By Garvin Karunaratne

The Island of August 2 reported that the Cabinet had given the green light for borrowing as much as $ 600 million from the international market to bridge the budget deficit. The Government is also trying to raise $ 220 million through privatisation of telecom, petrol/gas station chain and insurance. This is a sequel that had to happen because the Government failed to get funds at the Paris Talks.

Since 1977 we commenced borrowing heavily from both foreign and local sources to finance the budget deficit. In the initial stages there was foreign investment coming in and till the foreign investors sucked our resources dry and left our shores with bags of gold turned out by using the underpaid work force we did not feel the crisis advancing on us. In the first 10 years after 1977 we had our agricultural programme and the Mahaweli to talk of as development. We did achieve something despite increased indebtedness. The foreign investors took away the riches that should have remained in our country. Now we are bending backwards offering all facilities to investors and offering our assets at discounted rates. They will come in grab at the low rates, get into positions of monopoly and thereafter raise prices. The ruination of the country is what will definitely result.

The Budget The borrowing of $ 600 million as well as the $ 220 million raised by selling our assets are to be spent to meet the budget deficit. The much talked of budget does not have a single programme that will spur production. The budget provided tax benefits to the rich and squeezed the poor and the middle classes. It even abolished the 100% tax that foreigners had to pay if they were to purchase land in Sri Lanka. It did away with the fertilizer subsidies that was the backbone of paddy production. Agriculture has been sidelined since the mid Eighties and the infrastructure that had been built up over the last decades has been sacrificed and today agriculture has been reduced to a subsistence agriculture. No one produces for the market. What is sold is the extra amount that is automatically produced when one cultivates one’s own land with one’s labour. If anyone dares to employ labour and apply fertilizer and produce, then a loss is inevitable. This is my own true experience, handling our family farm with a small extent of paddy land and coconut. This is partly due to the lack of marketing facilities (we abolished the Guaranteed Price Scheme for paddy and the Marketing Department and privatised the canning factory) and partly due to the devaluation of our currency. No less a person that Deputy Minister Sajit Premadasa has pleaded that the cuts made on Samurdhi receipients should be restored. That is the extent to which the budget has hit the poor and the Samurdhi is a grant of a mere Rs. 250 or Rs. 500 a month to the needy. May I remind the Government that this is unfair. Please do not hit the poor below the belt. They do not deserve it. By importing everything under the liberalization and free trade policy we have made the people unemployed. It is the Governments that had created poverty by following the IMF guidance.

So how will the money be spent if the budget does not have a single production programme? Of course the money will be spent to import cars to sell to the rich. There was even a talk that we imported elephants to participate in the perahera. Foreign exchange has to be bereft of controls as the IMF dictates and everyone can draw as much as you like even on your local Visa cards. Those who have been born with a silver spoon in their mouth can go abroad for studies and even the Universities in the UK have reduced their entry requirements in their craze to attract this foreign money.

Let us not forget that even in the UNP days of Hon Dudley Senanayake, no one was allowed foreign exchange for studies if there was a local course in the particular subject. Then we were not bankrupt. The country was not heavily indebted. Now we are a heavily indebted country and this borrowing of $ 600 million will make us even more indebted.

It has been reported that the Vice Chancellors of the Universities have protested at the cuts that have been enforced. If we do not have the funds to run our Universities how do we have the funds to send the children abroad for studies?

The foreign exchange that goes into the Third World country has to be allowed to flow freely back to the donor countries. That is the IMF recipe for development that has been thrust on the Third World.

It is necessary to have a hard look at how we are spending the local money as well as the foreign exchange we earn and borrow at high interest. The IMF recipe of spending without having money to spend will be courted as a disaster course even by the cornerstone boutique keeper. Of course the World Bank and the IMF have retained the erudite and the most qualified in the world to write reports and come out with verbose arguments. Our Government does not want to call Kelegama and Gamini Corea, the greatest economists we have ever produced to battle the IMF, because then the IMF will not give the rubber stamp of viability to our country to enable us to borrow money.

Foreign Exchange Once in January 2001, when Sri Lanka free floated the Rupee, the then value of the Rupee fell from Rs. 85 to over Rs. 100 to the dollar. Then there was pandemonium in financial circles and the Government secretly scrambled $ 50 million- $ 25 million from the Asian Development Bank meant to develop small enterprises and another $ 25 million from AirLanka privatisation and fed it to the market to achieve equilibrium In July 2002, the pound sterling fetched Rs 152.00 and the dollar fetched Rs. 96.00. There is no pandemonium and no crisis is talked of. Constant devaluation of the Rupee has eaten into its value.

What has happened is that since the Rupee was free floated the Central Bank has washed its hands off controlling the foreign exchange that comes in. Before the free float the Central Bank fixed the buying and selling rates. In short the Central Bank allowed the banks to make a profit to that extent by handling the foreign exchange.

It is not well known that the foreign exchange that comes into our country was hoarded by the foreign banks and not released even to the state banks when they had to pay a large petroleum bill. It was this that sent to Rupee in a free fall to Rs. 100 to the dollar in January 2001.

The hoarding of foreign exchange by foreign banks in Sri Lanka was done even earlier. As far back as May 1999, money coming in pounds sterling to my Non Resident Foreign Exchange Account(NRFC) in the Bank of Ceylon, was credited with the equivalent in Rupees by the Standard Chartered Bank in Sri Lanka, who fought hard to retain the foreign pounds. The Bank of Ceylon officials took the transaction without protest and I had to wage a right royal battle to get the money to my account in foreign exchange. I had to throw my weight about and threaten to report them. This shows that even in 1999 the foreign banks were hoarding the foreign exchange that came in legitimately to the country which should have been available to the country to meet its foreign exchange payments.

After the free float when the State Banks had to pay a big bill(petroleum bill) and the foreign exchange it had was insufficient, it was compelled to go to the foreign banks and they had bid the dollar upwards with the result that the Rupee fell to Rs. 100 to the dollar. Earlier the foreign banks could charge only the sale rate imposed by the Central Bank. After the free float the sky was the limit.

What this episode tells us is the important role that the two State Banks play in handling the foreign exchange that comes to Sri Lanka. At first the IMF saw to it that the Central Bank is removed from controlling the foreign exchange. This was done with the Government being forced to free float the Rupee. Currently the IMF is agitating that the two State Banks should be privatised. This is because then the foreign banks can rule the roost. Today it is the two State Banks that are holding the value of the Rupee. Let me tell that if the two State Banks are privatised or marginalized in any manner, then the Rupee will be devalued to nonentity.

The extent to which some free floated currencies in Africa have lost value will illustrate this further. Nigeria is an oil rich African country where the Naira was almost equal to the pound sterling in the late Seventies. In 1983, Naira 1.1 equalled a pound. The value of the Naira fell from 1.1 Naira in 1983 to 131.9 Naira in 1999 to 200.7 Naira in 2002 to the pound. Over the period 1983 to 2002 the value of the Naira has fallen by 19,000%. Ghana was a show piece of the IMF for following the Structural Adjustment Programme. The Ghana Cedi has fallen from 5.6 Cedi to the pound in 1983 to 13,163 Cedi to the pound in 2002, a fall of 219,000 %. Comparatively over the period 1983 to 2002 the Sri Lankan Rupee has fallen from Rs. 35.3 in 1983 to Rs. 152.00 in 2002, which amounts to a drop of only 334%.

One cannot imagine the Rupee dropping to the level of either the Naira or the Cedi. One can imagine the drastic consequences that the people will have to face. But with the Free Float in January 2001 and the proposed privatisation of the State Banks, the death knell of the Sri Lankan Rupee is near.

It is held against the State Banks that they had handled loans irresponsibly. Let us not blame the banks. If there had been officials who had acted irresponsibly by giving loans resulting in losses then they have to be held responsible and they have to be called to pay. In the Administrative Service even senior Government Agents had to pay back for erroneous payments. It is not fair to bring the banks to disrepute because of a rogue manager.

— Center for Global Poverty Alleviation, London

Continued tomorrow