The Impact of Structural Adjustment in Sri Lanka

by Fr. Tissa Balasuriya
Center for Society and Religion (CSR)

I. Introduction

Since July 1977, a pro-capitalist and pro-Western government in Sri Lanka has been implementing a number of measures commonly associated with economic liberalization and structural adjustment in consultation with and under pressure from the International Monetary Fund (IMF), the World Bank and the "donor" countries.

Structural adjustment programs or policies refer to a package of changes in the laws and institutions of a society relating to its economy in order to adjust it to certain goals as desired by the World Bank and IMF that prescribe these measures. We can distinguish, however, between their expressed goals and the real effects of these changes - a perception between rhetoric and reality.

Structural adjustment programs (SAPs) propose changes in a country’s policies apparently intended to bring about rapid in-dustrialization and the transfer of technology through the availability of credit and foreign aid in the form of loans, grants and investment. The policy package includes:

  • Introducing open market policies in trade

  • Constructing free trade zones;

  • Liberalizing exchange rates, trade and banking, hence, making it easier to move money between countries;

  • Establishing stock exchanges through which local and foreign capital can buy assets;

  • Promoting export crops, export industries and tourism;

  • Opening the country to foreign investment

  • Permitting national and foreign ownership of the means of production;

  • Privatizing public sector enterprises;

  • Offering constitutional guarantees for foreign capital;

  • Providing infrastructure - communications facilities, roads and transportation networks - with state funds for private enterprise and foreign companies;

  • Decreasing budgetary deficits through regressive taxation;

  • Lowering taxes on capital, thus, affecting income distribution and demobilizing the State;

  • Reducing public sector involvement in the economy, including even administration;

  • Cutting subsidies for social services, such as education and health;

  • Restricting the rights of workers, thus, allowing their services to be more easily terminated, which impacts gender, race and ethnic relations.

These policies affect the whole gamut of economic activities and social relations of a society. On the basis of such adjustments, foreign funds are made available with external debt repayment as a primary objective. Through these polices, countries are integrated within the world economic system in which the transnational corporations (TNCs) dominate many lines of production, distribution, research and technology. The power of TNCs grows with their mergers and the takeover of state and private enterprises. The local political power is compelled to help them as a condition for further aid, and the local elites share economic benefits with the TNCS.

There are certain imperatives in the present economic context of poor countries which have to be recognized and dealt with - with or without IMF and World Bank recommendations. We must learn to live within our means. We must reduce our budgetary and balance of payments deficits. We must avoid losses and waste in the public sector. Bribery, corruption and favoritism must be eliminated. Civil wars must be ended with peace and justice to all. There must be freedom for enterprise and reward for work and initiative.

There are certain gains proclaimed for poor countries from this SAP process: the introduction of new technology and skills, the transfer of factories to these countries, the provision of new lines of employment and the growth of communication infrastructure. If they are very careful - not too dependent on foreign sources and not involved in internal conflicts - they may develop to the status of a Newly Industrialized Country (MC). This, however, is not the position of most countries nor is the model of industrialization widely replicable because of the lack of resources and its exploitative nature. Some have to pay the price for others to advance in this competitive, anti-social, ecologically harmful process.

II. Drawbacks of SAPs

Are the SAP remedies of the IMF and World Bank the way forward for poor countries? Do we have to accept naively the whole package of policies that are thrust upon us by foreign "donors"? In response, we can follow the findings of the World Bank and IMF which acknowledge that the strategies they have sponsored have not worked satisfactorily in most countries of the world. Dr. Rehman Sobhan of Bangladesh, analyzing the data in the 1992 World Development Report of the World Bank, also.notes that only a few of the 76 countries which accepted SAP reforms improved their economic performance in the 1980s. In general, 66 countries faced a decline in their growth rates in the 1980s compared to the earlier period; 53 countries registered a decline in export growth. Although not all of them were exposed to the reforms, most were. Evidence seems to indicate that, although claims are made that SAPs help the development of poor countries, these nations are often being underdeveloped further and made more dependent on foreign donors.1

In spite of the results of their own studies and those of others, the IMF and World Bank propose SAPs as a universal panacea for all countries and all situations, except, of course, for the dominant countries which are themselves in debt. UNICEF, the United Nations Development Program (UNDP), the International Labor Organization (ILO) and the United Nations Economic Commission for Africa (UNECA) have raised substantial and legitimate challenges about the operation of SAP policies, especially in Africa.

III. The Contradictions of SAPs: The Sri Lankan Experience

SAPs are said to save foreign exchange, but they have actually increased Sri Lanka’s foreign dependence. SAPs are also expected to increase state revenue and reduce deficits, yet they often reduce the state’s earning capacity by transferring profit making public enterprises to foreigners and/or local private companies, for example, Sri Lanka State Distilleries Corp. and Ceylon Oxygen. In addition, foreign investors are permitted to repatriate 100 percent of their profits, and there is often a loss of revenue because of tax concessions to capital while making the burden of indirect taxes heavier on the poor.

A. Budget Deficit

During the past decade, the budget deficit, after grants, has regularly been high. The government has had to utilize foreign funds for financing much of the budget deficit, which has included large expenditures for development projects, infrastructure for the liberalization of the economy and defense. Since 1988, the budget deficit includes a current account deficit, which means that the government is also obtaining foreign loans for current expenditures.

B. Balance of Trade

The balance of trade has been worsening during the past two decades because of Sri Lanka’s imbalance between imports and exports and more so in rupee terms because of the devaluation of the currency. From a trade deficit of Rs. 280 million (US$5.71 million [all conversions are based on 1994 exchange rates]) in 1970, the balance of trade deteriorated to a deficit of Rs. 16.35 billion (US$333.67 million) in 1980 and Rs. 28.25 billion (US$576.53 million) in 1990. Two years later it stood at Rs. 42.36 billion (US$864.49 million) in 1992.

There is a correlation between the balance of trade and the need for foreign aid, grants and/or loans to balance the resource gap. This, in turn, is linked to the increase in external debt and debt service payments. For an evaluation of our pattern of trade, it is necessary to analyze the composition of Sri Lanka’s imports and exports.

Sri Lanka ‘S Budget Deficits2

Year

Budget deficit (After Grants)

Foreign Borrowing

1983

-12,847

6,312

1984

-10,483

6,492

1985

-15,678

7,109

1986

-18,203

9,061

1987

-17,072

5,716

1988

-28,195

7,128

1989

-21,779

5,926

1990

-25,153

11,644

1991

-35,478

25,327

C. Food Bill

Our food import bill is very high and increasing, from about Rs. 2.26 billion (US$46.12 million) in 1977 when SAP policies were first implemented to about Rs. 17.07 billion (US$348.37 million)in 1991. This means that, with our population of 17.5 million, every Sri Lankan imports Rs. 1,000 (US$20.40) worth of food and an average household imports Rs. 5,000 (US$102) worth of food each year.

D. Increasing Foreign Debt

SAPs are intended to help debtor countries meet their debt obligations and improve their financial health. However, the liberalization of imports and related measures often worsens debt, and debt service increases as a result.

For example, Sri Lanka’s external debt increased from Rs. 1.55 billion (US$31.63 million) in 1970 to Rs. 25.83 billion (US$527.14 million) in 1980 to Rs. 233.97 billion (US$4.77 billion) in 1990. This was about a seventeenfold increase during the decade of the 1970s and about a further ninefold increase during the decade of the 1980s. By 1992, the foreign debt had reached Rs. 313.28 billion (US$6.39 billion). Looking at the critical year of 1977 when Sri Lanka first embraced SAPs, the foreign debt was Rs. 13.32 billion (US$271.84 million); in 1976, the debt had been Rs. 6.83 billion (US$139.39 million). From 1988 to 1991, the per capita external debt grew by Rs. 6,700 (US$137) in three years. The uncontrollable increase in our external debt indicates the weakness of our economy in spite of the high-level talk of reaching MC status by the year 2000.

Our mounting external debt has taken its toll on our export earnings. This situation is even worse when we consider the purpose for which the debts are obtained and the conditions of repayment. Increasingly the new loans are for current expenditure, and much of the aid goes back to the countries which supply armaments to the government.

The civil wars involve us in a vicious circle of poverty and war:

poverty brings about wars, and the wars lead to greater impoverishment and indebtedness.

Our indebtedness and the foreign ownership of our enterprises is leading to a position in which Sri Lankans are becoming bonded laborers for our foreign creditors. Children today are born with a burden of foreign debt which they may have to spend all their lives to repay!

E. External Debt Service Payments

As external debt has increased in volume over a period of several decades, likewise, debt service payments - the payment of the principal or amortization and interest - have also risen. For instance, in 1970, Sri Lanka’s debt service payments were Rs. 623 million (US$12.71 million); in 1980, they were Rs. 2.76 billion (US$56.33 milLon); and in 1990, they had grown to Rs. 17.97 billion (US$366.73 million). From 1989 to 1992, the country’s external debt service payment alone totaled Rs. 78 billion (US$1.59 billion) or about Rs. 4,500 (US$92) per person. Of this amount, the interest payment was Rs. 23 billion (US$469.39 million). In 1991, Sri Lanka’s debt service of Rs. 20.01 billion (US$408.37 million) was more than our total debt of Rs. 13.32 billion (US$271.84 million) in 1977.

This is a severe constraint on the budget and increases the need for further loans to bridge the gap of government income and expenditure. In its report of 1991, the Central Bank states, "The cumulative effect of borrowing to finance budget deficits has led to interest payments accounting for an increasing share of the annual government budget." During the past five years, interest payments increased from 4.5 percent to 6 percent of gross domestic product (GDP). It is more than the defense expenditure, which was 5 percent of GDP or 20 percent of current expenditure in 1991.

As Sri Lanka’s debt service payments increase, this leads to a further demand for loans, a fall in the exchange value of the rupee, further inflation, further sale of our public assets, more foreign ownership of our enterprises - the vicious circle of indebtedness. Devaluation increases the incidence of debt service in rupee terms, and the pressure of debt service leads to ongoing devaluation.

F. Exchange Rate

In the past two decades, Sri Lanka’s currency has rapidly devalued in relation to the U.S. dollar. About 20 years ago Sri Lanka only had to exchange approximately Rs. 6 for US$1 in 1970. This increased three times to Rs. 18 in 1980 and more than doubled again in 1990 to Rs. 40.24. Today the rate is about Rs.49.

The effect of SAP policies on Sri Lanka’s exchange rate can be clearly understood by noting that in 1976 the country’s rate of exchange with the U.S. dollar was Rs. 8.86; by the end of 1977 when SAPs were introduced, however, it was Rs. 15.56.

The SAP-recommended devaluation of currency is expected to increase exports and reduce imports. A U.N. survey of 12 SAPs, however, found little improvement in export earnings. With devaluation, the following effects instead have been observed:

  • The prices of imports have increased;

  • The cost of living has risen;

  • Foreign loans have encouraged imports to be maintained despite devaluation;

  • Commodity prices have fallen as more exporters compete for the same markets;

  • Devaluation has increased the burden of debt; and

  • Earnings have gone to the payment of debts instead of investment in development or essential services.

G. Foreign Aid

At the global level, the stark reality is that presently there is no net aid or financial transfers from the rich to the poor countries as a whole. The poor countries now transfer annually about US$30 billion to the rich countries, primarily in the form of debt repayments. Even if we include foreign loans as aid, the statistics of the Central Bank indicate that since 1987 Sri Lanka has not received more "aid" than we have paid in debt service.

The statistics, in fact, indicate that Sri Lanka has paid about Rs. 8.88 billion (US$181.22 million) more to foreign countries from 1987 to 1990 than all of the grants and foreign loans it has received. Sri Lanka is, thus, not a net receiver of foreign "aid." Is the foreign "aid" then that has been extended to Sri Lanka, in effect, simply more loans and grants with which the country can repay its foreign creditors?

H. Industry

It is believed that SAPs will encourage industrialization. However, SAPs imply a false dichotomy between "import substitution" and "export promotion." Some of the most spectacular successes of "export-oriented growth" came after a preparatory phase of intense import substitution with very Strong state intervention, as in south Korea. The two can, and generally need to be, complementary.

We must be cautious too of the blind alley of "export crop" specializations as in the case of our garment industry. While the textile industry is expanding rapidly, we must be careful about being too satisfied with its growth. First of all, 70 percent of its foreign earnings are used to import raw materials. In addition, the formation of the North American Free Trade Area (NAFTA) and the recent conclusion of the latest round of the General Agreement on Tariffs and Trade (GATT) negotiations are already threatening our textile exports to North America. A program from 1982 to 1993 to rapidly construct 200 garment factories has aggravated this problem. Secondly, the profits earned by our cheap, exploited labor are enjoyed primarily by the foreign owners of these factories. Thirdly, our economy, with these nomadic-like, foreign-owned enterprises that are uncommitted to our communities, becomes overly dependent on a competitive, volatile, international market that is still facing a major recession in many industrialized countries. Our garment industries are also limited to mainly tailoring factories with a lack of technological development or value added. There is little investment in the manufacturing sector in Sri Lanka that transfers significant technological expertise to our industries.

In addition, SAPs create monopoly control of some industries: Ceylon Oxygen, for example, retains its monopoly power in producing oxygen and nitrogen, Prima Ltd. in buying oils and the Fats Corp. through its grain elevator business controls a great portion of the livestock market.

SAPs also create more unemployment through the process of privatization, the retrenchment of workers, the displacement of small farmers through cuts in agricultural subsidies and a reduction of marketing facilities and the closing of local industries because of import liberalization.

Several incipient industries, for instance, had to close after the post-1977 liberalization program to promote exports. Thousands of hand looms and many small industries producing basic items, like matches, soap, salt, etc., which were popular cottage industries at one time, gradually declined in production, and some were erased from the market. As a result, there is increased poverty, unemployment, regional disparities and a growing external dependence.

In addition to these problems, there is insufficient planning of our long-term industrial growth. SAPs do not safeguard the national ownership of our enterprises. We are giving away our industrial raw materials to foreign companies without developing systematically our competence for their further industrial processing. Later we may find that valuable raw materials, like clays suitable for industrial production, are exhausted. There is an in-

adequate accent on building the capital goods sector as well. Meanwhile, SAPs encourage luxury imports while the poor cannot even afford their basic needs.

I. Agriculture

The very forces which encourage global food production also promote a lower standard of living and a decline in the demand for food. Food aid from excess supplies in rich countries discourages local food productions changes eating habits and encourages consumption of foreign products and processed food that are often subsidized by foreign governments, especially those in the European Community (EC) and North America.

Like the industrial sector, SAPs foster foreign TNC ownership. In the case of agriculture, this is foreign ownership of good agricultural land for export crops rather than factories for producing export goods. Agricultural resources are being committed for growing food for overseas consumption while Sri Lanka’s people are hungry. SAPs replace local staple crops with export crops, thus, increasing dependence on foreign markets - a long-term "recipe for starvation" as subSaharan Africa has experienced.

In the process of reducing public expenditures to balance the budget -a favorite SAP prescription for development - agricultural extension services have been neglected. This has reduced the transfer of better production methods to farmers. The agricultural marketing services of the State have also been reduced, and the development of cooperatives has been neglected. Sometimes farmers at harvest time have been unable to obtain reasonable prices because of the lack of agricultural planning and marketing services. Their frustration has led some farmers to commit suicide. On the other hand, those who control the market exploit both the poor rural producer and the urban consumer.

The relative neglect of agricultural production and agro-industrial development based on Sri Lanka’s raw materials, the reduction of subsidies on food and, more recently, the removal of the subsidy on fertilizers are making life hard for the poorer sectors of society, especially peasants. SAPs reduce food production and drive small farmers out of business and off their land, forcing them to become agricultural laborers or pushing them to the cities where they become part of the urban unemployed. The sturdy peasantry is increasingly transformed into an army of landless seasonal plantation workers. This is happening even in Europe and North America, which have 34 million unemployed.

The Central Bank Report of 1992 notes a serious setback in agricultural production, largely because of a prolonged drought. The growth rate in agriculture was minus 1.5 percent that year, and tea production decreased drastically by 26 percent. In addition, Sri Lanka’s future agricultural production is eroded by foreign managing consultants who tap the rubber trees for quick profits to the lasting detriment of the country, and the felling of coconut trees for housing and industrial development that must affect coconut production unless adequate replanting and subsidies compensate for the trees that have been cut.

The control of the seed market by giant agro-industrial companies, such as Cargill, who establish "plant breeder rights" to the detriment of millions of small farmers, leads to the destruction of biodiversity. In addition, pesticides used in export agriculture damage the environment.

The needs of debt servicing lead to an effort to produce more, especially for export. This contributes to the overutilization of the land and environmental degradation that, in turn, reduces agricultural productivity and worsens food shortages, as in sub-Saharan Africa. We export what we produce and import what we consume. Our export prices fall whereas import prices increase. Thus, our debts increase.

We should revise our tariff and subsidy policies to reduce food imports and become more self-reliant in food. Some of the state-owned tea, rubber and coconut plantations have been given to private, often foreign, management. These companies, mostly Indian, may abuse these valuable assets to earn quick returns during the five-year life of their management contracts.

J. Politics and Economics

SAPs advocate reduction of state activity in the economic field as a condition for economic growth. They, therefore, urge and demand the privatization of all state economic enterprises and the deregulation of the private sector. Reality, however, is that the nations that have advanced economically, like Japan and the East Asian NICs, have had strong governments giving direction to their economies. They fostered and protected their enterprises against foreign competition, at least until they were strong enough to compete successfully with others. They created an environment for economic growth through subsidized credit, protection and by implementing land reforms that increased local food production. Their opening to the free market was in an orderly and calculated manner - following success - while our opening is injudicious and from a position of weakness.

The policy of privatization is being pushed relentlessly by the IMF and World Bank. Once again, the main industrial, agricultural and service sectors of the aid-dependent poor countries are falling into the hands of local elites and large TNCs. The privatization of state enterprises tends to subsidize private investors and increases the prices of services for the poor: water and irrigation, electricity and roads and transportation. The deregulation of private enterprises provides opportunities for corruption and favoritism, even in the process of privatization.

Despite the rhetoric of democracy, there is a lack of transparency in discussions and decisions regarding conditionalities imposed on the debtor countries without exposure even to Parliament and select committees - much less to the general public affected by them. If this trend continues, people may resort to political violence as the only language that the corrupt and powerful recognize.

IMF and World Bank policies insist on demobilizing the State in poor countries and leaving people to the mercy of market forces. In this process, the countervailing power of the State is removed, and the country is rendered defenseless against powerful TNCs that occupy most sectors of the economy, especially since the private sector is weak in most poor countries. On the contrary, the State in the rich countries exercises a strong regulatory function on the economy, such as on agricultural production and marketing as in Canada through the Canadian Wheat Marketing Board, the Milk Board and other similar bodies.

With SAPs, the poor countries become dependent on foreign aid to balance their budgets. The governments agree to donors’ conditions in order to survive. The sovereignty of the poor countries is thus undermined by the conditionalities placed on aid. Their budget and policy decisions are made annually at the Paris donors’ meetings.

K. Social and Human Rights Concerns

The rich countries express concern over human rights, and rightly so, yet SAPs deny people their social and economic human rights. By reducing subsidies, cutting social services and making education and health fee-paying services, SAP policies make life difficult for the poor. In some areas, these cause famine; wages are kept low; the cost of living rises; inequalities increase; the social services improved in the previous era are reduced, if not abolished; strikes are effectively banned; job security is reduced; and labor laws are tightened against workers. A million people - the number believed to be unemployed, who are primarily youth - is a waste of human potential that could be a vital source for growth.

Instead of relieving poverty, however, SAPs have brought about the growth of social inequality, widening the gap between the rich and the poor. The markets are manipulated by the rich who claim that they are only following marketled policies. SAPs, we are told, bring about long-term gains after the people have experienced short-term pains.

Poverty became so bad that the late President Premadasa in 1988 proposed a vote-catching Poverty Alleviation Program, which would give income subsidies and Rs. 25,000 (US$510) to poorer families to help them overcome their poverty.

Worsening social conditions in Sri Lanka today though have led to increasing discontent, violence, an increase in expenditures for defense, more prisons and less law and order. As the country becomes poorer and there is less of a surplus for the ruling classes, there is a tendency for them to resort to other forms of manipulation. Ethnicism is one such approach. These forces - the desperation of both the poor and the rich - are partly the cause of our ethnic conflict. The fact that the ethnic conflict in Sri Lanka coincides with the liberalization of the economy and the strengthening of the SAP measures leaves room for questioning whether the civil war is not partly the result of SAPs themselves.

The worsening social conditions have meant that the government of Sri Lanka has functioned under continuing emergency regulations since 1977. There are now new measures for tightening these emergency laws to prevent public criticism of these state policies and of the powerful.

  • Young women are exploited in the free trade zones without the assistance of worker’s associations and find themselves working and living in unsuitable conditions;

  • Women are compelled to migrate to foreign countries to earn foreign exchange to survive because of rising prices and the unemployment of males;

  • Families break up with serious consequences on social and moral life;

  • Children are neglected; and

  • Prostitution, including child prostitution, increases.

M. Ecological Damage

The productive capacity of the country has declined because of the depletion of our non-renewable resources, such as forests, minerals and gems, and damage to our coastline and fisheries. In 1945, the forest cover was estimated at 45 percent of the country; now it is estimated at 20 percent in spite of the reforestation efforts of the government.

Industries and people responsible for the pollution of Sri Lanka’s water and air are not held accountable. Our canals and rivers are polluted. Because of erosion, the rivers carry away much of our topsoil. City roads are full of petrol fumes because of heavy traffic. Ecological and environmental damage is not considered when calculating our gross national product (GNP).

L. The Exploitation of Women N. International Impact

Despite the rhetoric about women’ s rights, modernization has meant the greater exploitation of women. High prices, food shortages and worsening health conditions place heavier burdens on women. Women also share the following experiences:

  • Women’s rights are not safeguarded but rather are sacrificed for the sake of earning foreign exchange;

SAP policies bring about changes in relations among nations. The poor countries return to a state of being colonized once again with control exercised through the World Bank and IMF, which, in turn, are directed by the rich powers - the United States, Western Europe, Japan and now the Asian economic "tigers’ -with the connivance of our local elites who also benefit.

The world is moving towards greater regionalization and a certain delin king within that frame work. We need to think much more about increasing understanding and improving planning among the countries of South Asia and Africa.

It is to be feared that, instead of developing into a Singapore, a Taiwan or a south Korea, we are on a disastrous trend towards becoming more like an Ethiopia or a Peru with their social and ethnic civil conflicts. Facing these issues with full consciousness of their import and gravity is one of the main spiritual challenges to us as a country with a long spiritual and cultural heritage, which we should not disown for the sake of foreign loans.

All these indicate that it is timely that we examine more carefully the ideological claims of SAPs. An intellectual neo-colonialism tends to accept the SAP paradigm rather uncritically. The poor countries need to regain the potential to design their own future after careful investigation of the results of the past two decades. An informed national dialog is essential; people affected must have a voice in deciding their future. Resistance to these SAP measures may grow as the poverty of the masses increases and as the poor in the rich countries too feel the pressure of marginalization by the powerful.

There must be a return to an accent on the social function of the economy and of the State; but for the many poor who will be eliminated during the coming decade, this will be too late. Despite all of our technological advances, the 1990s may be a most cruel decade. Humanity’s hope is in the rise of a social and moral consciousness that leads to a global people’s movement for the transformation of people and structures at the local, national and global levels.

Footnotes

1. Economic and Political Weekly, July 25, 1992.

2. All figures are given in millions of Sri Lankan rupees. The exchange rate in 1994 is about Rs. 49 + US$ 1.00 [Source: Central bank report 1991; Economic and Social Statistics of Sri Lanka, Nov. 1991.]


[This article was published in Voices Vol.18 No.1-2, March/June 1994. pp.40-46]