Hitting the poor and sparing the wealthy IMF Engineered Dispossession as Social Stability

 IMF programme is victimising the working class, not the wealthy

The 2020s has become a decade of distress in the Global South. Half the developing countries are now in debt trouble, with the situation having deteriorated considerably since 2010. 

Following the Global Financial Crisis of 2008, finance capital from the West flowed into the so-called emerging markets like Sri Lanka. Such high cost capital was absorbed into infrastructure and luxurious consumption and was short-lived in our countries. Without adequate returns and a massive debt burden, many developing countries now find it difficult to service debt. 

A United Nations Conference on Trade and Development (UNCTAD) report this year titled ‘A World of Debt’ provides a worrying picture of mounting external debt payments: “Half of developing countries are allocating at least 8.6% of their public revenues to servicing external debt—nearly twice the 4.7% recorded in 2010. … The ratio of external public debt service relative to export revenues has also doubled, from a median value of 3.2% in 2010 to 6.5% in 2023.” (Pg 11) 

The situation in Sri Lanka is much worse, where as much as 30% of projected government revenues and 30% of export earnings are likely to be used for debt servicing even after debt restructuring and the end of the IMF programme in 2027.

In this context, however, the IMF claims that Sri Lanka is a successful case of debt restructuring and economic recovery. Last month, the IMF released a working paper titled, ‘Sri Lanka’s Sovereign Debt Restructuring: Lessons from Complex Processes’ by three co-authors including Peter Breuer, the staff member who led Sri Lanka’s IMF programme. This month, another working paper was released by six IMF officers titled, ‘Restructuring Sovereign Domestic Debt in Developing Countries: New Cases and Lessons’. Both these reports are congratulatory of Sri Lanka’s Domestic Debt Restructuring (DDR). 

IMF’s whitewash

In this column,  I address two concerns. First, the IMF’s whitewashing of a great injustice done to our working people with DDR. The retirement funds of our most exploited workers, including those earning below poverty level wages in the tea and garment sectors, could lose as much as 47% of the value of their Employee Provident Fund over the sixteen year period for which Treasury Bonds held by such retirement funds were restructured. Second, the IMF continues to undermine sovereign policy making and domestic self-sufficiency, by collapsing external and domestic debt into one category. The IMF refuses to consider the foreign earnings constraint of servicing external debt, and discourages domestic policies of fiscal stimulus, so that countries like ours will remain dependent on the global markets of finance and trade.  In this way, while the IMF pays lip service claiming DDR is a sovereign decision, its programmes setting the terms of debt restructuring are increasingly pushing for DDR by design. The two IMF working papers mentioned above are part of the legitimacy exercise towards a shift from subtly pushing for DDR to making it the norm in IMF programmes. 

Sri Lanka over the last three years has been the guinea pig of DDR by the IMF, which now praises the country for having carried out DDR in a manner that has ensured “social stability”. This so-called “social stability”, a term that appears six times in the Breuer et al IMF paper, was the creation of the authoritarian and illegitimate Wickremesinghe-Rajapaksa government and an unprincipled Central Bank – disregarding its conflict of interest as both the custodian of the EPF while restructuring its holdings – as they unashamedly went along with the IMF and  external creditors and dispossessed our working people of their retirement earning. In other words this,  “social stability” is grounded in a great robbery of the working people

Redressing the DDR injustice

Sri Lanka did not default on its domestic debt and it did not have to restructure it. Nevertheless, as the bondholders put pressure with the complicity of the IMF, the unelected President at that time and the Central Bank whose high officials are beholden to the IMF and international agencies, all too eagerly went along with DDR. 

In wanting to reduce the debt owed in the form Treasury Bonds by 0.5% of GDP each year for sixteen years, they did not touch the banking sector that held the bulk of the debt, and for that matter even consider  wealthy individual investors. Rather, the Central Bank targeted the retirement funds – consisting mainly of the EPF which it directly manages – amounting to a third of the Treasury Bonds. The net impact to the retirement funds over 16 years is a massive 8% of GDP loss, which I calculate to be about 47% loss in returns.

There are provisions in the debt restructuring process for the other creditors. The Macro-Linked Bonds will ensure that even the meagre debt relief provided by bondholders will be further reduced with higher payments in the event that Sri Lanka’s dollar GDP increases between 2025 and 2027. This is a problematic move, for even if the GDP merely increases in nominal dollar terms but with little real recovery since the crisis, Sri Lanka will have to repay more debt. In fact, the IMF programme by design, and the Central Bank maintaining high interest rates undermining real growth and recovery, are effectively ensuring that the bondholders get paid more. In this context, when it came to the retirement funds and DDR, there was no clause to redress the losses even if there was strong recovery. The working people should now demand the returns owed to them! There are a number of possible ways to do that. For example, while the debt restructuring process hardly touched the commercial banks fearing “financial instability”, most commercial banks this year are reaping record profits propelled by high spreads between lending and deposit rates. Such profits should redress the losses to retirement funds. Next, wealthy individual investors were protected from debt restructuring, and a wealth tax now could be used to shore up the losses imposed on the retirement funds. 

Agenda of financialisation

The IMF working paper mentioned above covers nine countries – Argentina, Chad, Ecuador, Ethiopia, Ghana, Malawi, Sri Lanka, Suriname, and Zambia – undergoing DDR since 2019, is subtle but clear about the role of the IMF. The IMF’s double speak, which often confuses liberal economists and others whom in good faith want to engage the IMF, goes like this:

“The decision to enter a DDR and to determine the burden-sharing arrangements is a sovereign decision. … Without an IMF-supported programme, often seen as a neutral referee, creditors may not be willing to participate in negotiations. … The IMF also helps assess and monitor financial stability risks and design mitigation strategies, both during the planning of the DDR and after its implementation. A DDR is such a rare occurrence that most authorities will have little or no experience with it. As a result, the IMF’s ability to share relevant experiences from other countries can prove invaluable.” (Pg 48)

Clearly, the IMF plays an important role in DDR. The question is why it is so keen to push for such a problematic process. The answer probably lies in what follows that process:

“A DDR accompanied by fiscal consolidation reinforces policy credibility, restores investor confidence, and eventually lowers financing costs, contributing to a faster return to international capital market access and domestic bond issuances.” (Pg 39)

Indeed, that is the case in Sri Lanka as well. The IMF programme not only handed a sweet deal to the bondholders, but its end in 2027 initiates the next round of Sri Lanka borrowing from the international capital markets. The IMF programme is designed to float international sovereign bonds to the value of 1.5% of GDP each year into the foreseeable future. For a defaulted country,  it will be at much higher interest rates and setting Sri Lanka up for the next crisis. 

The question before us is: do we want to continue on this path of financialisation with dependence on international capital markets and for that matter local capital markets? And when do we want to start considering an alternative path of financial self-sufficiency along with public development banking?  

Even as we redress the great injustice done to our working people with DDR, we also need a different economic trajectory that does not throw us repeatedly into financial and debt crises.