Debt restructuring, austerity and the IMF: a panacea or an exacerbation?
Debt restructuring, austerity and the IMF: a panacea or an exacerbation?
Lionel Bopage
Part 1
An outline of the problem
Post-independent Sri Lanka (Lanka) has suffered from recurrent economic crises; the more notable ones being in August1953, in the late 1970s and most pertinently the current crisis which essentially bankrupted the country. The trigger for the current crisis was the prolonged pandemic that affected the world and the Russian – Ukrainian war in February 2022. The government’s misguided policies on agriculture, taxation and other sectors made the crisis worse. Post-independence, successive Lankan governments, regardless of their political hue and rhetoric have made more financial allocations to service its debt than it has allocated to education, healthcare, water, power and other essential social necessities. The advent of Covid-19 undermined trade and exacerbated this imbalance.
The pandemic resulted in a downturn in the Lankan economy, which is dependent on remittances from abroad, tourism and exports such as garments from the Free Trade Zones and agricultural products such as tea from the Malaiyaha areas. Global public debt as a percentage of GDP rose from an unacceptable 84 per cent at the end of 2019 to 100 per cent by the end of 2020. Even the world’s two largest economies China and the United States (US) were not immune. Their public debt ratio to GDP increased.
The conflict between Russia and Ukraine led to a spike in global commodity prices, particularly fuel, fertiliser and food. This adversely affected the poor and those who lived from one paycheck to the next. Furthering their misery was the strengthening of the US dollar - the “recognised” currency for world trade - thus making the defaults of low-performing economies like Lanka and Ghana a seeming inevitability. This becomes even starker when Lanka's debt is looked at forensically.
Public Debt Situation
According to the IMF figures cited for March 2023, total public debt of the government of Sri Lanka was USD 83.6 billion of which the outstanding foreign debt was USD41.5 billion, i.e., 63.5 percent of the public debt. Of the GDP, multilateral debts were 17.6 percent and bilateral debts about 17.5 percent. About 52 percent of the bilateral creditors were Chinese, about 25 percent Japanese and 16 percent Indian.[i]
This is sadly not something new. Sri Lanka's economy since at least the early 1950s has failed to produce sufficient foreign exchange to meet the cost of imports. Add to this the fact that the vast majority of the population, given the informal nature of employment and business practices, do not pay tax. In addition, the largest share of government revenue is devoted to the military, dwarfing expenditure on health and education.
Successive governments were able to hide this underlying weakness in the economy and their incompetence, and corruption of the public purse when it came to accountability, the rule of law and transparency by evoking the spectre of the “other” usually in the form of minorities and they were thus able to shift the attention of the populace from their own and the economy's shortcomings.
Hiding this fact that governments in the past, regardless of their political hue like in the present, have continued to borrow for non-productive and mostly wasteful and mismanaged projects leading to a huge external trade deficit, without being able to meet the country’s debt obligations; resulting in the country declaring bankruptcy. Lanka still produces few of its avidly sought-after consumer goods making the situation even more economically untenable. The top 20 per cent of the population enjoy 42 per cent of the island’s income while the lowest 40 per cent make do with 17.8 per cent.
“Free market” economy
The government as well as those in opposition are still advocating a free-market economy combined with a strategy of an export-led recovery process. So, the mantra of providing more and more incentives to attract foreign direct investment, promote tourism, and push local human resources abroad to make more foreign remittances continues. They conveniently forget that “free” market economics created the crisis in the first place and required the country to be bailed out by international financial agencies on numerous occasions.
Sri Lanka defaulted on its sovereign debt repayments last year and entered negotiations with the International Monetary Fund (IMF) for access to a loan package on the premise of implementing structural macroeconomic change. After obtaining USD 2.9 billion of financing from the IMF, Sri Lanka was required to initiate and complete its domestic debt restructuring process (reworded innocuously as debt optimization) in early July. As this process will lead to serious economic shocks, the government imposed a five-day bank holiday at the end of June 2023, to “facilitate” the market in absorbing those shocks and to avoid a run on banks.
This sort of brutal restructuring is not new to Sri Lanka. Since independence, Sri Lanka has had to go to the IMF with cap in hand 17 times. This will be the tenth IMF loan Sri Lanka received since the country was made into a free-market economy in 1977. The last loan was in 2016. The question the country needs to ask itself is, are we going to be hoodwinked yet again as the panacea offered by the IMF has been a systemic failure?
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Restructuring and austerity
The impact of restructuring will depend on what social layer one belongs to. To a majority, it will be austerity once again, and once more people will be forced to demand economic justice. Those who loudly advocate for the IMF-led restructuring have become conveniently blind to tax avoidance and evasion, illegal siphoning of funds and money laundering and corruption, mismanagement and wastage of resources in the state sector. They have also been muted on the vital need to restructure the economy to meet the needs of the populace, not a minority of very wealthy individuals and families. Austerity has historically made the majority of the population poorer and has increased income disparity.
This paper forcefully challenges the economic mantra that debt restructuring needs to accompany fiscal austerity. A blind obedience to the a priori dictates of neo-liberalism is a sure fire recipe for disaster. The way the neo-liberal economy is designed, tax evasion and avoidance have become a systemic issue. It allows the siphoning off of taxable profits that corporations earn in developing countries like Sri Lanka to tax havens around the world. In Lanka, the tax base is not wide enough due to its extensive informal economy, and the large human resource component in overseas employment, who make remittances.
Accepting the IMF package requires cutting down of vital public expenditure such as on education, healthcare and social safety nets. It will also promote direct and indirect tax hikes, selling state-owned enterprises as well as natural resources to the private sector, establishing public-private partnerships, liberalization of public procurement and trade, increasing labour market ‘flexibility’ to hire and fire and reduce wages and pensions, increasing interest rates etc. Nothing will be done about corruption, cronyism and economic mismanagement.
The next section will cast a critical lens at the neo-liberal approach the IMF has adhered to.
Part 2
Neo-liberalism
Neo-liberalism is not a solution, but the principal cause of the problem. I would like to offer some personal insights here from my working life with regard to the manner a non performing entity can be made more efficient and responsive, without resorting to the sort of tactics the neo-liberals are obsessed with. Neo-liberal tactics of austerity make the working people more oppressed at the expense of tackling key structural issues the country is faced with, which are at their heart political and economic. One of the best early examples in this regard was the top down approach used in 1970, after the dictatorial coup in Chile, which rammed home an austerity program without the consent of the people and the disastrous consequences its citizenry had to endure as a result.
This article describes the ideological frameworks underpinning the IMF's approach to a country's debt crisis. Its economic statements about fiscal responsibility and debt repayment pay little attention to the socio-economic and political causes that this debt crisis allows to emerge from time to time in a country like Sri Lanka or Ghana.
Neo-liberalism is not the solution!
When neo-liberal economy was introduced in 1977, successive leaders of Lanka told people that their future was going to be free, successful and marvelous. However, the future that materialized did not accord with what they predicted. Instead, we have a society where social and economic inequality and bad governance prevail and people’s freedoms are being taken away. This is the same situation in other countries where neo-liberal economics have been imposed on.
Neoliberalism focuses on economic regulation rather than economic planning. It promotes competition and protects market orientation against any controls. Neo-liberals encourage people to embrace entrepreneurship with the belief that at the micro level it creates wealth for the individual and at the macro level they need to accept socioeconomic inequalities deriving from such behaviors.
Instead of human rights, rule of law, civil liberties, freedom from prejudice and prosperity, what we have is a system that promotes authoritarianism, which gradually erodes our rights and freedoms over the years and justified in the name of a strident mono-cultural nationalism. The language and logic we hear are about democracies, but in reality, what we have are economic dictatorships; under the rhetorical guise of growth and productivity. Meanwhile the economic fruits have increasingly flown into the hands of the top echelons of society.
Skewed economy a trap
If this untenable and unfair economic system is not modified, the economic and political elite will continue to pay less tax for the riches they have acquired from the productivity gains made through labour and other inputs. The political elite who benefits from this inequitable system have no desire to make them pay their fair share of tax; instead, the regime offers them tax cuts on the erroneous premise that it is good for generating more employment opportunities and humane working conditions.
Instead, people are trapped in working long hours just to put food on the table for themselves and their families. They do not have much time for socializing or relaxation, having forced many of them to endure poor working conditions with no security. So, they do not have the luxury to quit the job looking for alternatives.
The prevailing system and its supporters have blunted our ability to choose what our prosperity will look like, or how to live our lives. We have lost the right to pursue our freedoms in our own ways without depriving or impeding the freedom of others. Enjoying that right is restricted to those who can afford to purchase that freedom to love, leave, leisure, and creation. This is not only unfair but is also irrational.
Running a business and governing a country
Governing a country is not like running a business entity or managing a home, though there are situations where similar strategies can be used. Financially insolvent situations can be considered as one. Let me start with my own business experience so as to reinforce the point of a collaborative approach to addressing the crisis. In 1987 I took over several business units of the largest non-governmental organisation in Sri Lanka, that were running at a loss, with the responsibility of transforming those into viable, profitable units. I was able to show results within a year, but also expanded those units and the workforce, and paid them better wages. This transformation was achieved during an extremely tough socio-economic and political environment in Sri Lanka.
This was not a unique situation as many face similar daunting tasks of turning around failing business entities under the influence of many factors both internal and external, such as project or market failure, diminishing sales and market share, shrinking profit margins, lack of timely and correct information, a disheartened workforce, lack of financial control, and inept management. I believe that most of the time, such business failures are self-perpetrated.
Dealing with an insolvent situation
If a business is not solvent, its senior personnel in collaboration with their staff need to come up with a plan on how to improve their economic survival. The best way to do this, would be to openly discuss what has gone wrong so far and what everyone, including the leaders could suggest making the economic prospects better.
Leadership needs to seriously consider and analyse the existing circumstances, decide on certain lines of action that are fair by the owners, managers, and employees, both consultatively and inclusively. They may seek advice of professionals with demonstrated business experience. Then those decisions need to be implemented proactively with contingency plans in hand in case of failure.
This is tough, though not an impossible task. Otherwise, the alternative is to resort to immoral and illegal ways through political patronage, corruption and black money etc. By doing the right thing, many businesses bounce back, even performing better and stronger. For the success is dependent on the leadership of the organisation; whether they take advice on board, evaluate the advice, and make tough but necessary decisions. Thus, they successfully implement the turnaround plan, without creating bitter and hostile environments.
Addressing an insolvency
According to my experience, businesses can continue to focus on producing and selling what they have been selling well already. At the same time, they need to develop new products/services to compete and survive in the market place. Here the focus should be on what customers need and if what the entity provides can satisfy their needs.
To regain trust, existing products/services may need to be improved, or new products/services, less expensive and of better quality can be provided in the market place. Branding may also need to change and new marketing strategies followed. Pricing needs to be competitive, but needs to generate reasonable profits to ensure the financial viability of the entity.
Additionally, human resources need be allocated to appropriate positions, so that skills of each employee and their contributions are better utilised. The business should have an adequate cash-flow to settle its bills in a timely manner, including the payments on monies borrowed. The business must manage its finances well. Also, the business should be accountable and transparent, and its transactions should be traceable. Bad financial reporting practices can lead to bankruptcy and closure of the business. Such practices should be stopped immediately. Hence, maintaining better financial reporting becomes crucial.
The next part of this article will point out that the economic panacea in the form of austerity is not only unfair but also has a detrimental effect on the unity of state as it does not address the underlying structural causes of the crisis.
Part 3
A culture of innovation
Long term survival of an entity depends on developing a culture of innovation. This needs to be an organizational priority. Fostering such a culture consultatively and inclusively needs a free flow of information, employee empowerment, collaborative problem-solving and aligning values, policies, and procedures to achieve business objectives.
An outward looking worldview, merit-based employment opportunities, recognising employee skills and knowledge, fostering life time learning and acquiring skills, encouraging to dream big in terms of future, flattening hierarchies and developing 3600 collaboration, fostering a climate conducive for accepting and respecting diversity and promoting sense of belonging and new initiatives are vital. These are crucial characteristics of an innovative culture. Only then an entity becomes dynamic, responsive, adaptable, and resilient.
Turning around a business
A business entity cannot be turned around without the active engagement of the workforce. Every worker needs to be convinced of and made accountable for the expected performance with the assurance that beneficial outcomes will be shared across the workplace.
If the entity is already insolvent, the situation needs to be turned around immediately. In this situation, it will be extremely difficult to get external funding. So, the entity must start with cutting down costs, expenditure, wastage, and mismanagement; expediently collecting what is owed to the business, and selling available products and services to the best customers for generating money.
Tough decisions in the turnaround plan need to be executed with full commitment and dedication of the workforce, while continuously monitoring key results areas and their performance indicators. Simultaneously, any contingencies that arise in the process need to be handled by thinking decisively and taking appropriate remedial action sooner rather than later.
What is crucial is the adopting of a disciplined approach in analysing the situation, developing a turnaround plan, and utilising the experience and expertise of everybody and executing the plan for achieving the anticipated outcomes.
Dealing with a country-wide economic crisis
Dealing with an economic crisis country-wide is more complicated than just spending less money, as politics plays a big role. Austerity, the key neo-liberal tool does not simply represent spending cuts. It is a process of moving society away from consumption and wages towards investment and profits. It strengthens financial capital at the expense of security and certainty in people’s lives, and drives increasing socio-economic inequality in society.
Private enterprise increasingly penetrates into the state and makes it more punitive, coercive and less welfare oriented, driving a culture where callousness and cruelty towards those in need and enforcing values of social hierarchy, dependency and competition. There are better and fairer alternatives as evidenced by what Chile endured and overcame.
Chile and neo-liberal experience
If we recollect Chile in 1973, the elected government of Salvador Allende was overthrown by the US backed and Augusto Pinochet led military regime. The USA sent a team of economists[ii] to introduce neo-liberalism in Chile and to counter the left movement that was gaining popularity in Latin America. This was done prior to neo-liberalism was introduced in Sri Lanka under the regime of President J R Jayawardene. Pinochet worked along with the IMF and restructured the economy following their conditionalities.
They reversed nationalizations, privatized public assets, introduced unregulated exploitation of natural resources, privatized social security, and facilitated foreign direct investment and free trade. The regime guaranteed foreign firms the right to repatriate profits generated from such business operations in Chile and favored export-led recovery over import substitution.
Despite these developments, Chile’s budget viability was dependent on the income generated from copper, which was the natural resource that was held in the hands of the state. All revenues from copper flowed into government coffers. The results of structural reforms in Chile, such as growth rates, capital accumulation, and high rates of return on foreign investment were short-lived. With the Latin American debt crisis in 1982, everything went pear shaped.
What an IMF package entails and not
An IMF rescue package is conditional on governments needing to enhance their incomes and shrink expenditure. For IMF loans, this means national resources and public enterprises will be privatised outright, or through public-private partnerships. Direct and indirect taxes will increase with price increases of all essential commodities including food, education, health, electricity, fuel, and water. Nevertheless, people’s reactions to such unpopular policies will be counteracted by the ruling elites pledging to create more employment by boosting agriculture and industry, with the private sector assisting national development. At the same time vital causes to the crisis such as corruption and ineptness of the leaders, and wastage and mismanagement of resources are side stepped.
IMF’s research arm in 2016 published a paper titled ‘Neo-liberalism: Oversold?’[iii]. IMF’s independent evaluation office has acknowledged that fiscal austerity has not delivered the expected outcomes. Despite this, IMF does not promote sovereign debt reduction? to boost economic growth, but insists on fiscal retrenchment and austerity. It appears that when it comes to countries like Sri Lanka and Ghana, IMF ignores its own advice. The IMF is still adhering to austerity measures that inhibit economic growth, thus undermining efforts to reduce debt-to-GDP ratios.
According to the IMF, unanticipated transfers to state-owned enterprises and unexpected exchange-rate depreciations may undermine debt-reduction efforts. The IMF has not acknowledged that such undermining occurs as an unintended consequence of its own programs. This is because indebted countries are required to shift to market-determined exchange rates, raise interest rates, and cut state subsidies. Such measures also drive up business costs.
Further into debt
The IMF executive’s emphasis is still on faster and more effective sovereign-debt restructuring. These measures have led countries into further debt distress and re-seeking IMF help to face excessive delays, geopolitical bullying, and unresponsive creditors. Disregard for their own research has led to lending programs that include onerous conditions that bring deleterious living conditions to these countries' populations and economies.
For countries like Ghana and Lanka, the IMF rarely looks at the socio-economic and political conditions that lead to debt problems. The risk is not necessarily the size of the ratio of debt to the GDP of a country. The issue really lies in what sources of income such as manufacturing, agriculture, services, tax revenues, and the amount of savings and reserve levels a country has. This overall picture will indicate whether a government could service a certain debt level while retaining lending agencies' confidence and credibility. If this manoeuvrability becomes limited or vulnerable, there will be difficulties in addressing the spending needs and any ensuing crises. Ultimately, these situations can negatively impact a country's health, education, and other essentials, leading to a crisis.
Part 4
National debt and human rights
The implication of debt on human rights is also of significant concern. Many countries in the world are either already in a debt crisis or approaching it. This is not a new phenomenon. Ability of many countries to service debt and meet the increasing demand for health services was made worse during the Covid pandemic[iv]. According to reports, some governments chose to borrow more funds to support at-risk groups and build health infrastructure to respond to the pandemic. During this period, many countries faced this tough choice.
Due to the pandemic, all over the world tax revenues declined and debt repayments increased while demand for expenditure rose. This had a negative impact on the provision of health services everywhere. In particular, the focus on Covid-19 has often been at the expense of other health concerns. Lockdown protocols also further aggravated health disparities between rural and urban areas, against a stark historical backdrop of existing health services, often failing to meet universal human rights standards of availability, accessibility, acceptability, and quality.
Obligations of state
The UN Committee on Economic, Social and Cultural Rights (CESCR)[v] has emphasised the obligation of states to respect, fulfil, and protect the right to health of their populations. This right is guaranteed under various international and regional treaties that many states have ratified, including Article 12 of the International Covenant on Economic, Social and Cultural Rights (ICESCR). This requires states to ensure the highest attainable standards of physical and mental health. Implementation of these obligations, however, has been hindered by budgetary constraints, corruption, and a lack of political will to prioritize health, even in countries that have ratified these agreements.
To hammer home the point, let me highlight the situation in Ghana, which is undergoing a similar process of restructuring as Sri Lanka is experiencing.
Ghana as a valuable lesson against austerity
Ghana has a similar economic and political trajectory to Lanka. It has been bailed out a number of times by the IMF, without tackling its structural issues of wastage of government revenue, corruption, nepotism and incompetence. It is a country whose economic model is based on products that are prey to global price fluctuations, and also suffering from a seeming inability to build an economy that meets the needs of the majority of its population, not a well-heeled minority.
Ghana is one of the world's biggest cocoa producers and the leading gold producer in Africa. The price of goods has been on the rise at an average of 41% in the past year. Ghana overspent like Lanka during its good times. It did not save much to help when facing downturns or external shocks, which were largely caused by price cycles for its exports, oil, cocoa and gold, and also due to excessive fiscal spending during elections.
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Ghana’s poly-crisis
Like Lanka, lacking fiscal discipline, and its practice of depending on foreign financing left Ghana vulnerable to investor speculation and investment selloffs. Starting in early 2022, Ghana faced a poly crisis, a complex of economic, financial and social crises. The real growth in GDP declined due to rising price pressures, mainly because of food and petroleum imports, and global supply chain bottlenecks that also contributed to rising inflation. To tame inflation, interest rates were hiked from 4.5 percentage points to 19%. The local currency, the Ghana cedi depreciated by almost 20% against the US dollar, making imports more expensive, thus escalating prices of goods and services.
Ghana technically defaulted on its domestic and international debt in February 2023. Ghana's unsustainable debt levels forced it to seek an IMF bailout in July 2022. In mid-May 2023, the IMF granted Ghana a three-year loan package of USD 3 billion to help it restore macroeconomic stability. Its conditions were to reduce public debt from an estimated 105% to 55% of GDP by 2028. This was the 17th loan package Ghana had received from the IMF since 1957. So, every four years Ghana had to go to the IMF with the begging bowl.
Balance of payment crisis
This deficit in the balance of payments is supposed to be addressed partly by the IMF loan package. Ghana was forced to seek IMF assistance in dealing with global and local economic shocks, such as the economic slowdown in China, the global commodity price slump, irresponsible spending made during the elections in 2012 and 2016, and a protracted domestic electricity crisis. Of course, there were external economic shocks due to the COVID-19 pandemic and the Russo-Ukraine war. Yet, domestically, the regime was inefficient, and irresponsible in managing its finances. The country was burdened with excessive borrowing and led to a looming debt crisis.
Ghana’s debt comprises domestic dollar bonds, cocoa bills, pension funds and debt owed to the central bank. Ghana has reached an agreement with banks to restructure 15 billion Ghana cedi ($1.36 billion) of locally issued U.S. dollar bonds and cocoa bills[vi]. About 85 percent of eligible bondholders participated in this process. Ghana wishes to reduce its external debt interest repayments by $10.5 billion over the next three years under the IMF bailout secured in May this year.
Ghana received its first instalment of USD 600 million to be used to boost the country’s foreign currency reserves, help stabilise its currency, and support the budget. However, many believe that despite this IMF deal, Ghana is still not out of trouble. The receipt of further loan instalments depends on how Ghana performs in terms of external debt arrangements; socioeconomic reforms – austerity and necessary trade-offs; and central bank reforms.
Governance and “Winner takes all” approach
Ghana has deep structural economic problems that require a multi-stakeholder approach to resolve. Unfortunately, the entrenched pervasive system of governance of Ghana, like in Lanka, based on ‘winner takes all’ approach distorted a broad national dialogue on what has to be done and how it needs to be done. It must fix structural problems, such as over-reliance on exports of physical and human commodities, utilizing strategy of "export-led recovery." In addition, society, particularly the privileged classes, needs to live within its means.
The country had virtually no foreign reserves, so it did not have any means to pay in USD for its imports. So, it's no wonder many Ghanaians have been nervously waiting for the IMF bailout. As usual, to qualify for the IMF bailout, it had to undergo debt restructuring with its creditors. Ghana is going through lengthy negotiations with its creditors. Other leading agencies such as the World Bank have pledged to help the country come out of this messy situation. Investors are expected to return without fear of losing their money.
Ghana’s IMF experience
Given the country’s past experience with the IMF, it is doubtful to what extent its latest cash infusion will help solve Ghana's long-term economic problems. As mentioned earlier, the most recent IMF assistance came in 2019. Like in Lanka, this need for regular assistance is the result of wastage and mismanagement and an inability to enlarge the economy for the benefit of all, by successive governments over many years. If there is no system change, the question remains whether the situation will get messy again. It could happen at the end of the three-year IMF bailout. Given past loans and an inability to bring in transparency, the rule of law, accountability and create an economy that benefits the majority of the population, the country could expect another bailout in the near future. This is a bleak scenario for Ghanaians who barely survive economically.
To better understand what this means for Lanka, let’s now look at what an IMF package contains for the island.
Part 5
The IMF program in Lanka and its implications
The IMF agreement with Sri Lanka emphasises fiscal consolidation, which requires the government to achieve a budget surplus within two years. It also conditions its funding on increases in energy tariffs and flexible exchange rates that will likely lead to currency devaluation and higher interest rates. In addition, the program projects unrealistically high revenues without imposing wealth taxes or restricting illicit financial flows.
Loan conditionality and austerity measures are regressive in nature and have a disproportionate impact on the most vulnerable members of society, and Sri Lanka is no exception. For example, the elimination of fuel subsidies will make transport for people in remote areas more costly, thereby reducing access to the services they receive. Similarly, increases in electricity tariffs will lead to higher healthcare costs, forcing those less well off to the Hobbesian choice between food, electricity, medicine and education for their children.
A better public sector
The rationale for a government to provide some services to the public is that profit-making or profit-maximising will not deliver those services to all who need them at an affordable price. A fundamental difference between a government and a business is that a government's goods and services will be available to everyone who should get them. The wellbeing of an economy depends on certain resources being available to everyone who requires those resources in the population, irrespective of one’s ability to pay.
The efficiency of a government enterprise should not be assessed by whether it makes profits or not. For example, a public utility provider such as one delivering electricity, water or public transport can increase profits by raising the price of the good or service it delivers. But the result is that some people, usually the low-income consumers, will be deprived of their necessities.
Slashing the public service and making government smaller have been a repetitive mantra sold as a political panacea for addressing many economic challenges. In practice the results have been disastrous in numerous cases around the world. For example, in Australia, after several rounds of slashing the Federal Public Service and an increasing dependence on unaccountable, expensive private consultancies, the government has recently been forced (much to its ideological chagrin) to take tentative steps to reversing that trend. The reason is that instead of providing better services at lower cost, privatisation of public services often delivers massive profits for rich corporates while increasing overall costs to the government, providing lower quality-higher cost services to the public, and fostering political corruption.
It is true that the public sector often fails to meet basic service standards. What is needed then is to improve the quality of the services and the efficiency with which those services are delivered by undertaking investments in the sector that are needed to increase the? skills, understanding, and capacity for providing such services to the population.
Austerity and inequality
Austerity as demanded by the likes of the IMF will disadvantage the poor consumers, who already pay a large and unsustainable amount of their household income towards essential items, even further. The Governor of the Central Bank has rejected the assertion that almost the entire burden of debt restructuring will be borne by the working class. He states that it is a misrepresentation of reality[vii]. However, the government is pushing ahead with the offensive by taking measures such as privatising public assets and targeting superannuation funds of working people. A hand-in-glove approach is used to provide more and more relief to the corporate sector, such as debt reprieves, tax holidays, and flexible labour laws. Finally, the government and IMF supported by their media outlets and think tanks have launched a ruthless assault on any alternative financial and fiscal routes.
There are alternatives which the next section explores, and which are being sidelined by supporters of the IMF package.
A non-austere path to addressing the crisis
As the Italian theoretician Antonio Gramsci remarked in the early part of the 20th century, when Italy was enduring one of its periodic economic and industrial crises:
“The crisis creates situations which are dangerous in the short run, since the various strata of the population are not all capable of orienting themselves equally swiftly, or of reorganizing with the same rhythm. The traditional ruling class, which has numerous trained cadres, changes men and programmes and, with greater speed than is achieved by subordinate classes, reabsorbs the control that was slipping from its grasp. Perhaps it may make sacrifices and expose itself to an uncertain future by demagogic promises; but it retains power, reinforces it for the time being, and uses it to crush its adversary and disperse his leading cadres, who cannot be very numerous or highly trained.”[viii]
IMF reforms focus on deregulating the economy and privatising resources available in the economy. For example, Sri Lanka has never been asked to industrialise by utilising its own natural resources. So, the country became dependent on exporting commodities of which prices vary, depending on global supply and demand based on the vagaries of the corporate world.
Securing vital sectors of economy
The sectors of the economy vital to Sri Lanka and its people are not secure. Like many developing countries have done, Sri Lanka has also bypassed strengthening of its manufacturing base. Instead, all those countries including Sri Lanka are relying on service sectors, built on a foundation of an unstable, vulnerable and manipulated economy based on speculation.
For example, almost all neo-liberal countries have secured food and energy sufficiency, while Sri Lanka is still overly dependent on food and energy imports[ix]. Ignoring the fact that Lanka can easily become self-reliant and secure in terms of food, energy and water has led to an ever-increasing foreign exchange deficit problem, forcing the country to borrow foreign exchange with no end in sight.
Developing countries like Sri Lanka are in structural dependency due to their external debt. Of course, almost all countries in the world carry some form of debt. However, the cost of borrowing depends on how economically advanced the country is. Developed countries can borrow at a much lower interest rate, as such loans are classified as “low” risk.
International experience with austerity
There is no historical evidence that austerity measures have worked in getting countries out of a debt crisis. Examples over many decades and spanning from Greece to Indonesia to Egypt and Tunisia show that austerity does not work. Reducing the fiscal deficit and servicing debt by squeezing the public sector have made the economic recession and crisis more severe by exacerbating inequalities. The need to have austerity measures in place has nothing to do with fixing a country’s long-term structural issues but ensures that its debt repayments will be prioritised to pay back international lenders and institutions.
Instead of repeatedly relying on measures that do not work and penalise the majority of the country’s citizenry, other financial steps ought to be put in place in indebted countries like Sri Lanka. Sri Lanka needs to assure the fiscal responsibility of the government by enforcing the laws against corruption, mismanagement, and wastage. In a country like Lanka, the ruling elite and its dependents eschew such fiscal responsibility by violating all transparency and accountability provisions. The country needs to find a fair economic pathway to live within its means. One way forward for this could be the electorate to hold politicians to account during election campaigns, by demanding them to provide concrete funding plans for their campaign promises in their election manifestos.
Fiscal transparency and accountability
The country needs to develop an Integrated Financial Management System (IFMS), so as to ensure each and every public transaction is fully captured allowing auditing agencies to trace back if and when necessary. At the moment, nobody knows what happens with the finances the government receives from lending institutions. This opaqueness has paved the way for many opportunities for collusion, corruption and money laundering. Limits should be placed on the government’s overall borrowing from domestic and international capital markets. Another significant measure the government can take is to reduce public expenditure. This will include cutting down the size of the government, in particular the large and untenable security apparatus.
The government needs to be transparent in its dealings with the IMF. All information between the IMF and the government needs to be fully disclosed to the populace, particularly the indebtedness of all state and semi-state agencies. Any measure that is implemented needs to be subjected to broader consultation within a wide national stakeholder forum on the economy. This should include all key representative groups including business and political entities, civil society, and trade unions, among others. Such consultative forums will generate valuable and innovative ideas for economic reforms. In turn, any reforms proposed would thereby enjoy better societal support.
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Part 6
Conclusive remarks
The IMF programme needs to be used to negotiate debt restructuring with commercial and multilateral creditors. It would create space to spend on priorities such as food and fuel. However, the country needs to urgently reinstate its fiscal responsibility, with a prescribed annual cap on fiscal deficits. A medium-term debt management plan updated for a certain period should be formulated and implemented with that cap limiting the expansion of non-concessional loans.
Necessity of Inclusivity
Stakeholders need to stop over-politicising economic issues, as populism has deeply clouded effective decision-making. What we need is the development of an inclusive, consensus-based and egalitarian approach towards a national development framework. The country needs to aggressively diversify its open economy, especially those that are mostly dependent on primary commodities, primitive value-added products, exports of human resources and tourism. Currently, the open economy is dependent on the export earners that are subject to significant volatility due to price fluctuations and regional instabilities.
A green and sustainable approach
Sri Lanka has a great potential for greener and sustainable economic development by utilizing its renewable energy sources and value-added industrial clusters such as for minerals processing. However, IMF debt restructuring, while not improving the country’s economic conditions, will only prolong its indebtedness. Instead, policies need to be formulated and implemented so as to ensure the population’s basic needs are met by guaranteeing the safety of food, energy and water. Significant cuts to unnecessary handouts and wastage in government and public service delivery will be necessary. This can include cutting down the size of the government including both the executive and legislature.
Performance evaluation
Performance targets need to be established in key result areas such as public finance, education, energy, health, and transport. Aggressive restructuring of state-owned enterprises can be carried out without selling them to the private sector. For example, hiring competent managers and firing inefficient ones, providing subsidies to those most in need of assistance, and trimming government expenditure by cutting down on excess political appointments. Education, health and energy need to remain as state flagship initiatives but be made efficient and result focused.
Alternatives and national dialogue
To come out of the current poly crisis, there are certain possibilities that could be adopted as alternatives; for example, progressive taxation, open governmental transactions, independent debt audits and prioritising social protection. However, all of these should be underpinned by a national public dialogue. This is about national social movements genuinely leading the national public dialogue in a transparent manner, where the behaviour and agenda of vested interest groups, both domestic and external, are curtailed. This involves sitting down together with civil society organisations, trade unions, government members, feminist collectives, human rights groups, NGOs, and community development organisations.
Vital role of government
The government’s guiding role in the economic and social development of a country is vital. As such, promoting a small government in developing countries where public services are essential and in extreme demand is misplaced. Instead of a bloated public service, there should be a service which is a productive, effective and people oriented. In the long term, we need to establish a skilled public service, where public servants bound by service charters will treat the general public fairly, with respect and courtesy, while catering towards satisfying people’s socio-economic needs. As demanded in many developing countries, Sri Lanka needs to implement a rights-based approach towards economic and social development.
Assured failure
The panaceas of neo-liberal economists do not eliminate periodic crises but generate worst ones over time. In the short term those panaceas reduce budgetary income received via tax receipts. However, businesses will demand governments reduce taxes on profits and investment, while the public will demand more services and provisions. Thus, such unplanned, competitive and antagonistic production relations will allow the state coordinated long-term regulative and growth strategies to fail.
Rights busting
Neoliberalism has succeeded in union busting and restricting workers from participating in political and institutional decision making. Throughout the world, union memberships have fallen and continue to fall. Another factor in this equation is the power within trade unions being moved away from grassroot workers to a growing bureaucracy. This bureaucracy receives increased privileges under a conservative form of leadership with its display of political timidity as their main characteristic. Trade unions do not represent politics of protest anymore.
Paralytic left
Though the Left works in the belief that capitalism has been always weak, decadent, and is in its final death throe, capitalism has survived under many guises. Yet, if able to unite under a single banner, workers may have more power than ever before. We are aware that capitalism is moving from one crisis to another, but it has not broken down yet and has not lost its political control. Moreover, the working class and the Left have not seen much of a surge. Rather neoliberalism has strengthened, pretending to be the best solution to the crisis generated by itself.
Diversity and exclusion
Instead of working together, activists in Sri Lanka try to undermine each other. Unfortunately, this is also a global experience. If everyone worked together instead of undermining each other, the situation could have been made better. Thus, people do not have any other choice to come out of this poly-crisis, but to confront this catastrophe holistically. Instead of dwelling solely on current issues, activists may need to focus on where it makes an impact, honestly acknowledging the challenges society is faced with and working towards long-term solutions for addressing the root causes of inequality and injustice.
A shared burden
Therefore, it is imperative for us to unite and bring to power a government with the political will and commitment that will share the burden of debt restructuring with those who can bear that burden without destroying the lives of people who are already at a disadvantage due to existing systemic issues. It is the affluent and the elite that are the most astute at using loopholes in the existing system to evade taxes. They then launder their ill-gotten gains in offshore tax havens. They need to be compelled to pay their fair share of tax. They also need to be held accountable for the lax in many cases of criminal and corrupt activity they have partaken in for many a decade. Everyone must keep in mind that the revenue and expenditure of a government are the commonwealth of all the people, not of a select few. Fiscal and monetary policy must be adapted accordingly.
This article is not arguing for building a socialist economy or a self-sufficient economy. However, it rejects the prevalent neoliberal model of capitalist production that is accompanied by corruption, mismanagement, waste, and lack of transparency and accountability and the sacrifice of national interests and sovereignty to satisfy international financial interests.
Sri Lanka needs to pursue an economic development strategy that is efficient, sustainable and equitable. The priority must be to produce in the country, the maximum amount of its essential commodities, i.e., goods and services necessary for the well-being of its inhabitants that can be sustainably and efficiently produced, while also utilising global markets to optimise the use of its resources to enhance overall national welfare.
Sri Lanka should avoid unsustainable imports and associated international indebtedness that result in ‘boom and bust ‘ cycles while undertaking appropriate investments and implementing appropriate policies to harness and enhance the natural and human resources needed for the country’s sustainable long-term development.
The end
4 August 2023
[i] International Monetary Fund March 2023, IMF Country Report No. 23/116, Sri Lanka Annex 11. Public Debt Sustainability Analysis, Pp 53-54, available at: https://www.elibrary.imf.org/view/journals/002/2023/116/002.2023.issue-116-en.xml
[ii] Chile was the testing lab for the neo-liberal model. The economists (Chicago Boys) asked Pinochet to withdraw government involvement in all private sectors at once so as to bring back the Chilean economy to equilibrium. This move backfired with inflation escalating above 700 percent. These policies were so destructive, and difficult to implement under a democracy. Mostly, this was done through military dictatorships and state terror campaigns against any resistance emerging anywhere against it. Aggressive deregulation of economy needed aggressive regulation of the political sphere. Refer: https://www.hoover.org/news/chiles-chicago-boys-and-latin-americas-other-market-reformers and https://www.promarket.org/2021/09/12/chicago-boys-chile-friedman-neoliberalism/
[iv] How does public debt affect the right to health: Case studies in East and South Africa at, https://www.amnesty.org/en/latest/campaigns/2023/05/how-does-public-debt-affect-the-right-to-health-case-studies-in-east-and-southern-africa/
[vi] Kwadjo N June 2023, Government, banks agree to restructure GHS 15bn of cocoa bills, local dollar bonds, https://www.businessworldghana.com/government-banks-agree-to-restructure-ghs-15bn-of-cocoa-bills-local-dollar-bonds/
[vii] Discourse on Development (Devdiscourse) 7 July 2023, https://www.devdiscourse.com/article/headlines/2515211-sri-lanka-central-bank-governor-dismisses-concerns-over-projected-losses-for-epf-due-to-domestic-debt-restructuring
[viii] Antonio Gramsci, ‘State and Civil Society’, in Quintin Hoare and Geoffrey Nowell Smith, eds., Selections from the Prison Notebooks of Antonio Gramsci, Lawrence & Wishart, London, 1971, pp. 210-11.
[ix] For example, the Australia is demanding the European Union to offer significantly more generous concessions to Australian agricultural producers in order to ink a free trade agreement between like-minded partners at a time of mounting geopolitical uncertainty. Refer Australian Financial Review, 9 June 2023, https://www.afr.com/policy/economy/trade-deal-unlikely-unless-eu-lets-in-australian-farmers-20230709-p5dmv7