillies and other curry stuff. I had the unenviable task of meeting the Prime Minister every Saturday and Sunday morning, at around nine, at the Warakapola Rest House, and to accompany him to a host of meetings in his electorate, ending in the late evenings, and there was never a person that had a complaint. The Divisional Secretaries had to work hard. There were a few bad eggs that I had to get rid of. Had there been any interruption in food supplies, the ministers would have complained to the Prime Minister or Dr NM would have raised the matter in Parliament.

This was also the situation in Matara, where I was the Government Agent from, 1971 to 1973. There were no ministers in any electorates, and only one Deputy Minister B. Y. Tudawe. There were no shortages, except during the JVP insurrection of April 1971.

There was no foreign exchange problem, because there were effective controls over the little foreign exchange that came in through exports and other sources. There were no currency dealers who handled foreign exchange like today, and the intake of foreign currency was a guarded property used first for importing essentials, and small allocations were made to import useful items such as automobiles and refrigerators. This was the situation even when we had ample funds – when we financed the Gal Oya Development Project – a massive project building a tank three times the size of Parakrama Samudra, Polonnaruwa, bringing 60,000 hectares under cultivation and creating many industries, all done with foreign funds we had.

In 1970, I worked as the Deputy Director of Small Industries, and one of my tasks was to ensure that every small industrialist had an allocation of foreign exchange, to import any particular item they required for their manufactures. I can state that every application was inquired into by my inspectors of industry – I had some 20 of them and assessed by me, every genuine small industry received an allocation. Then no foreign funds were allowed for foreign study, but an exception was made to provide foreign funds to Sunethra and Chandrika Bandaranaike, and I had the occasion to ask the Prime Minister why he had done so, and he replied, “That is the only request I had from my predecessor and I felt like obliging.”

Foreign exchange was then effectively controlled. When I left the Administrative Service and moved abroad in April 1973, I did not get a single penny. My wife and three children were given only three pounds and five shillings.

It is sad that university dons, the most learned in our country, have failed to grasp how the country was run those days. Professor Atukorale has said, “It is impossible to rely heavily on import and exchange controls without compromising on a massive economic collapse and social upheaval.” It was by effectively controlling import and foreign exchange that all Third World countries managed their economies, without any economic collapse. The economic might of India itself is indicative of an economy that did not follow the IMF, and used funds borrowed from the IMF to bring about development by controlling the economy.

Sri Lanka managed its foreign exchange effectively, till President Jayewardene was fooled by the IMF to follow the Structural Adjustment Programme, which advised him to allow the rich to spend foreign exchange, as much as they wanted, for endless foreign travel to educate their children abroad, import all luxury items; and the IMF provide loans for this purpose and mind you to entice the leaders, even provided grace periods when the service and interest charges were not to be paid. The then leaders enjoyed and the rich played with the funds, leaving the future leaders to bear the brunt of repayment. That is the process that led us to the present abyss.

Then there were two budgets: a local rupee budget for handling all work in the country, including major development tasks, funded with printed money, and a foreign exchange budget to handle the foreign exchange that was collected. Recently the Central Bank Governor Cabraal had decided that all foreigners staying at hotels should be charged in foreign currency. This is a decision that should have been taken long ago. Other countries, like India and Thailand, took similar action over decades ago. We, unfortunately, do not collect even 50 percent of the foreign exchange that comes in today, and it is time that we put a dragnet like in the period before 1977.

Of the period 1948 to 1977, an exception is the period 1974 to 1977, when there were shortages due to the Government de-emphasising agricultural development in order to have their own Divisional Development Councils Programme, and embarking on land reform which stifled development and caused foreign sanctions. Even Prime Minister Sirimavo Bandaranaike managed to make all demanded payments and managed without falling into foreign debt. 1976 and 1977 happen to be the last years when our country was run without a deficit. Since then annually our foreign debt has increased and is at $ 56 billion today.

Thus, the manner in which we handled the economy in the pre-1977 period is a tried and tested blueprint that worked successfully for nearly two decades, and this is the only way we could get out of the present mire.

Dr. Karunaratne is the author of Author of How the IMF Ruined Sri Lanka and Alternative Programmes of Success: Godage, 2006 and How the IMF Sabotaged Third World Development: Kindle/Godage, 2017.