Debt Restructuring and Hidden Agendas

The consequence for the developing countries with high levels of debt is a prolonged development crisis with capital extracted for debt repayments and little capital left for investment to stimulate growth.

Two years ago in February 2022, Sri Lanka rapidly descended into an economic crisis that had long been in the making. The war in Ukraine and the sudden escalation of global commodity prices made it very difficult to import essential goods such as fuel. Having exhausted its foreign reserves without prioritising the imports of essential goods, the government defaulted on its external debt two months later.  

Many neoliberal economists who saw the IMF as the final solution had begun calling in late 2021 for a default on the country’s external debt, claiming that a quick agreement with the IMF, bridge financing from donors, and a rapid debt restructuring process would solve Sri Lanka’s economic problems. Some of us, including Devaka Gunawardena and I, wrote that a default will be crippling, and that we should prioritise and reduce imports, and forestall a default.   

The then ruling regime shuffled the high officials including the Finance Minister, the Secretary to the Finance Ministry and the Central Bank Governor. And within weeks of a new Minister and officials assuming office and egged on by President Gotabaya Rajapaksa’s advisors, they announced the default in April 2022. However, their stated objectives did not materialise; there was no new bridge financing, the IMF agreement took another year, and debt restructuring is yet to be achieved.  

The 17th IMF agreement that Sri Lanka signed is now devastating our working people with austerity measures. Unlike earlier IMF agreements, this time the IMF has a choke hold on the country, because normalising the country’s external finances after default requires the IMF’s role as the arbiter for debt restructuring. Will this IMF solution work and what hidden agendas does it serve?  

Hegemonic Debt Narratives

Two years ago, the Western establishment was worried about the possibilities of a domino of defaults needing extensive debt restructuring. Indeed, even nuclear powers like Pakistan were considered to be on the verge of default.   

The hegemonic narrative today is going through change; the insolvency crisis (inability to repay debt) is now being constructed as a liquidity crisis (lack of short-term funds to make debt payments). It is claimed that if there is sufficient sloshing of funds including new loans to such debt-ridden countries, then debt restructuring will not be necessary.   

This shift in the global construction of the debt problems as one of liquidity rather than insolvency, serves the interests of the powerful creditors who need not consider any form of debt cancellation or even reduction, but can continue happily with their accumulation of the current state of high interest rates. The consequence for the developing countries with high levels of debt is a prolonged development crisis with capital extracted for debt repayments and little capital left for investment to stimulate growth.  

In this context, the countries that avoided default at all costs have some flexibility in charting their economic policies. This raises questions about the prudence of the Sri Lankan officials, advisors and think-tanks that called for default. How does one consider the public gleefulness of these officials and so-called experts when Sri Lanka defaulted, and how can one even consider their economic advice today?   

Sri Lanka’s default has trapped the country into the clutches of the IMF, and made it now a guinea pig for experimentation for the next phase of debt restructuring mechanisms, amidst geopolitical manoeuvres prioritising global financial accumulation. The vultures of global financiers, International Financial Institutions, Western Powers and the Asian Giants at loggerheads are all seeking their own interests with little care for the suffering of the people in Sri Lanka.  

Dispossession as Solution

With the debt problems in the Global South now pushed towards a fix absorbed through a long development crisis, what are the hidden dynamics of the problematic solution for the debt crisis in Sri Lanka? This has been one of the central questions of the work I have undertaken with my fellow researchers Madhulika Gunawardena, Shafiya Rafaithu, Sinthuja Sritharan and Yathursha Ulakentheran.  

We analyse the IMF programme as articulated in its agreement as unsustainable. Indeed, the IMF’s debt sustainability analysis itself states: “Even after a successful program and debt restructuring, debt risks will remain high for many years.” (IMF Agreement March 2023)   
We see three scenarios going forward.   

Firstly, the IMF programme as stated is taken forward continuing with economic contraction, which results in another default following a creditor-friendly debt restructuring process with little debt relief, as well as another IMF agreement after a few years, and thus prolonged and repeated debt crises.   

Secondly, in the event that a new leadership in Sri Lanka tears up the IMF agreement and refuses to repay the debt, the country would then sail into choppy global waters where its future will also be determined by developments in other countries affected by debt crises and the possibility of a new global financial architecture.   
Thirdly, it is the scenario of the unsaid and hidden solution underway now of a fire sale of public assets, tremendous wage repression ensuring profitability for local businesses along with increased competitiveness in export markets, and the fix of austerity absorbed by working people’s households.  

Our economic analysis focuses on the third hidden and cynical solution. The privatisation of public assets kills two birds with one stone for the regime. When foreign investors come and pick up our utilities for example, it brings in both foreign exchange to repay dollar denominated external debt, and also addresses the short fall in revenue necessary to stay on the course of the IMF programme. Next, wage repression where real wages have halved, are ensuring local businesses to continue to make profits. Furthermore, even with unstable global markets, Sri Lanka’s foreign earnings are keeping the country afloat. Indeed, contrary to the claim of an IMF bailout which only brings in an average of US$ 60 million a month, Sri Lanka’s export earnings of US$ 1,000 million a month are crucial for meeting the import bill.   

The most worrying aspect of the solution is the manner in which the fix for the national debt crisis is displaced to the level of the working people’s households. And here it is, women who have to face the challenges of household finances including to provision essentials and struggle with the wellbeing of their children and dependants. In other words, (in our feminist economic analysis) whether it is market pricing of energy leading to the increased electricity bill for their houses and increased bus fares of their school-going children, or the consequence of the price hikes of imported foods from milk powder to wheat flour, or managing the household with lowered incomes through daily wage due to lack of work, all of these pressures fall on the lap of women.   

The cunning of capital – masked in this case by the IMF programme and its debt restructuring process – seeks to displace crisis with so-called solutions; which ensure capitalist accumulation, while the working people bear the entire cost. In the above hidden solution, indeed the three dimensions of the sale of public assets that further dispossess the working people of public services, the reduced wages, and the crippling absorption of the crisis in the home with hunger are related.   

What should the working people demand during this election year? From a solution that seeks to fix the crisis through austere homes, should we not demand solutions that redistribute wealth at the national level and debt cancellation at the global level?