Dr. N.M. Perera’s Policies and
Achievements as Finance Minister
by Buddhadasa Hewavitharana,
Reviewed by SAMAN KELEGAMA
Stamford Lake Publications, 2006.
Dr. N.M. Perera was a colossal figure in the Sri
Lankan political sphere. Among his many roles, the role he
played as the Minister of Finance during the periods 1964/65 and
1970-75 stands prominently. The policies that Dr N.M Perera
(henceforth NM) articulated and implemented during his second
term of office truly reflected his ideology and realities of
that time. Prof. Buddhadasa Hewavitharana, the author of the
book, was closely associated with the policy making process as
the Economic Advisor to the Ministry of Finance during 1970-75.
In this book, he recollects the political economy of the policy
making process in order to explain the underlying thinking and
objectives of the policies.
The coverage of issues is vast but they have
been methodically arranged into 4 chapters, viz., Management of
External Finances: Policies & Measures; Management of Internal
Finances: Policies & Measures; Economic Development & Growth:
Policies & Measures; and Building Socialism & a Socialist
Economy: Policy Perceptions & Approaches. The author has gone
through a vast array of literature including his own
writings/notes at that time to extract important material to
compile this book.
The book starts with the inherited economic
crises of the United Front government in 1970 — a foreign
exchange crisis and a large domestic financial imbalance. NM as
the Finance Minister was not prepared to accept the stringent
conditionalities of the IMF. For the first time, several
‘Letters of Intent’ of the IMF that the previous regime had
agreed to was tabled in Parliament where there was prior
commitment for a certain set of economic policies. A number of
previous short term borrowing bills had to be settled with the
IMF. NM was of the opinion "small beggars cannot be big
choosers" (p.33) and if the country refused to honour these
bills, it would be treated as a bankrupt nation. He did not want
this to happen and went on to state: "we cannot brush aside and
completely ignore the International Institutions; we can
repudiate their terms only if we are prepared to face the far
reaching dislocations" (p. 07).
NM saw the transformation to a socialist society
to be determined not by heavy dependence on international
financial institutions but by the extent to which the country
was willing to make sacrifices and increase its productive work.
He always looked at economic management from a long term
perspective and thus pursued a policy of containing present
consumption via the practice of austerity or ‘tightening the
belt’. A plethora of measures were implemented to address both
the external and internal deficits and a massive effort was made
towards domestic resource mobilization for economic development.
Accordingly, a system of higher taxation (capital levy, wealth
tax, etc.), income ceilings and forced and voluntary savings
were introduced, accompanied by price control and rationing of
essential commodities. The exchange control laws were tightened
and extended to cover trade malpractices and asset transfers.
The author identifies the formation of the State
Gem Corporation as a shining example of NM’s strategy to address
the foreign exchange shortage. As far back as 1937, NM was
instrumental in setting up a Select Committee of the State
Council to inquire into the Gem Industry and was also a member
of that Committee. From the mid-1960s, when he was the Finance
Minister for a short period, NM had an idea of formalizing gem
business in the country when he argued in the then budget speech
that the annual output from the gem industry could be in the
range of Rs. 100 million although the customs recorded only Rs.
3.5 million worth of exports. He argued that the bulk of it may
have been smuggled out and fed the black market operations in
foreign exchange. In turn, the government not only lost foreign
exchange but also revenue because of the inability to tax as
there was no proof of income received.
The Gem Corporation was set up to "recapture
this foreign exchange that the country was getting deprived of"
(p. 08). NM "prioritized foreign exchange gains over local tax
revenue gains in the trade-off between foreign exchange earnings
and tax revenue"(p. 12). Among other incentives offered, the
Convertible Rupee Account (CRA) introduced in 1973 acted as a
powerful incentive for increasing gem exports via the SGC. The
rate under the Foreign Exchange Entitlement Certificate (FEECS)
system inherited from the previous government (introduced in
1968) was adjusted to support this initiative. According to the
author, by these measures the prevalent gem cutting monopoly was
diminished, the farcical rigged auctioning was broken, and
organized gem smuggling and related black marketing in foreign
exchange and goods was crushed. Gem exports rose steeply from a
mere Rs. 3.4 million in 1971 to Rs. 152.8 million in 1973 to Rs.
234 million in 1974, making gems the third largest export income
earner and the lead item in Sri Lankan non-traditional exports.
Another method by which NM attempted to address
the external imbalance was to set up an Export Import Bank (EIB).
The genesis of this was inspired by the socialist idea of
liberating the country’s financial system from the control and
influence of foreign banks. Accordingly, a new EIB was to be
created as a jointly-owned venture with the government owning
51% of the capital and 49% to be owned by the nine foreign banks
that were in operation. This idea was proposed from the
perspective of servicing the non-traditional exports, supporting
exporters who did not have access to commercial banks at that
time, introducing export guarantee systems, etc. A Committee
Chaired by the author argued against it as the timing was not
correct given the very small size of the non-traditional sector.
Moreover, there was objection from the bankers, particularly,
the Bank of Ceylon which had a large lucrative foreign trade
division. NM accepted these realities and decided to abandon the
idea of setting up an EIB.
The author notes "revenue increased at a slower
pace than expenditure and the gap between the two rates widened
due to financial imprudence `85.. Several years monetary
expansion`85`85. had by 1970 created a cumulatively increasing
inflationary pressure and an escalation in prices" (p. 19). The
country was basically living beyond its means and corrective
measures were urgently needed.
A revenue enhancing exercise was launched not by
discovering new sources but by making existing ones yield more
revenue through innovative methods in tax collection.
Introduction of the PAYE (pay as you earn) system, raising tax
rates on luxury and semi-essential goods, expanding tax coverage
via an innovative demonetization exercise were noteworthy
measures. As a part of mobilizing savings, a ceiling on
disposable income was imposed to contain consumption and
collecting the income above the ceiling as a contribution to
compulsory savings. The objective was to divert income from
consumption to a process of saving and investment through the
In the monetary history of Sri Lanka, the
demonetization exercise was unique where the primary purpose was
to bring in tax evaders to the tax net. At that time,
demonetization was conceived as the only measure that could
possibly bring tax evaders to the tax net. It required the
prevalent large denominated currency notes (Rs. 100 and Rs. 50)
to be surrendered in exchange for new notes and in the process,
details of the owner were passed on to the Department of Inland
Revenue. Acting on this information, it was possible to rope in
additional sums of tax collection. The author provides an
interesting account of the preparatory work and the social
response to this exercise.
Promoting savings received top priority in NM’s
budgetary management. He gave emphasis to non-inflationary
financing of the budget deficit and for this purpose he saw
increasing savings as an essential ingredient. Although measures
such as demonetization mobilized private savings, and income
ceilings to contain consumption and engage in compulsory saving
had some impact on saving, there was a need for an overall
institutional framework and policy to mobilize more savings. The
existing saving institutions were handicapped by their
cumbersome procedures for depositing or withdrawing money and by
their inability to mount aggressive savings mobilization through
attractive schemes. Thus, the National Savings Bank (NSB) was
established by merging the Post Office Savings Bank, the Ceylon
Savings Bank, and the Savings Certificate Branch of Post Master
General. The bank interest rates were raised to cap this
initiative and thus "fulfilled a pre-requisite for building-up a
viable market for savings of all sections of society" (p. 27).
NSB was not the only institution to support
budgetary management. The State Distillery Corporation (SDC) was
established in 1971 to increase public revenue among other
objectives. Earlier, the Excise Department (under the Ministry
of Finance) was managing the State Distilleries and it was not
run on a commercial basis. The author served as the Chairman of
the Committee to overlook this transition and played a key role
in forming the new Corporation. NM’s initial idea was for the
Corporation to take over the entire distilleries and make it the
sole monopoly of distilling arrack. The Committee felt this was
a too radical approach and advised against it and NM following
the Committee’s recommendations made it take over only the
commercial functions of the State Distilleries. The author
documents steps taken to energise the new Corporation by
training toddy tappers, combating illicit liquor, etc. Many of
the objectives were achieved and today the SDC remains a major
source of revenue to the government.
1973 Oil Price Hike
NM’s guiding principle was ‘long-term interest
of the country before short term popularity’. Often at the risk
of unpopularity with Cabinet colleagues and the people, he
pursued this policy. The second measure of rice at subsidized
price that the United Front government introduced had to be
scaled down and eventually withdrawn from the rationing system.
In 1973, at the time of the first oil price hike, import of
subsidiary foodstuff was banned to reduce the trade deficit. The
concept of ‘self reliance’ gathered full momentum in 1973. NM
firmly believed that Sri Lanka can cushion against all external
threats if the country develops its own resources and enters a
path of self reliant growth.
Local import substitution industries could not
catchup with demand due to well known problems of the
limitations of import substitution industries and the government
became very unpopular with shortage, queues, etc. Revenue
protection was uppermost in NM’s thinking; when the import price
of sugar and flour rose and "profit margins and revenue came
under threat, the Minister did not hesitate to raise the sale
price of these items in order to protect revenue" (p. 22).
NM was convinced that channelling of increased
resources for welfare expenditure in the context of limited
growth of revenue impairs the availability of resources for
development. However, he did not take a pure technocratic
approach to curtailing welfare measures, but attempted to
replace universal welfare with provision of welfare on a
selective basis. Withdrawal of the free ration from the tax
payers and introducing the two-tier pricing system for sugar are
a few examples.
The author notes that these measures were not
very successful as they were one step behind the escalating
world food prices.
Development and Growth
Chapter 3 deals with Economic Development &
Growth. The strategy for dealing with the problem of raising
resources for investment to achieve development was to increase
savings by containing present consumption via the practice of
austerity. Income ceilings, compulsory savings, cuts on welfare
expenditure, and a ‘climate of austerity’ were to provide the
The growth, investment, and productivity nexus
as illustrated in standard economic theory (Harrod-Domar model)
was very much in NM’s mind when he argued that wages should be
tuned to productivity levels and low productivity should be
addressed by increasing work intensity. "For the investment that
is made by mobilizing resources to succeed, its productivity
must be high" (p. 33). Sri Lanka’s wages were out of proportion
to her productivity at that time and this fact was recognized by
the ILO mission in 1971 headed by Professor Dudley Seers. NM
proposed ‘Workers Councils’ to increase productivity. The author
identifies this as a first step towards socialism.
Worker-participation in management can generate a process of
weakening the wage-labour based consciousness and raising the
level of social consciousness to a point where eventually the
workers can take over the management (p. 59). NM in fact
initiated an awareness programme on this where the author played
his role as the Economic Adviser.
That productivity was uppermost in his mind
comes out clearly when the author discusses the estate sector.
When Land Reform was introduced in 1972 NM looked at it in terms
of increasing productivity and not from a populist angle. NM was
concerned about the break-up of economic units under possible
land fragmentation and the adverse impact on productivity. The
author notes: "The impression I have is that the Minister viewed
the proposed land reform with much reservation, although he did
not go public about it" (p. 43).
In this Chapter, the author covers a number of
issues such as the take over of the Plantation Companies in
1975. But what is noteworthy is how some of the policies that NM
wanted to pursue got diluted due to ideological differences
between the LSSP (of which NM was the leader) and the SLFP (key
political party of the United Front coalition). For instance,
capital expenditure allocations which came under the Ministry of
Planning were not in accordance to the expectations of the
Ministry of Finance. The author highlights the uneasy
relationship between the Ministry of Finance led by NM and the
Ministry of Planning, where most crucial issues were handled by
the Secretary to the Ministry, Prof. H.A. de S. Gunasekera, and
his unsuccessful attempts to reconcile the differences. The
failure of the Five Year Plan (1972-1976) to take-off the ground
could also be partly attributed among other factors to this
conflict of the two Ministries.
The last Chapter is on Building Socialism & a
Socialist Economy. In a socialist economy social consciousness
emerges as the integrating force of the socialist process with
planned economic development process. In essence, it is the
driving force of a political economic process. NM always argued
that a radical transformation of the economy cannot be done
unless the level of social consciousness is high. He warned the
JVP that there are no easy shortcuts to socialism. A heightened
social consciousness was necessary to motivate different groups
in society so as to mobilize them effectively to make a success
of the implementation of the Five Year Plan, which was the means
of achieving the development objectives.
The author highlights the problems encountered
in creating social consciousness in a coalition political set up
and where the social consciousness was low. Then the author
moves on to highlight policies and measures of socialistic forms
that had strong redistributive elements (pp. 53-55). The popular
concept in the 1970s ‘redistribution with growth’ was close to
NM’s thinking even before it was advocated by Robert McNamara –-
the then Chief of the World Bank.
The author has enriched the narrative with wit,
humour, and some anecdotes. Moreover, the documentation of his
interaction during the policy formulation process with a galaxy
of LSSP leading lights of that time, viz., Colvin R De Silva,
Bernard Soyza, Hector Abhayavardhana, Doric De Sousa, and Osmund
Jayaratne adds colour to the narrative.
An investigative reader may look into some data.
For instance, to what extent did the NSB assist non-inflationary
budgetary financing?; to what extent did the demonetization
exercise enhance government revenue ?; how effective were the
income ceilings and compulsory savings in curtailing consumption
and promoting savings? These are not mentioned in the book.
Thus, to comprehend some of the points highlighted by the author
it would be essential to delve into the Budget Speeches and
Central Bank reports of 1970-75 period and this is left to the
interested researcher. But giving such data analysis may not
have been the intention of the author from the beginning. As
stated in the concluding remarks: "This book is not about
evaluation of the totality of policies and activities" (p. 60).
It is imperative to note that both the external
and internal deficits became major issues for NM and he gave
priority to rectifying them by repaying short term debt,
tightening import controls, and engaging in a massive domestic
resource mobilization effort. He attempted this strategy at a
time when the terms of trade deteriorated from 260 in 1970 to
145 in 1975 (44 % decline), international oil prices soared from
147 in 1972 to 826 in 1975 (price index of oil with 1969=100).
It was also a time when the Bretton Woods system of orderly
exchange rates collapsed creating chaos in currency management.
On the domestic front, the 1971 insurgency had disrupted the
supply side of the economy, the 1972 republican constitution had
re-emphasized "economic independence" and less external
dependence, 1974 was marked by a severe drought, etc. These
factors both from the external and internal fronts posed a
serious challenge to NM’s strategy and the Five Year Plan.
In this negative economic environment whether
the strategy of austerity that NM pursued went too far needs to
be discussed in detail. For instance, Ronald Herring, in an
article in the Economic and Political Weekly in 1987, identified
the Sri Lankan economy at that time as the most controlled and
restricted economy outside the Soviet bloc. Whether the policy
response to the situation was the most appropriate also needs to
be examined. For instance, would a flexible exchange rate policy
instead of a fixed exchange rate with import controls have
reduced the burden on the masses in terms of shortages and high
That the social consciousness movement did not
make an impact was clearly seen in the 1977 electoral verdict
when the political left was completely wiped out from
parliamentary positions. Thus while the overall objectives and
goals may have been appreciated, people were not prepared to
forgo consumption for nearly 5 years for the sake of future
Economic historians will judge the 1970-75
period according to their ideological bias. Critics will dismiss
the policies of this period stating that they were too
restrictive and inward looking and prevented Sri Lanka emulating
the high growth of East Asian Tigers and made it a latecomer in
global integration. The supporters will say that some of these
policies laid the foundation for strengthening the domestic
production base, and had more time been given, Sri Lanka would
have come out of austerity for a full-scale development
take-off. Whatever the judgement is, Economic Historians can do
a detailed assessment of this important period in Sri Lanka and
assess NM’s contribution given much of the valuable information
given in the book. For one thing is clear from the authors
narrative, i.e., NM did not fail to temper his ideologies with
pragmatism when such it necessary and the result was some home
grown wisdom and innovative thinking. NM was a rare kind of
statesman when compared with most of the present day
politicians. He valued scholarship, was prepared to listen and
learn and change his mind when required.
This is an altogether engaging book and a must
read to all those who are interested in the progress of the Sri
Lankan economy over a period that is now dismissed by some
commentators as a ‘dark era’. The book is indeed a valuable
addition to the current literature on the Sri Lankan economy.