SL economy, IMF claims, and reality
Peter Breuer, Chief of IMF Mission to Sri Lanka has claimed that the Sri Lankan economy is showing signs of progress. The monetary and fiscal measures like tax increases and particularly the debt moratorium may have resulted in giving some breathing space for the country to recover from the period of extreme hardship caused by non-availability of foreign exchange to import essential requirements. Now, there are no fuel and gas queues and shortages are not severe. Economic parameters like GNP, inflation, are improving, tourism, are positive, and foreign remittance is flowing in. All these signs are favourable and could make the economist say the economy is doing well.
However, even in the field of economics as it applies to our country there are looming crises. The foreign debt has to be paid in the future and that will be a severe strain on the country’s foreign reserves. Import/export imbalance has been widening mainly due to the lower demand for our products and also the slow growth of production. Our overall export earnings have been declining in the post-Covid period. The Export Development Board has said that cumulative merchandise exports in 2023 decreased by 9.54 percent compared to 2022 (EDB report 31.1.2024). Unless the situation improves quickly foreign reserves which are satisfactory at present may decrease forcing the country to take more loans.
The following facts would substantiate this reality. Sri Lanka’s earnings from exports was only 23% of the GDP in 2014 and it has been around that figure since 1977. We have not been able to improve this situation. There is no way we could change this equation to any significant degree because to increase exports we have to increase imports too. To overcome these problems, we must attract investors (most of whom are Robber Barons) and prepare an investor friendly environment (often by denying the rights of workers and at the risk of environmental degradation) and be able to compete to capture our share of the market (which is often manipulated). This is well-nigh impossible for Sri Lanka as well as other developing countries.
We are not alone in this predicament. This system often leaves us short of dollars for our essentials, and we are forced to borrow from international lenders. Then, we turn to the IMF, which has been created for the purpose of keeping countries like ours afloat. This remedy is often worse than the malady and consequently the poor suffer more than others. The fact that we will never be able to come out of this mess becomes clear when we consider the following.
The new wealth produced by the world since 2020 has been USD 42 trillion. Two thirds of it have gone into the pockets of 1% of the world population. The whole of the rest of the world population, i. e., 99%, will have to do with one third of this wealth, which was largely produced by them. Further, during the last few decades, the debt burden of poor countries has increased by 12 %. Inequality between the rich and the poor has increased by 8%. These facts and figures show that the poor countries could never come out of poverty by following the economic policies they have followed in the past. They must, jointly if possible, work out new policies and mechanisms to come out of their poverty.
Contrary to the IMF claims, we are already witnessing the ill-effects of their policies on the lower middle class and the poor. Child malnutrition, stunting, and school dropouts are rising by the day. Although the IMF says these issues must be addressed by welfare measures, these don’t seem to be sufficient to mitigate the problem. Far-reaching effects of child malnutrition and inadequate education are well known and our country has been experiencing these ills continuously in the past. Health and education are imperative for economic development. As per the Family Health Bureau’s Nutrition Month 2023 Summary Report, the percentage of children under five years, who are underweight, was reported to be 17.1%, compared to 15.3% in 2022 (16.9.2023).
The ultimate future economic loss due to child malnutrition, which has health and mental development implications, is apparently not in the IMF equation. A World Bank report warns that malnutrition is costing poor countries up to 3 percent of their yearly GDP, while malnourished children are at risk of losing more than 10 percent of their lifetime earnings potential (20.3.2006). According to the report—malnutrition has long been known to undermine economic growth and perpetuate poverty, and yet, over previous decades, the international community and most governments in developing countries have failed to tackle malnutrition, even though well-tested approaches for doing so exist. The report says developing countries that invest in better nutrition for their children get high returns on their spending. A group of the world’s leading development economists, including three Nobel Laureates, concluded in a 2004 study known as the Copenhagen Consensus, that nutrition investments were one of the ‘best buys’ that developing countries could make in reducing poverty and improving economic growth.
There may be some chance of getting out of this vicious cycle by a process of import substitution. It may be easier to save foreign exchange by cutting down on the imports, which could be produced locally. We have been importing a significant quantity of commodities that could be produced locally. If Sri Lanka could produce the essential food items, the import expenditure could be reduced by about 50%. If import of non-essential goods is stopped another 25% could be saved. Then, our export earnings will be adequate for the essential needs of fuel, etc. Moreover, if the goal of 70% of renewable energy could be reached, which should not be difficult for a country blessed with ample sunlight, we could save enough of the export earnings for development work. All developing countries must strive for self-sufficiency and move away from export oriented, debt dependent economies. Indonesia has achieved economic development by increasing its agricultural output, which has risen to 15% of the GDP whereas in Sri Lanka it has remained at 8% for the past several decades.
Joseph Stiglitz, Professor of Economics at Columbia University and former senior vice president of The World Bank and Nobel Memorial Prize winner, wrote in April 2000 in an article for the New Republic “They will say the IMF’s economic ‘remedies’ often make things worse – turning slow-downs into recessions and recessions into depressions. And they will have a point. I was chief economist at the World Bank from 1966 until last November, during the gravest global economic crisis in a half century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled”. He was made to resign from his post in the World Bank. John Maynard Keynes in his book, ‘National Self Sufficiency’ (1933), says: “Ideas, knowledge, science, hospitality, travel, – these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and above all let finance be primarily national. Experience accumulates to prove that most modern processes of mass production can be performed in most countries and climates with almost equal efficiency.”
N. A. de S. Amaratunga
