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Sovereign Bonds: Defaulting, Repaying and Banning

07 Feb 2022 - {{hitsCtrl.values.hits}}      

No one can deny the economic crisis in Sri Lanka. The Government that wasted valuable time as the crisis deepened with its insipid vision of “Vistas of Prosperity and Splendour”, is finally acknowledging the depth of the crisis and is now desperate to find a way out. The urgent problems confronting the Government are repaying the external debt and importing essential goods in a time of foreign exchange shortages.  
The economic establishment, and more recently the Finance Minister, see only one way out and that is by turning to the IMF. They believe that turning to the IMF will help restructure the debt and provide access for more external loans to address the foreign exchange crisis. There is also an asinine quarter in Colombo calling for defaulting on sovereign debt as a way of increasing the pressure on the Government to turn to the IMF. Furthermore, to amplify their calls for turning to the IMF these actors claim it is the only path forward to put “food on the table.”   

I address below the flawed economic thinking in these times of great economic crisis requiring drastic alternatives, and critique the policies of the comprador elite steering the economy. The central questions are that if “food on the table” is the urgent issue, why are they not talking about prioritizing certain imports while restricting others? And given that they have finally acknowledged that sovereign bonds are a problem, why are they not considering an eventual ban on such sovereign bonds? 

Import bill  

In my recent columns, I have put forward the idea of restructuring the import basked to prioritize essential goods such as food, medicines and intermediate goods for production including oil. It is the availability of such essential goods that keeps the economy from grinding to a halt and even creating famine type conditions.   
The Government has to take responsibility for its disastrous policies. First, it has undermined the local production of food through the sudden restrictions on fertilizer imports during a crucial period last year. Second, it has not been prudent to address the bloating import bill characterized by non-essential goods.  

"Why are they not talking about prioritizing certain imports while  restricting others? And given that they have finally acknowledged that  sovereign bonds are a problem, why are they not considering an eventual  ban on such sovereign bonds?" 

The fertilizer debacle is now clear to everyone; sudden restrictions after decades of policies making farmers depend on fertilizers, the consequent fall in production of rice and vegetables, and importing the very same produce while the country lacks foreign exchange. The Government will certainly pay for this arrogant blunder at the next election, for they could not have thought of a better strategy to alienate both the farmers and the consumers, as the self-inflicted character of this food crisis has been exposed.  

As for the bloated import bill the latest data available from the Central Bank, ‘External Sector Performance – November 2021’, is revealing. During January 2021 to November 2021 compared to the same period in 2020, Sri Lanka’s imports increased to US$ 18.4 billion from US$ 14.5 billion. Part of the US$ 4 billion increase is due to the rise in global fuel prices, and that amounted to US$ 1 billion. However, the rest of the import bill makes it clear that the Government is not in control. For example, during that period in 2021 Sri Lanka has spent close to US$ 2 billion in Non-food consumer items, and even if one were to subtract the amount spent on medical and pharmaceutical goods, it still amounts to US$ 1.2 billion. Despite the deepening crisis, an island nation with vast marine and agricultural resources, the Government did little to support import substitution even in food, where Sri Lanka imported US$ 112 million in seafood and US$ 351 million in vegetables. The numbers speak for themselves, and of the debt to be repaid in 2022, the US$ 1.5 billion in sovereign bond repayment is the real crunch as they cannot be negotiated, but can only be secured through prioritizing imports. The US$ 5.4 billion owed to bilateral and multilateral donors requires negotiations on repayment. 

Global capital  

Over the years some of us have been questioning the strategy of floating sovereign bonds that come with higher interest costs. I have been pointing out that it was the Rajapaksa regime claiming to be the guardians of sovereignty that first started selling sovereign bonds in 2007. The Sirisena-Wickremasinghe Government continued that trajectory, and all along the economic establishment cheered the successive governments to float more of these sovereign bonds. This pro-West establishment continued to harp about a Chinese debt trap, even though the share of external debt to China was only 10%. Whereas the high interest sovereign bond debt was 40% of total external debt.  

The problem with sovereign debt is that it is owed to global financial markets, which is to say, powerful financial institutions such as mutual funds and investment banks. There is little room to negotiate, as it is not owed to any single actor. Furthermore, the interest rates of sovereign debt including to roll over such debt are influenced by the ratings of international rating agencies who are in collusion with these global financiers.

  ''The Government has to take responsibility for its disastrous policies.  First, it has undermined the local production of food through the sudden  restrictions on fertilizer imports during a crucial period last year.  Second, it has not been prudent to address the bloating import bill  characterized by non-essential goods''

The chorus of actors now calling for Sri Lanka to reach an IMF agreement – even if that means austerity, cuts to welfare and privatization of public services – believe, it will lead to better ratings and allow for more borrowing to roll over its debt. I argue this strategy is not just undesirable given the longer-term social suffering, but also unfeasible even in the shorter term to roll over debt given the depth of the Sri Lanka’s crisis and current global conditions. The US Federal Reserve is on the path of raising interest rates and the interest rate spreads for Sri Lanka, even with an IMF agreement, will be too high for capital market loans in the near term.  

What of those maverick economists in Sri Lanka calling for default on sovereign bonds? The rise of neo-liberal think tanks such as Verite and Advocata in Colombo signify not just a turn towards free market policies but also a shift away from analyzing agriculture and food which research centres focused on four decades ago. And the discourse of these think tanks are being amplified by other actors perhaps ignorant of economic dynamics, including the statement most recently by Parliamentarian M. A. Sumanthiran. Default could mean the unravelling of Sri Lanka’s international contracts and access to external resources leading to even greater shocks to the economy. This brinkmanship demand seeks to push Sri Lanka through the most painful scenarios of austerity, cuts to social welfare and a fire sale of its assets with privatization before or after default, and to be overseen by the IMF.  

The duplicity of these maverick economists, and for that matter the emptiness of the broader neoliberal economic establishment, should be challenged by asking, why did they promote global financial markets including the floating of sovereign bonds in the first place? And are they willing at least now to commit publicly towards charting a path of banning our governments from floating sovereign bonds in the future?