Sovereign-debt crisis

“Without debt relief, Sri Lanka’s economy will keep deteriorating”

Both poverty and political repression have been worsening in Sri Lanka since last year’s sovereign default. Here is the assessment of Ahilan Kadirgamar of the University of Jaffna.
Rally opposing social-protection cuts in Colombo in August. picture-alliance/NurPhoto/Pradeep Dambarage Rally opposing social-protection cuts in Colombo in August.

Sri Lanka’s government defaulted in April 2022. How is economy doing today?
The situation is dire. Sri Lanka’s GDP contracted by 7.8 % last year and is contracting this year as well. Some 500,000 formal-sector jobs have been lost. Another 1 million informal jobs were lost in the construction sector. Cost of living has risen by over 70 % with the crisis. According to the World Bank, the poverty rate doubled to 25 % last year, and the UNDP reckons that multidimensional poverty now affects over half of our people. Multidimensional poverty takes account of things like child mortality, nutrition, school attendance and consumption patterns.

Doesn’t the bailout your government agreed with the International Monetary Fund (IMF) help?
The problem is the austerity our government is imposing to fulfill its conditions. The government has cut social spending, including subsidies for basic goods. The rupee’s exchange rate has plummeted. The dollar went up to 360 rupees rather than 200 before the crisis. Fuel prices tripled. The central bank raised its lending rate from 6 to 16.5 %. It is now 11 %, but commercial loans reached as high as 30 %, so credit-financed investments are not viable anymore. Austerity is exacerbating preexisting economic problems which were caused by the Covid-19 pandemic, a resulting drop in remittances and later, when Russia invaded Ukraine, rising food and energy prices.

What is the political situation?
The government is increasingly repressive. It has passed and is passing bills to curtail civic freedoms. The list includes a new antiterrorism act, a new online safety bill and a new broadcasting bill. The authorities are restricting public dissent. Local elections were postponed because they were supposedly too costly. Presidential elections are due next year and parliamentary elections in 2025. Will they take place? We do not know.

Last year, a broad-based protest movement toppled the right-wing populist government of President Gotabaya Rajapaksa. Has the democratic momentum been lost?
Well, the protests initially did inspire hope, but the result was weaker, not stronger democracy. According to our constitution, the people elect the president and the parliament. After Gotabaya fled abroad, however, the parliament, in which his followers still dominate, chose Ranil Wickremesinghe as the new president. He is beholden to the Rajapaksa oligarchy. Gotabaya’s brother Mahinda, as you certainly know, is a former president himself. He and other brothers served in Gotabaya’s cabinet.

To a large extent, the debt that is crippling Sri Lanka was piled up by Mahinda. Is corruption the main problem?
Corruption plays a role, but its relevance tends to be overrated. This is Sri Lanka’s 17th IMF programme. The sheer number shows that we were never on a sustainable growth path. IMF policies did not solve Sri Lanka’s problems, they made them worse. Over the decades, our welfare programmes were weakened. Liberalisation led to education and healthcare becoming defunded and increasingly costly for the people. We have free universities in Sri Lanka that are now under threat, and now even our universal healthcare system is under attack. People’s lives are becoming more precarious. On the other hand, market-orthodox policies encouraged speculative investments, and occasional spurts of growth facilitated new lending from abroad, both to the government and private entities. The pattern is that we may end up in another default when the debt burden eventually becomes too heavy, and then the next IMF bailout leads to yet more market-orthodox policies.

Private-sector creditors are much more important in many sovereign-debt crises around the world today than they were in the past. Moreover, China has issued huge loans too. Multilateral institutions and western governments are not the main players anymore. Western governments want all relevant parties to be involved in the kind of debt restructuring that Sri Lanka obviously needs. Do you see any progress in that regard?
Well, we only have rather vague public information. Our government says it is making progress, both in talks with the Chinese and foreign private-sector financiers. Information regarding China is slightly more precise, so negotiations with the private financiers probably look even less promising. India matters too, however. It has been supporting the Wickremesinghe government with new investments and clearly wants to limit China’s influence. It would certainly like Indian investors to buy Sri Lankan infrastructure when relevant facilities – such as the port of Colombo, for instance – are privatised. Geopolitical interests matter very much.

Getting China and the private sector to agree to debt restructuring seems to be western governments’ top priority regarding sovereign-debt crises in many countries. China is a very difficult partner. In the case of Zambia, for example, it only agreed to limited debt restructuring and insisted that the government start paying again as soon as the economy improves enough for doing so. Zambia’s outlook thus remains much darker than it would be if the country were allowed to restart with a decisively reduced debt burden.
Well, China is making things difficult for Sri Lanka too. We are yet to hear any public commitment to restructuring Sri Lankan debt. We are a middle-income country, and the G20 Common Framework on Debt Treatment, which China endorses, only applies to low-income countries. Without debt relief, Sri Lanka’s economy will keep deteriorating. In the meantime, IMF demands are accelerating the downward spiral. The Fund wants Sri Lanka to achieve a primary budget surplus next year and increase it to 2.3 % in 2025. This agenda is brutal. We had a primary budget deficit of 3.7 % last year.

Sovereign default means that a country’s sovereignty is damaged. I always wonder how democratic self-governance is possible in nations that are tied down by an unpayable debt that was incurred by a former government.
An international mechanism for restructuring excessive sovereign debt would help. All countries have legal procedures to ensure that private insolvencies are resolved in ways that limit the economic harm. We need something like that to contain the impacts of government defaults. Such a legal mechanism would clear the slate, creating deliberative space for democratically elected governments. Since there is no such system, whatever government is in place in a heavily indebted country basically must negotiate bailout terms with the IMF. The democratic public is irrelevant. In our case, the IMF terms benefit Sri Lanka’s oligarchs, but hurt disadvantaged people. A wealth tax would make sense, for example. It would only affect the most prosperous families and bolster the national budget. The bailout programme actually foresees such a tax from 2025 on, but consumption taxes, which hurt low-income consumers, were raised immediately. According to the IMF, the wealth tax cannot be introduced faster because it is challenging in administrative terms. Somehow administrative worries do not matter when austerity measures affect masses of poor people.

Germany’s Federal Government has spoken out in favour of an international sovereign-default mechanism. I suppose you would like it to promote the cause more forcefully. What else would you like it to do?
Well, there are several other things Germany could do. After China, Japan and India, your country is the distant fourth among Sri Lanka’s bilateral creditors. Together with Japan, your government wields considerable influence in the Paris Club of western creditor governments. The same governments dominate the IMF. Your government could question the prevalent market-orthodoxy, which has failed. Moreover, it could use its leverage to make the IMF impose measures that are less severe and more fit for purpose.

Are some measures counterproductive?
Yes, indeed. For example, the current programme absurdly frames that domestic creditors write off some of their debt. Since their bonds are denominated in rupees, that debt hardly matters. Debt denominated in foreign currencies becomes crippling when things spin out of control and the exchange rate deteriorates fast. International private creditors have demanded domestic debt restructuring. The way it has been implemented, moreover, will cause further hardship in the future. Our central bank shied away from imposing write-offs on Sri Lankan banks, because that might easily have triggered bank runs and, ultimately, the collapse of the financial sector. Instead, the central bank cancelled bonds held by the private retirement funds for formally employed people. Pensioners will therefore be worse off long term. Ironically, the central bank is the custodian of the provident funds. To meet IMF demands, it had to disregard its responsibility for safeguarding the pension system.

Ahilan Kadirgamar is a sociologist and senior lecturer at the University of Jaffna.

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