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Sri Lanka crisis: Lenders accrued massive profits

09 Jan 2023 - {{hitsCtrl.values.hits}}      

  • 182 economists and experts issue statement 
  • Demand that Sri Lanka’s debt be cancelled
  • Private creditors mostly to blame
  • Lack of transparency in debt negotiations

By Easwaran Rutnam 

In a damning statement issued yesterday, a group of 182 economists and development experts accused private lenders for the economic crisis in Sri Lanka.  Debt Justice said that private creditors own almost 40% of Sri Lanka’s external debt stock, mostly in the form of International Sovereign Bonds (ISBs), but higher interest rates mean that they receive over 50% of external debt payments.  

“Such lenders charged a premium to lend to Sri Lanka to cover their risks, which accrued them massive profits and contributed to Sri Lanka’s first-ever default in April 2022,” Debt Justice said. 

Lenders who benefited from higher returns because of the “risk premium” must be willing to take the consequences of that risk, they added. 

In a statement, the signatories – including Jayati Ghosh, Thomas Piketty, Dani Rodrik, Ravi Kanbur, Yannis Varoufakis and Ha-Joon Chang – called for debt cancellation by all external creditors and measures to stem the illicit outflow of capital from the country.   The signatories also noted that giving private bondholders an upper hand relative to sovereign debtors in the Paris Club and the IMF’s required debt negotiations violates the basic principles of natural justice.   In addition, the lack of transparency of the debt negotiation process and accountability of the holders of ISBs underscores the concern that risky lending to corrupt politicians (leading to what is now recognised as “odious debt”) was a significant element in generating the current debt crisis, the statement said.   Apart from revealing the identity of ISB holders, Debt Justice said that it is also important to disclose how ISBs were deployed, and the use of those funds. 

Multilateral organisations, particularly the international financial institutions (IFIs), such as the IMF and the World Bank, were also accused of not currently living up to their responsibilities, at a time when they are most urgently required.  

“They have been slow to respond to the crisis, and are apparently requiring onerous policy and fiscal conditionalities, such as moving to a primary fiscal surplus in a very short time, even as the economy continues to plunge,” Debt Justice said. 

Debt Justice said the Sri Lankan case will provide an important indicator of whether the world—and the international financial system in particular—is equipped to deal with the increasingly urgent questions of sovereign debt relief and sustainability; and to ensure a modicum of justice in international debt negotiations.