Debt Restructuring and Structural Reforms: It’s Class, Stupid!

Sri Lanka earns US$ 1 billion a month in exports and it needs to bring the import bill down to US$ 600 million per month to have close to a total of US$ 5 billion per year to make the repayments on external debt

The Sri Lankan economy is sinking deeper and deeper into crisis. The economic establishment and their policies that reduced the country to this state of affairs are screaming for more of the same. They are calling for restructuring the external debt along with structural reforms, disregarding the fact that it was similar polices in the past that pushed the country into the debt trap.  
What can be gained from so-called restructuring of external debt? And what will be the impact of the so-called structural reforms? Hidden under these assertions about debt restructuring and structural reforms is class; the interests of the wealthy elite as opposed to the working people. 

Debt fix  

By restructuring debt, bankers and economists mean lengthening the time of repayment; that is to find ways of paying the interest and delaying the payment of capital on accumulated debt. Furthermore, to gain the mercy of the lenders, they claim, there is a need for structural reforms to give confidence that the debt will be repaid. Those structural reforms include austerity measures including cuts to social services and privatization of state enterprises. However, cutting social welfare and privatizing public services, will reduce the little support working people receive and force them to pay more for public services.   

The issue is that even if the lenders restructure Sri Lanka’s debt – either through a guarantee of the IMF or through negotiations on a piece meal basis with the various actors to whom debt is due – with imports exceeding exports, the country will in a short time accumulate more external debt. So why is it that mainstream economists never talk about restricting imports? Because the economic policy packages that Sri Lanka has been following for decades, the acceleration of which are called structural reforms at the current moment, have at their core the idea of trade liberalization. The result is the free flow of goods into the country regardless of the import bill.   

In this way, rising external debt that eventually turns into a debt trap as we are facing now, has been a useful tool for the powerful global capitalist forces and their local comprador agents: that is to restructure economies towards the accumulation of capital by cutting the entitlements of working people. Similar to the crisis of the 1970s leading to the open economy reforms, the current crisis is seen as an opportunity by right wing ideologues to carry out dispossessing structural reforms linking them to debt restructuring. 

Public distribution system  

We are told there are no alternatives to painful structural reforms. However, there are in fact other counter paths. First, given the debt trap, support from external actors to boost foreign reserves is necessary, but that has to be combined with not just restructuring the debt, but also restructuring the import bill.   
Sri Lanka earns US$ 1 billion a month in exports and it needs to bring the import bill down to US$ 600 million per month to have close to a total of US$ 5 billion per year to make the repayments on external debt. The import bill should be brought down and limited to the bare essential of medicines, food, oil and the intermediate goods necessary for exports. And that can only be done if a public distribution system by the state takes charge of imports. If debt can be restructured, then there will be more room to say increase imports to US$ 800 million per month, but ensuring imports are limited to essential goods will require a public distribution system in the medium term. Non-essential imports should only be considered after exports drastically rise. 

Relief and social investment  

Next, with the mounting economic crisis there is going to be increased poverty and social suffering, so visibly evident with increased begging on the streets. At the very moment when relief and state support is most needed, cuts to social welfare will be disastrous. Where will the Government find the funds for such relief? Indeed, having cut taxes for the wealthy over the decades, and most recently two years ago, Sri Lanka has abysmally low state revenues now of just 9% of GDP.

The solution that some of us have proposed and conveniently ignored by the Government is a wealth tax. That is a tax on property of the wealthy, with redistribution benefiting the working people. Indeed, we should be using revenues from such wealth taxes to beef up social welfare, rather than increase the social burden on working people during these times of crisis.  
Next such wealth tax revenues should also be channelled towards state investment to increase domestic production capable of substituting imports and to create a virtuous cycle of production that can contribute to increase exports. These are times when domestic actors are unlikely to invest with the economic depression, and increasing Foreign Direct Investment (FDI) that did not even materialize during the best of times remains a pipe dream. Therefore, state investment to increase production, employment and effective demand are crucial for rejuvenating the economy. 

Global turbulence and class struggles  

The global economic winds are also unfavourable for Sri Lanka. With the US Federal Reserve on the path of increasing interest rates, capital flows and international loans are going to become tighter for developing countries. That is all the more so for a country like Sri Lanka on the verge of default, and restructuring debt much less getting foreign investment, is going to be much more challenging.  

According to FAO’s Food Price Index, global food prices increased by 28.1% over the last year and the index is at a ten year high. Just when we need cheaper foods, our import bill for foods are also rising. Unfortunately, the same is also true with rapidly rising global crude oil prices as well, which is a large share of our import bill.  

In these worrying times survival is of utmost importance and that needs to begin with food. Without a public distribution system and relief for the working people we may face famine type conditions. The anger of the working people and the protests out on the streets are revealing. What is keeping the economic establishment and our ruling class from understanding this dire reality? It’s class, stupid!