Part 4: Inability To Pay Loan-Traps, and Future Bankruptcy – A candid study and an action plan Economic and social development for Sri Lanka – By Professor Sunil J. Wimalawansa
Would taking excessive (unnecessary) loans by Sri Lanka lead to bankruptcy?
In 2002, Sri Lanka paid more than US $320 million as import duties to affluent countries. While some European countries exported three to five times more than Sri Lanka, Norway paid only $125 million, and Switzerland paid $245 million in the same year. Why such a discrepancy? Such data illustrates how Sri Lanka is trapped in increasing its debt and widening its trade gap, partly due to the Western agenda but primarily due to greed, lack of familiarity with macroeconomics and proactive actions by lazy politicians.
Irrespective of the political party in power, the government must have a long-term, viable and sustainable national policy to develop the country, protect its sovereignty and unitary status, and maintain security, law and order. The general development strategies carefully mapped out for the government should continue, regardless of changing the political party in power or the ideas. Legislations imposing severe punishments for anyone attempting to derail the country’s progress, irrespective of party politics, must create deterrents: this seems a reality only with a replacement of the constitution.
Dangers of depending solely on the traditional economy
In an economy based solely on exporting raw materials, low-quality, easily manufactured products are highly vulnerable to fluctuating currency and competition from cheaper suppliers such as China and Taiwan. A similar was observed recently in the tea and rubber markets. In these situations, the country’s economy can take a downturn overnight, as happened during the Asian currency crisis a few years ago. In the long run, Sri Lanka must develop its brand names and identity (such as Ceylon Tea, Sri Lanka Tourism, Sri Lankan Eco-Tourism, etc.), especially in high-margin industries, to sustain fierce competition from under-cutting countries like China, Taiwan, and South Korea.
Sri Lanka must consider augmenting the traditional raw material export markets with value-adding to raw materials before exporting, as with the manufacturing industry and export of finished goods. It would not make economic sense to ship raw materials cheaply to industrialised countries, and import finished products from the same raw materials at a much higher cost. It is also necessary to consider exporting non-traditional and refined products like titanium and thorium extracted from sand, which provides a larger profit margin. Similarly, instead of exporting cardamom, cloves, and other spices, Sri Lankan must remove essential oils and aromas and ship these spices at a significantly higher price.
NGO involvement and the need to avoid spending traps
Sri Lanka does not have the luxury of importing everything just because the mass media induce fantasy markets or the consumption of luxury items (e.g., luxury cars). Irrespective of who imports them, such irresponsible imports drain the country’s foreign exchange for the benefit of a handful. Similarly, the trap of spending money from international donors or expatriates on importing non-essential items in developing countries, like Sri Lanka, is detrimental to the recipient country’s economy: this leads to repetitions of the poverty cycle. Furthermore, international aid agencies as well as I-NGO’s must be made accountable to their governments, philanthropic donors, and the recipient countries for (im)proper utilisation of funds, poor outcomes, and the lack of cost-effective use of donated funds.
There are other issues associated with grants, donations, and loans. By scrutinising the projects over the past two decades, it is apparent that no government agency is responsible for monitoring progress, finances, and outcomes. Consequently, there is no accountability for how money was spent (e.g., competitive bidding or allocated underhand to political cronies) or the quality of outcomes. Donors should ensure more cost-effective utilisation of funds if they identify focused projects created by motivated local organisations or individuals, oversee contractors’ work and progress, and find creative ways to solve locally relevant problems. The local talent must take that challenge and use the most cost effective and suitable way and material for the job. Sri Lanka experienced these scenarios during the recent post-tsunami era, where little work was accomplished by the large I-NGOs versus the progressive and cost-beneficial work done by the grass-root small organisations.
Organisations and independent auditors must monitor, oversee, and scrutinise these projects in the field to document the progress and outcomes—emphasising pros and cons and the cost-effectiveness as an audit process and for the benefit of future projects. Unfortunately, Sri Lanka does not have such authorities independent of politicians and government bureaucrats, with legal control to monitor operations and take firm actions, including exposing the organisations that do not deliver or do inappropriate or unethical work locally and internationally. Auditing, internal policing, and punitive measures are necessary to minimise fraud and pilferage of funds and wrongdoing.
Government responsibilities for economic development
Governments are not expected to act as job agencies. Instead, they should facilitate the environment and business opportunities to create jobs for the country’s benefit. Other than maintaining sovereignty, law, and order, the government’s position is to identify potential and strengths for economic growth and identify and facilitate international markets for exports. Especially in high-intense economic activities such as communication centres, high-tech industries, propagating brand names, export of highly skilled labour to the West, export of value-added finished products, and systematic development of credible tourism. Critical barriers to these include widespread corruption, bribery, lack of proper infrastructure, and destructive/ negative behaviour of specific sectors, including unacceptable driving habits.
The government should earmark essential development resources that increase revenue generation and stop constructing roads to ‘nowhere’ (i.e., dismiss unnecessary and wasteful projects). It is also crucial to ethical business and marketing; training that includes compliance and adherence to ethics is essential. These sectors must have comparative advantages for Sri Lanka and strategically position the country for recurring revenue.
However, these should not be at the expense or compromise other sectors like agriculture, education, peace, or the country’s sovereignty (e.g., division of the country or setting up any foreign military bases in Sri Lanka). All sectors must be modernised, supported, and expanded without political interference. In addition, the Sri Lankan government must assist and nurture local industries and businesses, identify new export markets, and facilitate export products via its foreign missions/ambassadors. There is little effort in these vital areas essential for economic growth.
These will boost local industries and enhance job opportunities, help recover from the current economic downturn, and decrease future debt, assuming politicians would not seek unnecessary loans, yet again, from creditors. The Chinese government has been doing this efficiently for the past three decades, and the Indian government has begun to adopt this process, but it is yet to happen in Sri Lanka. Another area that needs strengthening and diversification is the positioning and bolstering of high-margin, low-risk industries such as assembly or manufacturing, production of essential items, and some high-tech products.
As a country endogenously moves through its product life cycle, this will likely happen eventually but letting it for decades is unacceptable—respective governments have not leveraged or taken steps to expedite this cycle. For example, Singapore and Hong Kong began with petrochemicals, plastics, and textiles: with their maturity, they moved to more stable industries like shipping, electronics, and banking. They eventually established themselves as the shipping and financial capital in the region, accelerating their growth and advancing social welfare.
Reliance on international loans
Historically, Sri Lanka has been a wealthy country; it has even given loans to Great Britain and supported Japan immediately after the second world war. However, since independence in 1948, forward-looking things and projects, use of brain-power, and accountability systematically deteriorated to the extent that the country now relies on foreign aid and loans. Consequently, each year, Sri Lanka became economically poor. All those who govern Sri Lanka are responsible for this failure.
Successive governments and their political leaders failed to deliver what the country needed. While, except for prime minister Dudley Senanayake, all others fattened their pockets, while the country became poo. They must bear responsibility for the economic and social deterioration of the land, but to date, none of them has been made accountable. Sri Lanka has not yet seen the bottom: thus, it is up to the public to prevent further destruction of the country and its economy by politicians. Since there is no mechanism to recall and replace” politicians who failed and/or engaged in criminal activities available in the USA, constituents must vote them out from elected positions.
The dependency on loans was created by politicians and converted into a perfect situation for them to siphon funds and appoint unqualified and uneducated persons like themselves into high positions in the government, adding to inefficiency and over-burdening taxpayers. They have developed skills to use others to get their dirty work done with false promises at the expense of the public. At the same time, the West is exploiting the situation to its advantage: imposing its failed culture and policies” (disguised as human rights and democracy) and gaining control over the local decision-making process. They use secret services organisations, like the CIA and RAW, to entice local folks to achieve their goals, including regime changes.
The involvement of the International Monetary (IMF) and the World Bank are designed to impose the Third World Structural Adjustment Policies/Programs” in developing countries, including Sri Lanka. The end-game includes marketing their unwanted products (dumping), spreading religion (i.e., unethical conversions by gimmicks and false promises), and eroding the traditional culture food and drinking habits (illegal drugs, night-clubs, larger-scale gambling, alcohol parties, etc.). The expansion of such economic traps began after the dreadful 1977 constitution that opened the doors for globalisation and opening the markets.
In their attempts to assist Sri Lanka, IMF, and the World Bank, plan to provide credit liberally, which inevitably became massive burdens to developing countries like Sri Lanka. However, the negativity we see is only the tip of the iceberg. As with several other developing countries, the debt trap will continue to increase with the cumulation of interest payments and will eventually lead (with the greed of politicians) to default. That will likely happen to Sri Lanka—the question is when? In specific cases, temporary/ short-term financial assistance for restructuring (structural reforms) could be helpful to come out of the mess; however, not under some of the conditions imposed by organisations like the IMF with hidden agendas.
Unfortunately, those countries that shortsightedly accepted the new ‘generosity’ of the IMF and World Bank would not consider the negative consequences of enforcing full-fledged free trade and liberalisation as lenders advocated. Doing so without drastically reducing government spending with austerity measures will significantly erode local production of agriculture and other products and increase import dependency, further draining precious foreign exchange. It will also pave the path to dumping shiploads of cheaper products, including food, preventing the local production and sustainability of local farming that cause some families and small businesses to go bankrupt.
Loan traps increased the misery of constituents
There is no free lunch. Even though lending organisations are forcing their austerity policies, the governments of affected developing countries must be responsible for accepting these. Loan traps are destructive for the recipient country. Printing money, significantly increasing taxes, and over-regulation invariably led to inflation that would mostly hurt ordinary people, and small businesses may not survive this threat. While a few of these policies are good, like reducing government spending, developing countries must implement these gradually to prevent chaos, increasing unemployment and threatening security. But that is contrary to what the donors like the IMF are demanding as conditions of loans.
Unsurprisingly, many Western countries control the IMF and the World Bank. The Blackrock and Vanguard corporations control these global lending agencies. This octopus-like arrangement makes it easy for the West to exploit developing countries politically, economically, and socially. The system is designed to use lines of credit to infiltrate and spread the Western agenda, not rescue developing countries from poverty. If these counties with higher economic growth become self-sufficient and come out of poverty, the existence of the IMF and World Bank becomes redundant. They will lose the power to control developing countries and impose Western economic agendas on them. Supply chains for importing raw materials and exporting unwanted commodities to them are lost. They do not want to see that happen. As a result, there is a massive conflict of interest inherent to these lending organisations.
Consequently, the mentioned organisations will prevent developing countries from becoming developed. So, those controlling countries in the West can continue exploiting developing countries and maintaining the raw materials supply chain cheaply. Therefore, the surest way to ensure their goals and marketing agenda is to keep an economic grip on developing countries. For example, since accepting the conditions associated with these loans, the Sri Lankan currency has continued to devalue, particularly against the US dollar, the lending currency and inflation skyrocketed. This resulted in an increased cost of living and associated impoverishment of its citizens and poverty—70% of the population in the country. This vicious cycle will repeat and worsen if the government borrows more funds. The only way to prevent this is to maintain vigilance, transparency, good governance, and a balanced budget and oust the unpatriotic, evil politicians.
Loans provided by the IMF under the Structural Adjustment Program are contingent upon allowing an open free economy with no import restrictions so that wealthy, industrialised nations can flood markets in developing countries, dumping their (un)wanted products and curtailing local products. Lifting foreign exchange restrictions will allow citizens (and foreigners) to drain the remaining foreign exchange out of the country. Eliminating limits on individual borrowing will lead to escalation of debt, loan defaulting, bankruptcy, social unrest, and suicides. How come these are good for Sri Lanka? Does this what ordinary Sri Lankan want?
Besides, untimely deregulation increases the country’s budget deficit while keeping the interest rate high, harming small industries and ordinary people. Entrepreneurs and enterprises will have to borrow capital at higher rates, increasing the risk of bank failures and bankruptcy. Encouraging imports and reducing tariffs will eliminate the competitiveness of local products. This would further increase imports and decrease exports leading to an increase in the budget deficit—creating a vicious cycle of unemployment and poverty in the recipient (developing) country—a classic poverty trap.
Could Sri Lanka head for bankruptcy?
Due to the bad loans taken by politicians on behalf of the country but without the approval of constituents, Sri Lanka’s foreign debt rose from US $750 million in 1977 to over $12 billion in 2005. Ironically, even Sri Lanka cannot service its current debts without austerity. Yet, further expensive projects and loan initiatives are planned. The latter includes an additional $4.5 billion US$ loan (under the disguise of ‘reconstruction’: sheer insanity)—a dangerous slippery slope which may eventually lead the country to bankruptcy.
Against any common sense and internationally accepted norms, even as we speak, the World Bank, Asian Development Bank (ADB), and the IMF negotiate directly with the known terrorist group in Sri Lanka before handing over a loan to the government. Ironically, as pushed by the Norwegians and biased Western I-NGOs, loan organisations have expressed interest in directly providing part of the loans to this terrorist group. Despite that, this extremist group is labelled a terrorist organisation and banned by many countries, including the USA, Canada, Australia, Great Britain, and Europe. With this backdrop, why are international lone-givers negotiating with a terrorist group in Sri Lanka—and for whose benefit? Why are they trying to bypass the country’s legitimate financial institute—Central Bank, and the government?
If these loans are granted to named terrorist organisations, against common sense and violating international law, more innocent people will die. The ordinary taxpayers in the country will have to pay back these loans to the creditors. Thus, such arrangements are insane. One should notice that these are neither donations nor interest-free loans: they will increase the country’s debt by 38%. Who will be paying this back?—certainly not the current politicians or the government. These demonstrated the sheer lack of responsibility of politicians.
Part five discusses errors of judgement by successive governments, the International Monetary Fund, and potential solutions to prevent bankruptcy.
