Sri Lankan Economy, Peace and
The Debt Trap

By Vasantha Raja

The signs are that Sri Lanka’s crumbling economy is set to cause a far bigger problem for prime minister Ranil Wickramasinghe’s new administration than the Liberation Tigers of Tamil Eelam (LTTE), unless it acts decisively to meet the Sinhala majority’s urgent economic needs. The latest statistics of the country’s economic fundamentals suggest the country is well and truly bogged down in a debt-trap similar to that which is pulling down former economic giants like Argentina into a Devil’s Spiral towards total bankruptcy. In Sri Lanka, fast deteriorating government revenue is already far below the amount necessary to service the state’s relentlessly expanding debt to foreign and local financiers.

“There will be no money for any other government expenditure after we service the debt”, deputy finance minister Bandula Gunawardene is reported to have confessed recently. “The war chest is empty,” finance minister K.N. Choksy commented no sooner than he took over the new ministry. The implication is stark: continuing the war in this context would be similar to committing economic ‘hara-kiri’. Colombo’s new pragmatic administration appears acutely aware of this reality. This would seem to explain its determination to try to win the trust of the LTTE and end the war quickly. All this, certainly, improves the chances of a successful peace process being launched this time round, in contrast to earlier sham efforts. The benefits of a peace settlement restoring stability to a bankrupt economy are obvious. For one thing, ending the war would save a huge amount of government expenditure as well as much-needed energy and power, presently being consumed by the Sri Lankan security forces on a high priority basis.

Also, the large-scale return of wealthy Tamil expatriates to a freshly developing north-east - with newly acquired entrepreneurial skills - could help to kick-start economic activity in the south too. And of course, a genuine breakthrough in the peace effort would set the scene for the resurgence of a tourist industry that is presently in a nose-dive. While all this is true, the country’s economic disintegration is too deep-seated to be saved by peace dividends alone. The export-oriented (but not sufficiently diverse) economy has, for too long, been dependent on western markets that are presently in a state of contraction. Textiles, clothing and leather production fell by 16 per cent in the third quarter of last year - mainly due to the drop in demand from major buyers in the US and the European Union (EU), which together account for more than 90 percent of total demand. Many of Sri Lanka’s once thriving industries have collapsed.

The manufacturing sector, in particular, plunged 10.5 percent in the third quarter of 2001. Many local and foreign industrialists are folding their investments to flee the country. A dramatic drop in the import of investment goods is also indicative of the fast eroding manufacturing sector. Unemployment is growing fast, while the cost of living is rising: for the lowest 40 percent of income-earning households in Colombo, the cost of living rose at an annual rate of 10.3 percent in December. Consumer demand is meanwhile evaporating. The accumulated losses of the corporate sector run into billions and billions of rupees. Physical economy This sudden collapse of the government’s tax base is, in fact, the inevitable result of the fast eroding physical economy. For example, government revenue last year was down by 30 billion rupees; GDP shrank by an unprecedented 3.7 per cent in the third quarter of 2001; the budget deficit was 10.5 per cent of GDP, and GDP growth is now in the negative. Meanwhile, the debt bubble continues to expand, ensuring that annual debt service charges grow bigger and bigger, mauling further the government’s dwindling revenue base.

All-important infrastructure facilities - including power and water management, communications, transport, health and education - are in a total mess to say the least. Above all, the gap between the ultra-rich minority and the destitute majority is widening by the day, providing a lucrative recruitment ground (particularly among rural youth) for pro-war Sinhala extremists led by the radical Janatha Vimukthi Peramuna (JVP). Come what may, the new administration seems determined to faithfully maintain debt servicing by drastically reducing public spending. To do this while maintaining even a skeleton form of infrastructure and public services, the government will need to add further huge sums of credit to the existing heap. This scenario, while creating lucrative conditions for the foreign and local financial oligarchy, is likely to further undermine the manufacturing sector, thus further eroding the government’s tax base. This is the hallmark of a debt-trap that locks up the economy in a vicious circle. In this context, the new prime minister and his close ally Milinda Moragoda, the minister for economic reform, seem confident of their radical new vision of Sri Lanka as part of a dynamic South Asian regional economy dominated by its giant neighbour, India.

They seem hopeful that a proposed ‘Landbridge’ between Sri Lanka and India and the formation of five “independent” economic zones in Sri Lanka (similar to the way China’s economy is being restructured) will eventually bring prosperity. Whether the north-east will be touted by the government as one of these five independent economic zones - as part of a peace settlement with the LTTE that might be more palatable to the Sinhalese - remains to be seen. The concept of an independent economic zone, however, may not be enough to meet the political aspirations of the Tamil side. In this respect, the existing reality of a Tamil ‘army’ may well become the crucial issue, as well as a political structure that would involve voluntary cooperation between the Sinhalese and Tamil nations. Peace process One of the biggest short-term challenges for the UNF government is the preservation of social stability in the face of Sinhala ultra-nationalists’ efforts to undermine the peace initiative.

The government’s strategy to deal with the pressing economic problems could determine a lot within the next few months. It has installed a special committee to find ways to reduce the cost of living and promote job creation. However, the extent to which the recommendations of such a committee could be reconciled with the monetarist logic of IMF recipes is not clear.

What is clear is that any measures that worsen unemployment and further undermine the living standards of ordinary people, including the middle classes, only serve the warmongers desperate to rock the peace boat. The ability of the JVP to win over the Sinhala nationalist base from the now-discredited SLFP must not be underestimated. The JVP would be only too happy to take advantage of mass discontent at this juncture to revive its old theory of Indian expansionism to give a new twist to its Sinhala supremacist campaign. Perhaps, this would be a good incentive for India to assist prime minister Wickramasinghe get his economic act together before it is too late. Debt bomb The finance ministry’s willingness to abide closely to IMF demands has already shown that the thinking within the new administration has failed to transcend the economic axioms of the monetarists. Indeed, perhaps it is time to question the credibility of such policies.

Here, it is prudent to reflect on how IMF recipes have catastrophically failed in Argentina pushing that economy into total bankruptcy, causing widespread social unrest in the process. The government may have to resort to radical new ways of reinvigorating the economy, assuming of course a lasting peace atmosphere in the near future. Dogmatic adherence to monetarism could be fatally misplaced. Commenting on the Argentine catastrophe, the controversial US political economist Lyndon LaRouche, a democratic presidential pre-candidate for the 2004 elections, recently said the time has come for the IMF to fold up its operations internationally. Putting the blame for Argentina’s mess squarely on the IMF he said:

“There would be no stability in Argentina until a National Banking System is created to issue directed credit for job creation and to reactivate the domestic economy” [My emphasis; press release of the Executive Intelligence Review, www.larouchepub.com]. In fact, LaRouche has, in many different countries around the world, argued that those governments shackled by terminal debt crises will sooner or later have to get to grips with their own “credit creation and distribution” in order to launch directed investment on massive infrastructure projects to facilitate favourable conditions for industrialists and farmers to thrive. The watchword of a caring government, in his view, is its dedication to the “common good” of all sections of the people. He has come up with exciting and imaginative solutions to the present global monetary disintegration, while advocating equally novel perspectives for individual countries trapped by ominously ticking “debt bombs”. Cosmetic patchwork aimed at temporarily buying off the masses is not going to work in a “global economic meltdown”, Larouche warns.