After a free-market surge, Sri Lanka orders austerity to curb inflation

The payoff was quick and dramatic when Sri Lanka made its celebrated economic about-face from welfare-state socialism toward a free-market economy more than three years ago.

Taking Singapore as its economic model, the government of President J. R. Jayewardene threw open the island nation's doors to export-oriented foreign investment, relaxed import restrictions, cut back price controls and budget-draining consumer subsidies, and set off on large-scale capital development projects.

But the initial euphoria brought on by dramatic growth rates -- 8.2 percent in 1978, 6.3 percent in 1979 -- is giving way to concern about soaring inflation , widening trade deficits, and a slowdown in the growth rate to an estimated 5.6 percent for 1980.

With inflation estimated as high as 40 percent a year and higher import bills threatening to gobble up Sri Lanka's real economic gains, austerity has become the new government watchword.

Free-spending ministries are feeling the budget ax, and big-ticket showpiece public works projects are being scaled back in an effort to reduce the government's own contributions to inflation. Capital budget cuts of up to 35 percent represent an attempt to win back the smiles of the International Monetary Fund, which demonstrated its displeasure with runaway government spending last year by halting disbursement of loans committed for 1979-81.

A fresh concern is whether the inflation-fighting cutbacks will hurt the government's often-stated top priority: creating more jobs for unemployed Sri Lankans.

"We are caught between Scylla and Charybdis," Finance and Planning Minister Ronnie De Mel moaned as he presented the government's 1981 austerity budget. "If we curtail development and growth, we lose the fight against unemployment. If we do not put on the economic brakes, even slightly, we lose the fight against inflation."

"It is the classic damned-if-you-do, damned-if-you-don't situation to which economists, political scientists, and practical politicians all over the world still have to find a satisfactory answer," Mr. De Mel said.

The government takes pride in having trimmed the number of unemployed from 1. 2 million in 1977 down to the current level of 875,000. It has promoted the available work force as one of the chief attractions of the free-trade zone set up outside the capital, with emphasis on both the comparatively low going pay scale -- about $35 a month -- and one of the highest adult literacy rates in the developing world.

Tax holidays, import-duty exemptions, and other incentives have proved a powerful lure for foreign investors. By the end of 1980, 64 companies had signed agreements to set up shop in the free-trade zone, with a job potential of 33,000 at full capacity. By year's end 24 were in commercial production, employing a work force of 10,650.

"We've had excellent results with the free-trade zone," a Sri Lankan diplomat says proudly. "It's far surpassed our expectations." Eager to move into export of electronics assembly items a la Singapore, the government was particularly pleased to sign on Motorola Inc. last year for a semiconductor plant that will eventually employ about 2,700 people. "That was one of the big fish we were able to get into the zone," a government official says.

The Jayewardene government has not denationalized the industries taken over by the previous government of Sirimavo Bandaranaike; about 60 percent of industry is still in the public sector. But troubled state enterprises such as textiles and sugar production have been given to private companies to manage. "We are asking these firms to put things right, and in a few years' time they'll hand the industries back to us," Mr. Jayewardene has said.

He has dropped or cut back costly food, utility, and transport subsidies that consumed much of the previous socialist government's budget. But he has kept other social welfare benefits, such as free health care and free education through university level, which have produced quality-of-life standards remarkable for a developing country.

Although Sri Lanka's annual per capita income still falls below $200, its average life expectancy of 69 years, adult literacy rate of 88 percent, and low population growth rate of 1.7 percent are the envy of most third world countries. About 7 million Sri Lankans -- nearly half the population -- remain poor enough to qualify for the government's food stamp program.

Foreign aid donors have stepped up assistance to Sri Lanka since its economic turnaround, concluding aid agreements of nearly $1.3 billion in the three-year period ending last June 30. Tourists are also calling on Sri Lanka in rising numbers; 321,780 arrived last year to drive up tourism to the country's fourth-largest foreign-exchange earner after tea, rubber, and industrial exports.