Debt and Structural Adjustment in Sri Lanka

by Vijaya Kumar
Christian Worker’s Fellowship (CWF)


Sri Lanka has now endured the World Bank’s stabilization and structural adjustment programs for 15 years. The World Bank for decades traditionally financed long-term development projects to countries with short-term balance-of-payment difficulties by attaching conditions to the loans that they provided. The stabilization program was targeted at reducing current account deficits while the structural adjustment program is aimed at achieving Newly Industrialized Country (NIC) status for Sri Lanka by the year 2000.

The deep involvement of the World Bank and the International Monetary Fund (IMF) in Sri Lankan economic policies took place only after 1977 with the election of the United National Party (UNP) government of I. R. Jayewardene. The United Front (UF) and Sri Lanka Freedom Party (SLFP) governments of 1970-1977 refused to accept the World Bank package for underdeveloped countries (currency devaluation, cuts in social subsidies and the relaxation of trade and exchange controls) in exchange for World Bank loans. There is no doubt that the failure to obtain sufficient external funding to tide over the global oil and food crises in the 1970s played an important role in the defeat of the UF/SLFP governments. The World Bank-IMF programs, on the other hand, have been the cornerstone of the UNP government’s economic policies. During its tenure in office, the UNP government has drastically changed the country’s economic policies. What are the principal changes that have been made?

  1. In November 1977, the Sri Lankan rupee was drastically devalued. The devaluation had the effect of increasing the value of a U.S. dollar from Rs. 8.59 to Rs. 16.03. The economic policies of the government have led to a continuing devaluation of the rupee so that the U.S. dollar after 15 years is now worth about Rs. 48.

  2. Exchange controls were liberalized with commercial banks being authorized to sell foreign exchange for specified purposes.

  3. Almost all import controls were removed; imports and exports of most items were liberalized; and import duties were drastically reduced.

  4. Price controls were removed with a view to encourage capacity utilization of industries.

  5. Income taxes were reduced, and a business turnover tax (BTT) was introduced.

  6. State monopolies in the import and internal trade sectors were dissolved.

  7. Changes were made in social welfare programs, and public expenditure on health and education in real terms has been reduced.

  8. Investment promotion zones (IPZs) were established to encourage foreign investment. International finance could invest in companies in these zones with no restrictions on ownership and could enjoy the free transfer of capital, tax holidays on profits, an exemption from tax for foreign personnel and non-resident shareholders, duty-free imports, foreign currency banking and exemption from the normal labor laws of the country.

  9. Similar concessions were offered for foreign investment outside the IPZs although there were restrictions here on the extent of foreign control and the normal labor laws applied.

During the last few years under the structural adjustment program, there has been further liberalization of exchange controls and the privatization of several state institutions and parastatals; restrictions on the foreign ownership of land and foreign involvement in the stock market have been largely removed as well. IPZ concessions have also been offered to industries in some sectors outside of the IPZs.

The aims of the World Bank stabilization programs were to reduce imports and expand exports to eliminate the external payment deficit over a relatively short period of time. In practice, it has not been able to reduce the deficit. What we have seen instead is the transformation of a positive current account balance in 1977 of Rs. 1.3 billion (117 million special drawing rights [SDRJ or US$27.08 million using the 1993 exchange rate for U.S. dollars for consistency for all figures below) into a negative balance of 75 million SDR in 1978 (US$17.36 million), which rapidly increased to about 500 million SDR (US$115.74 million) in 1980. It remained at approximately 400 million SDR (US$92.59 million) from 1980 to 1986 with the notable exception of 1984 when the deficit decreased to 50 million SDR (US$11.57 million). After 1987, the deficit remained between 200 million SDR (US$46.30 million) to 300 million SDR (US$69.44 million), except for 1991 when it rose to 352 million SDR (US$81.48 million).

An analysis of these figures shows that, although export earnings have increased at a faster rate than import expenditures, Sri Lanka’s trade balance has recorded a 600 million SDR (US$138.89 million) to 700 million SDR (US$162.04 million) deficit during most years. The balance-of-payment good years of 1977 and 1984 were years where there was a boom in tea prices while the bad year of 1991 showed a decline in tea export income. During 1980-1982, large balance-of-payment deficits were incurred, but this was because of a sharp increase in imports. Private transfers progressively increased from 6 million SDR (US$1.39 million) to 256 million SDR (US$59.26 million) in 1983; but since then, they have remained at that level.

Even though the rate of increase of import expenditures has decreased, Sri Lanka still requires 200 million SDR (US$46.30 million) to 300 million SDR (US$69.~ million) each year to meet its current account deficit.

The World Bank formula has resulted in a cycle of devaluation of the rupee (to protect local manufacturing) followed by inflation arising from the devaluation. This leads to pressure on wages - the increase of which makes local manufactures less competitive, requiring further devaluation of the rupee. This can be seen in the progressive increase in

value of the U.S. dollar which rose fromRs.2Oin 1981 toRs. 25 in 1983 toRs.3Oin 1987 toRs. 4Oin 1989to Rs. 45 in 1992 to Rs. 48 today. The Colombo Consumer Price Index, which notoriously underestimates inflation, increased by 650% during the 15 years after 1977, compared to an increase of 90% in the 15 years prior to 1977. The SDR which stood atRs. 10 (US$.21) in 1977 is now Rs. 62 (US$1.29).

The balance-of-payment deficit was largely financed by borrowings, grants of less than 15% of the deficit and direct investment of below 5% of the deficit, except in 1992 when it rose to 9% of the deficit. It is not surprising that the foreign debt has increased from Rs. 13.3 billion (700 million SDR or US$162.04 million) in 1977 to more than 5 billion SDR (US$1.16 billion) in 1992. The debt service ratio rose from 7.8% in 1980 progressively to 28.6% in 1988 but has since decreased to 16.7%.

The structural adjustment program which was introduced in the late 1980s has meant even greater involvement of the World Bank and the IMF in the economic policies of Sri Lanka. The Sri Lanka government has privatized more than 40 state institutions and parastatals during the past three to four years. Many of them were well-operated, profit making institutions. Some of these institutions have been undervalued, and the privatization process has not always been as transparent as it should be. For example, Ceylon Oxygen Co. (a well-managed company according to the Norwegian firm which took control after privatization), the Fats and Oils Corp. and the Fertilizer Manufacturing Corp. are a few of the institutions which were sold at a fraction of their value. One of the most profitable parastatals, the State Distilleries Corp., has also been privatized.

The tea and rubber plantations, which were owned by two parastatals, have been converted into 22 privately managed companies. The privatization of management is no doubt a prelude to the privatization of ownership itself.

Privatization has also affected the transportation sector. The privatization of state transport was preceded by the break up of the state monopoly on bus transportation, and the regional state transport boards have been converted to companies with workers’ shares, which will no doubt be eventually sold to private businesses. As for road and rail transport, its privatization is part of the World Bank strategy to eliminate subsidies in the transport sector. The government has also been required to eliminate subsidies on fertilizers, wheat flour and rice.

Within the government itself, several departments are to be closed, and the staff in the public sector is to be reduced by privatization, retirement incentives and the freezing of appointments.

Foreign capital has benefited from several changes implemented by the Sri Lankan government. For example, the 100% tax on the transfer of shares to foreigners has been removed, and the restrictions on foreign ownership of Sri Lankan companies have been reduced. This and the privatization program has seen direct investment increase from 25 million SDR (US$5.79 million) in 1990 to 49 million SDR (US$11.34 million) in 1991 to 86 million SDR (US$19.91 million) in 1992; portfolio investment has fluctuated from 7 million SDR (US$1.62 million) to 24 million SDR (US$5.56 million) to 18 million SDR (US$4.17 million) during the same period.

What are the results of the World Bank-IMF program?

At the outset, it must be mentioned that the results have been distorted since 1983 by the effects of the 1983 pogrom against the Tamils, the Janatha Vimukthi Peramuna (JVP) activities of 1989-1990 and the war in the North that has seriously affected the economy since 1985. It must be remembered that the government has been unable to administer much of the North and East during the past few years and that most of the utilities and services in this region have broken down.

In spite of this, there has definitely been an increase in growth. A growth rate of 5% to 7% was recorded during 1977-1983, but this decreased to 3.3% in 1983-1985. Since then, however, it has recovered to 4% to 5%.

As for investment, it increased as a percentage of gross domestic product (GDP) from 14% in 1977 to 31% in 1982 but declined to 22% in 1990. This is primarily because of a decline in public investment; foreign direct investment (FDI) accounts for only 5.4% of total investment.

Unemployment during this period decreased from 1977 to 1990 when it stood at 12%, but it is now believed to be 16% to 17% in spite of the war providing a new avenue for employment for youth, especially for males. Of the 8.6 million people available in the labor force, more than 1.2 million are unemployed, and several more million are underemployed. Of these, 800,000 have completed secondary school and obtained the G.C.E. (Ordinary Level) qualification while the number of unemployed graduates exceeds 25,000.

In the villages, unemployment appears to have increased while unemployment in towns has decreased. Small manufacturing units in the villages have not been able to survive the competition from foreign and local large-scale manufacturers that are well-known in the market. Most of the industrial development has taken place in the towns and suburbs. Recently, garment factories have been established outside of Colombo to take advantage of IPZ concessions offered to industrialists.

The removal of subsidies for fertilizers and competition from imported grain have caused many independent small-scale farmers to abandon farming. There has been an increase in the number of agricultural laborers.

The gap between the rich and the poor has also increased. Between 1953 and 1973, the share of income enjoyed by the top 10% of the households decreased from 40% to 28% while the share of the bottom 40% increased from 14% to 19%. Since then, the share of the top 10% has increased to more than 40% while that of the bottom 40% has declined to 11%. The difference between the income of the top 20% and the bottom 20% in the whole of Asia today is the highest in Sri Lanka.

An important consequence of the fall in incomes of the lowest strata is the emergence of malnutrition among children. The percentage of children suffering from chronic malnutrition has increased sharply since 1972. School dropouts have also increased with 35% of students leaving school before the fifth grade.

The black economy has expanded, and much of this money is used for ostentatious consumption. A government estimate in 1990 suggested that the circulating black money could be as high as Rs. 50 billion (US$1.04 billion) or 20% of the gross national product (GNP).

With the World Bank-IMF programs in place for 15 years and the burdens it has heaped on the poor and the working classes of Sri Lanka, one would have expected the development of a sustained campaign against the programs. The absence of such a campaign can be ascribed to the weakness of the organized trade union sector and to the "bribery" of workers in companies being privatized by the distribution of shares in the company.

In 1980, when the first effects of the program were being felt, a trade union demand for an increase of Rs. 400 (US$8.33) per month to offset price increases was resisted by the government, which declared the strike illegal, fired 40,000 strikers and replaced them with new appointees with political sympathies close to the government. This was a major defeat for the organized working class from which it has still not fully recovered.

The expected struggle against privatization by workers affected by it has also not materialized. The principal reason has been the offer by the government to the existing employees of 10% of the shares of the institutions being privatized. This has proved to be a bonanza to most workers as the shares offered to a worker could have a market value equivalent to their salaries for three to 10 years.

However, there has been some resistance to the new management when attempts have been made to change labor practices and norms in these institutions. A three-month- old strike at the Tyre Corp., which was privatized in 1992, has just been settled while similar strikes have taken place in privatized leather and textile firms. Workers in tea plantations have resisted attempts by the new managers to change working norms and to decrease the guaranteed number of days of work offered.

The labor campaign of Sri Lanka has, therefore, been restricted to attempts at educating workers on the consequences of deepening indebtedness and structural adjustment. There has been some analyses of their effects by academics in the press and in the publications of nongovernmental organizations (NGOs), like the Christian Worker’s Fellowship (CWF). The plantation trade unions have tried to convey the message to their members, and there is now some awareness and anxiety among estate workers that their standard of living could be reduced after privatization. Estate workers who were, until 1976, under private management well realize the differences between working under private and public management. They have, therefore, been able to confront management whenever they perceive any action against their interests. Furthermore, the government has not been able to offer them a 10% share of the plantation. They instead have been offered a 10% share of profits, if any, and ownership of the dilapidated, overcrowded 10 foot by 15 foot line room which they call their home.

One of the main demands underdeveloped countries with chronic balance-of-payment problems should make to the West is the immediate cancellation of outstanding loans. Debt service is itself often the major cause of balance-of-payment problems in most countries. We must also require the World Bank and the IMF to develop mechanisms to protect the lower strata of our societies from the effects of structural adjustment. Already there are signs that the World Bank is understanding the undesirability of the social consequences of its policies and is introducing ideas to alleviate poverty. In Sri Lanka, a poverty-alleviation program introduced as a populist measure by the previous president, has attracted some World Bank support, but this program does not seem as successful as it should be. To my mind, it is inconceivable that the World Bank, whose every policy appears to be designed to enhance social inequality in underdeveloped countries, could formulate solutions to the problems of poverty created by these same policies.

(Ed. note: The article below was presented at the Asian Consultation on Debt and Structural Adjustment, August-September 1993, Manila, Philippines.)