Last year, Sri Lanka exploded into international attention with severe shortages of fuel and food, and tremendous
protests. While the uprising chased away the President, the Rajapaksa-led illegitimate parliament elected Ranil Wickremesinghe as president, who in turn used the security forces to unleash tremendous repression on the protesters. On the economic front, close to eighteen months of austerity based on the IMF’s recommendations and its subsequent agreement in March 2023 have been devastating for the working people. The world is watching how the crisis will play out in Sri Lanka, and if the IMF solution underway here can be the way forward for over 50 other countries in the Global South facing severe debt problems.
The US$ 3 billion IMF package for Sri Lanka to be released over four years will only service three percent of the country’s import bill, and it covers just five percent of the external debt stock. The IMF claims it is more of a signal to obtain additional financing. However, given Sri Lanka’s default on external debt last year, the US$ 4 billion over a four year period from the World Bank and Asian Development Bank are likely to be the only additional sources of external funding to address the continuing balance of payment problems.The fact remains that Sri Lanka is sustaining its US$ 20 billion annual import bill mainly through its own foreign earnings generated by its exploited workers; the very people that the Government is abandoning for the IMF.
This political economic trajectory with market reforms and debt restructuring can drastically transform the relationship between state and society in Sri Lanka. It also has implications on political economic changes in other parts of the Global South, where hyper-financialized global debt has led to repeated and deepening crises over the last few decades. Such crises reflect the need for fundamental changes in the global financial architecture.
What is at stake are questions like the ones during the Great Depression of the 1930s. Will the answer for the Global South be international co-operation strengthening self-sufficiency with social welfare? Or polarization that intensifies exploitative extraction through further dispossession?
Budgets and debt restructuring
The IMF package for Sri Lanka has a twofold focus. First, it demands a primary budget surplus, or higher revenues than expenditure in the budget. Second, it demands debt restructuring, to ensure the creditors receive agreed upon repayments.
Austerity, pushed by the IMF, have led to cyclical downturns around the world, undermining economic recovery and growth. The unsaid trade-off in the Sri Lanka IMF package are the returns of external creditors and the interests of future financiers as opposed to economic growth and relief to its people.
As per the IMF agreement, external debt servicing over the next ten years for Sri Lanka will amount to 4.5% of GDP per year. However, GDP growth over the coming years is only expected to be 3%. Such paltry future growth cannot rectify the massive contraction of 7.8% last year and the continuing downturn this year. Indeed, 50 percent more than the share of Sri Lanka’s growth in output will go towards repayment of external debt. Such constraints on investment will lead to a lost decade of development.
Next, the IMF claims those most affected by the crisis will qualify for targeted support. But the amount allocated for social protection is a meagre 0.6% of GDP per year. Not only are these allocations inadequate, but this targeted social protection with cash transfers approach is a direct attack on the legacy of universal social welfare in Sri Lanka. Indeed, targeting is likely to narrow even further, and the cash transfers will be inflated away. This is what happened with Sri Lanka’s poverty alleviation programme, Samurdhi.
Here, to add insult to injury, the Government, with the goal of pleasing international creditors, has completed domestic debt restructuring in line with the IMF’s gross financing targets. This involves extracting 0.5% of GDP per year over the next 16 years from working people’s retirement savings, amounting to a loss of 47% percent of their accumulated retirement funds. The cutbacks impact some of the most exploited working women in sectors such as garments and tea plucking.
The IMF and its proponents in Sri Lanka claim corruption as one of the central causes of the crisis. But the current crisis is widespread across the Global South and cannot be explained away with corruption. Furthermore, the corruption narrative claiming to change economic governance seeks to accelerate privatisation and entrench technocratic rule. These “anti-corruption” recommendations are oblivious to the fact that corruption peaks when countries privatise, particularly with the fire sale of public assets. The latter is the likely scenario, given the IMF’s budgetary conditions for Sri Lanka. Furthermore, technocratic solutions undermine democratic control of the economy and betray class biases against the working people as evident with the recent process of domestic debt restructuring.
Markets and international fixes
The IMF, however, appears uninterested in the political consequences of its austerity package. Its solution is to reinforce the logic of the market in the interest of global capital. Financiers seek returns, regardless of the great market turmoil and the related suffering. But as we see periodically with such international solutions, the hubris of the powerful actors can lead to the emergence of opposing forces that thrive on xenophobia and polarization.
Two decades ago, Sri Lanka came into the global limelight with one of the most internationalized peace processes after decades - long protracted armed conflict. Norway, backed by the United States, the European Union and Japan, promised a whopping US$ 4.5 billion in donor aid, which was conditioned on advances with conflict resolution and neoliberal development policies. In a revealing coincidence, President Wickremesinghe,who was then the Prime Minister, championed the flawed neoliberal peace package.
Great power arrogance and disregard for local democracy created the momentary respite for both sides to re-arm. Meanwhile, the Prime Minister was thrown out in the next elections. The resumption of a more vicious civil war led to its catastrophic end that cost tens of thousands of lives. This was also the political context for the emergence of the authoritarian and chauvinist Rajapaksa regime.The same hubris of Western powers today is leading to experimentation with an IMF solution that can lead to a protracted crisis that pummels the working people in Sri Lanka, and also forebodes the rise of fascist forces in reaction.
The current wave of debt crises in the Global South calls for approaches different from the usual technocratic and finance capital-centric solutions. Instead, it demands a programme to democratize the economy. In other words, not more austerity, but the redistribution of wealth. It is time for the global finance capital, which has extracted so much from countries such as Sri Lanka,to write off or cancel debt. The global financial system is broken, and if development finance is to really contribute to development, then it should be concessional, long-term and meaningful investment, rather than the short-term speculative flows that characterises the current regime of accumulation by global finance capital.
The wealthier domestic classes in the Global South that have gained from rising inequalities and extraction should also be made to pay through measures such as wealth taxes.Policies of self-sufficiency to avoid the pernicious impact of food crisis should be the priority over the luxurious consumption of the elite classes that comes with the trade liberalization push of the Western powers. Only a solution on this scale can ensure that working people do not lose yet another generation, manifest in a range of consequences, from the destruction of livelihoods to child malnutrition and even mortality. Today, both democracy and economic survival are at stake as the world confronts the worst debt crisis in recent times.
