5 February, 2023

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A Child’s Guide To Demand Of 182 Academics For Cancelling Sri Lanka’s Foreign Debt

By W.A. Wijewardena

Dr. W.A Wijewardena

Aseni, a whiz kid in economics, has learned of a statement made by some leading economists numbering 182 demanding that Sri Lanka’s foreign debt be cancelled instead of restructuring as insisted by IMF and the Western countries that back IMF. The statement has been reproduced by the UK based charity Debt Justice in its website. This statement has been viral on social media and has been the top news by all the media houses in the country. Aseni wanted to know about this statement and asked her grandfather, Sarath Mahatthaya, a former official of the Ministry of Finance to guide her. The following is the conversation between the two of them.

Aseni: Grandpa, did you see the statement made by 182 leading academics, including some from Sri Lanka as well, urging the creditors to cancel the debt they have granted to Sri Lanka? This has gone viral on social media and widely quoted by local media. Is there any justification for this demand?

Sarath: Yes, I read it. It is a galaxy of academics belonging to the social sciences field. In addition to several economists, this group consisted of those in the academic fields of sociology, law, anthropology, geography, women’s studies, microfinance, history, world affairs, and what not? The only exception was that there were not any scientists from natural sciences. However, these academics have proven diverse expertise. Therefore, it is a multi-disciplinary group excepting the contributions by natural scientists, and their opinion should not be ignored. As such, it need be critically appraised because, if accepted for Sri Lanka, it in fact provides a blueprint for a new world economic order.

This is specifically important because the group consisted of such giants in economics like Dani Rodrik who was sympathetic toward right type of reforms and markets underlying Washington Consensus in late 1990s but later critical of its achievements and Thomas Piketty who was in the opposite camp challenging the capitalist system of economic development. Dani Rodrik was later a member of a team of reputed global economists who met in in 2004 in Barcelona, Spain, to modify Washington Consensus and propose a new global governance now known as Barcelona Consensus. To bring these people together into a single platform would have been an enormous challenge. This statement is not specifically an address for Sri Lanka’s problems. It is a message delivered to the world community at large and more specifically a critique of the economic model being propagated by the old proponents of the Washington Consensus, namely, IMF, World Bank, and US Treasury.

Aseni: I have read this statement but could not figure out its main message. It is only a one and a half page, but behind it, I think there are thousands of pages of detailed economic matters that we should connect to understand it properly. Grandpa, can you help me understand it?

Sarath: True, it is brief and that is its beauty. But it is a fine critique of the current world economic order. The world economic order is how the world economy functions with its interconnectedness and interdependencies by engaging countries, their governments, local and multinational institutions, and above all, markets. After the collapse of the Soviet Union in early 1990s, the world economic order centred on free markets and their ability to create a prosperous world for everyone. However, this goal was an elusive one, and, instead of reaching equality in prosperity in the globe, the gap between those who are prosperous and those who are not has further widened. It is natural that those who have failed finding fault with those who have advocated it. The two chief architects of this failed order, namely IMF and the World Bank, have been the main target of attack.

In addition, the side supporters of these two architects like the World Trade Organization which is also unsuccessfully fighting for the elusive goal of global free trade and the international financial system that has facilitated the movement of global funds have also been at the receiving end. The statement of 182 academics is a summary of this attack. Hence, to understand it, you must know how the global economy works.

Aseni: I know a little about it. But how does it work?

Sarath: The global economy is also like the local economy. It is interdependent and interconnected. What this means is that rich countries depend on poor countries and poor countries on rich countries. They are also interconnected meaning that without this connection, they cannot function properly. This is like the human body. One part of the body is dependent on and connected to all other parts of the body. That is why when you have a pain in a very small part of the body, say, like a nail, it is felt by all other parts of the body. They also become either less performing or even non-performing. So, if you break this connectedness, the whole body become non-functional. In the same way, if we remove the rich countries in the world, the poor countries will also be removed. Similarly, if we remove the poor countries, the rich countries will also be removed. Hence, both are necessary for each other’s sustenance.

But the reality has been different. Poor countries feel that rich countries are hostile toward them and bent on robbing their resources. Rich countries feel that poor countries are beggars and seek to live a lazy life out of the resources transferred to them. The statement issued by 182 academics is a testimony to this ground reality from the point of poor countries. Therefore, it is only half-complete. To make it complete, the position of the rich countries should also have to be incorporated into it. In other words, a fair statement should have contained the appreciation of each other’s problems and recognition of the role being played by each one of them.

Aseni: Oh, I see. What does the statement then contain?

Sarath: The statement has three parts. First, the symptoms of the ailment which Sri Lanka is suffering. Then, the diagnosis and finally, the prescription. But as I mentioned, it has been done from the point of poor countries and has failed to present a balanced view.

Aseni: What are the symptoms it has identified?

Sarath: Those are the symptoms of a general disequilibrium in the macroeconomy of a country. First, Sri Lanka has been vulnerable to external and internal factors, normally known as shocks. Shocks are happening always, and some are expected, and some are unexpected. If the expected shocks happen, a country can pre-design the corrective measures to keep the adverse impacts at a minimum, if not able to eliminate them altogether. But if the shocks are unexpected, there is no way to preplan the safety measures. So, the country involved should necessarily go through the shock and suffer from its adverse impacts. However, if the systems of the country are flexible or it has sufficient space to come out of it, we say that the country has resilience.

For instance, suppose that there is a Tsunami which is an unexpected external shock. But if the country has a surplus workforce that can be mobilised quickly to remove the debris, and if it has adequate finances to rebuild the damaged infrastructure, and it can provide quick relief to people who have been affected by it, then, that country is resilient. So, shocks are not a matter for fearing if the country is resilient.

The other symptoms are rising food and energy prices together with interest rates. The depletion of foreign reserves and mounting balance of payments problems have forced Sri Lanka to suspend the repayment of some selected foreign debt. There are many more important symptoms that have not been identified. One is the continuously slowing real economic growth which has now become negative and will remain so in the next few years as well. Another is a stagnant export growth in a background of high imports leading to a stubborn trade deficit. On human capital side of which this group is highly concerned, there is this increased migration of technically qualified professionals in search of a new life outside the country because they have no opportunities back at home. This is a serious lapse in the statement of the academic group.

Aseni: That is interesting, but what is the diagnosis which the academic group has made?

Sarath: The diagnosis is not in a single place. It can be found throughout the statement. It cites policy mismanagement as one of the causes of the ailment. This mismanagement is not what the mainstream macroeconomists normally refer to as erroneous fiscal, exchange rate, and monetary policies that have compounded the goal of attaining a stable high growth. Instead, according to the academics, mismanagement specifically refer to deregulation and openness encouraging irresponsible borrowing, enabling illicit financial outflows, and leading to political corruption. However, in the case of Sri Lanka, both deregulation and openness of the economy are just myths. Neither the economy has been deregulated nor has it been open as it had been in East Asian countries. Sri Lanka’s capital account is still closed, and the private sector cannot enter the market without the approval of authorities.

And those approvals have been only a few dozen cases based on the merit of each case. If you are interested in learning of the state of Sri Lanka’s deregulation, just examine its ranking in the Ease of Doing Business Index compiled by the World Bank. In 2020, the country was ranked at 99 out of 190 countries in this index scoring only 62 points out of 100 (available at: https://www.doingbusiness.org/content/dam/doingBusiness/country/s/sri-lanka/LKA.pdf).

Hence, it has to go a long way to deregulate the economy. But these restrictions are not applicable to the Government which can always waive these restrictions when it decides to go to international markets for loans. Hence, the allegation by the academics that deregulation and openness had encouraged irresponsible borrowing applies only to the Government. The other charge that illicit financial outflows that are alleged to have taken place are not due to deregulation and openness but due to regulation and opacity in the economy. It seems that the learned academics have misdiagnosed it.

The charge that the successive governments have gone for irresponsible borrowing in commercial markets by issuing international sovereign bonds or ISBs is substantiated by the available evidence. When ISBs are issued, a prospectus guiding the prospective investors should be issued by the Government. In all these prospectuses issued since 2007, the Government has falsely claimed that the proceeds are used for development projects. But these proceeds go into a kitty from which general government expenditure is being met. Since Sri Lanka governments have run a deficit in their revenue accounts, these proceeds may have been used for the general consumption expenditure as well. By any standard, this represents irresponsible borrowing misguiding the prospective investors. I do not have to tell you, that when you borrow and consume, you will eventually run into difficulties.

Aseni: It is now clear to me. I believe that the prescription they have recommended is that these external creditors should cancel their loans to Sri Lanka instead of attempting at restructuring. Isn’t it a good thing for Sri Lanka?

Sarath: Any borrower will love if his borrowing is cancelled by creditors. But it can be extended only to a few selected borrowers and not universally to all the borrowers. If loans are cancelled for all the borrowers, creditors will be bankrupt, and the globe will lose an important recycling of the global savings. In this sense, the recommendation by the academics is outrageous. It also ignores the working of the global financial architecture today. In this architecture, people save by curtailing their consumption and make available those savings to those who are without adequate savings relative to their requirement. Sri Lanka is one such country.

It saves about 25% of its income as a whole and is required to invest about 35% of income to realise a growth rate of about 8% needed for becoming a rich country. This gap is known as the savings-investment gap, and it should be filled by using the savings made by people in other countries. If the loans are cancelled wholesale, those savers will lose and will not make any saving by cutting their consumption. Without these savings for filling the gap, it is the Sri Lankans who will suffer in the future. The available option in the absence of those foreign savings is for Sri Lankans to cut their consumption drastically, which we call tightening of the belt, and make available those savings for investment just like the Singaporeans did in 1960s and 70s and the Chinese are doing today. This is a bitter medicine and strangely the academics have not talked about this bitter option.

Aseni: But there are some positive sentiments expressed by these academics, aren’t they?

Sarath: Yes. They have warned the bilateral lenders not to play geopolitical games with Sri Lanka. This specifically applies to China, India, and the West. If these countries are genuinely interested in helping Sri Lanka, they should set aside the geopolitical ambitions without using Sri Lanka as a pawn.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 6
    2

    Indeed Dr. Wije: if accepted for Sri Lanka, this Statement provides a blueprint for a new world economic order! This international group of drafters of the Statement are talking primarily about the inequitably Global financial order dominated by the Washington Twins and the Colonial Club de Paris: They are well aware that there are 50 plus Global South countries currently in –post-Covid-19 Eurobond Debt Traps and the IMF-Colonial Club de Paris “Bailout Business”. BlackRock which got huge US government Covid-19 ‘bailout funds’ and its Indian Partner Adani is the biggest Odious Debt accumulator in the world.
    The focus of the statement is on the international Supply Side of Odious Debt and corruption in the international global sovereign bond debt trap and financial and Economic Colonialism trade system. The drafters were also aware of the high crimes and Bondscams at the Central Bank of Sri Lanka committed by successive Ranil Rajapakse Governments and the chilling killing of Mr. Dinesh Shaffter, primary material witness in the 2015 Bondscam that the current President, then PM, who is backed by Donald Lu’s “Force” used to fund his election campaign.

  • 5
    0

    I will give a similar view, which is not so uncommon to see in our medical world. I have seen highly reputed medical experts / doctors , after retirement, on social media / other media, not just criticizing pharma companies but questioning medical science, treatment modalities which they once practiced for years. To the extend , doubting benefits, some focusing only on the risk and not benefits, advising public to go with indigenous methods and not with scientifically proven facts, not just questioning advanced but even routine treatments like antibiotic use, medical management of high blood pressure / sugar——–. So it’s not a surprise to see 162 experts from different fields, coming together in criticizing the lenders and not the receiver. After going through, I found the word CORRUPTION , mentioned only twice, that too in a casual manner. After all there must be a few like Dinuk in all parts of the world. Aseni, obviously seems to be brighter and fast learner compared to so called experts.

    • 7
      0

      Chiv,
      Successive Sri Lankan governments preferred to borrow and spend billions on killing their own citizens in an ethnic conflict which could have been solved peacefully, given willingness on both sides. As it happened, the voters themselves voted for war and not peace. Post-war loans were used to build grandiose ego-boosters instead of real development. Eye-candy for gullible voters, who fully deserve the results.

      • 4
        0

        old codger
–
The Daily Mirror flashed today 16 January 2023 “Sri Lanka finalises oil exploration rules, earmarks 900 offshore blocks”
–
I also remember reading “Natural Resources: A Blessing or a Curse?”
–
I found a twitter message in a whatsA(U)pp group and I copy and paste the content here:
–
Oil exploration is not an easy business. Developing countries finding oil means there are only two pathways either you take the Nigerian route or the Norwegian route. No middle way is possible. What is #lka envisioning? Why is there silence? Thread 1/5
–
Immediate concerns, 1. how is the profit gained from oil and gas to be shared with the public? Do we have a constitutional guarantee? Do we have a transparent mechanism? Politico-bureaucratic-business nexus will profit. Oil&Gas belong to Lankans and the profits from it too. 2/5
–
2. There will be massive geopolitical implications, which will make #lka’s future bleak. The talk of oil exploration is not new. We had a few rounds over the past two decades; why it didn’t happen? What are the lessons? Are we going to serve vested interests? 3/5
–
3. What are the environmental consequences of oil exploration? Are we serious about it? Do we have the mechanisms to ensure that there is no ecological damage? http://documents.gov.lk/files/egz/2023/1/2313-47_E.pdf

        old codger
        Do you agree with the above message?

        • 3
          0

          Native,
          Given the record of past governments, I think it would be better to hire someone to cover up these alleged oil wells. We are always looking for an easy way out.

          • 3
            0

            old codger

            Thanks
            Why our media is not discussing this issue seriously.
            Does the media want one corrupt family to benefit from all future deal?

            We are constantly bombarded with the news that Sinhalese and Tamils are doing well outside the island. Why can’t Ranil demand Wimal Weerawansa, Sarath Weerasekera, Champika, Nimal’s favourite Elle, Gnanasara, Gnana Akka…. …. Sivajilingam, C V Wigneshwaran, Adaikalanathan (Mannar MP), Sritharan (Kilinochi MP), Mavai (Federal Party Leader) .. bring the right people and investments from their respective diaspora?

            Is it all Talks and No Action?

        • 0
          0

          Dear Native, though the question is addressed to OC, I will add my two cents of wisdom. At a time when black gold was at it’s peak, to invest in stocks globally (not just U.S) , I did some reading and followed, few major players for more than 10 year including Nigerian, Norwegian ( Statoil), Venezuela(PDVSA ), Exxon, BP, French (Total), Petro China and few North American companies ( Chevron). Decision to explore / drilling is a major decision having an impact on each and every citizen. Even with stringent regulations, things have gone wrong many times ((some were not anticipated). It’s one of the reason oil / natural resources rich Canada has restricted all investments. In a country like Lanka , dysfunctional and broken system needs to be fixed before making such decision.

          • 3
            0

            chiv

            Thanks for your comment.
            Ranil is bit more serious about oil exploration, not because he loves oil or oil fueled development he is not only compelled to deal with debt traps, foreign exchange crunch, …. etc but also this could be another deceiving foreign policy Carrot to keep the powerful countries happy.
            ——–
            After reading the original Twitter no one (except Nimal and SJ) could refuse to study the disaster which is waiting to happen, corruption, environment, depleting and wasting natural resources, Geo-political issues, … above all how the income is divided among the provinces by law. Therefore we need new laws to force the centre (Colombo) to distribute all income from natural resources to on an equitable basis to the provinces.
            ——
            Many would prefer more people in the provinces to swindle or share the extra income than just one man or one gang or one family. We know we can’t stop corruption altogether but we can democratise corruption by increasing the number of beneficiaries.

            This may be a serious issue.

            China’s man in Sri Lanka might prefer all 900 licenses to be given or issued to his beloved decent country.

            • 0
              2

              The trauma drags on.
              Sheer neglect, I would say.
              Please, please search elsewhere for the doctor for the doctor is not in the room.
              Remember, I care for your health– emotional especially.

          • 1
            0

            Chiv,
            It is also useful to be aware that India produces about 15% of its oil needs, but fuel prices are higher than in SL (over 500 LKR for petrol).

            https://www.bankbazaar.com/fuel/petrol-price-india.html

            • 0
              0

              OC, you are right. One of the reason is unreasonable fuel added taxes by government. Alternative clean energy is better choice but transition will take time

            • 0
              0

              OC
              I have this from https://www.tolls.eu/fuel-prices-asia
              ………………..Gasoline 95……..Diesel
              India……….. € 1.22(₹ 108)….€ 1.47(₹ 130)
              Sri Lanka…€ 1.29(₨ 515)..€ 1.29(₨ 515)
              Prices in much of Asia (even excluding petroleum exporters) is less than that in Sri Lanka.
              Petrol costs more in Sri Lanka while diesel costs more in India.

              • 0
                0

                SJ,
                Even petrol is more expensive in India than here.
                108 INR is currently about 550 LKR. We’re having an easy time, relatively, at 370 LKR.

      • 2
        0

        OC
        The voters voted for peace when they elected CBK.
        But the lady pursued a war for peace. (That is not to excuse the LTTE for its own irresponsible actions.)
        So the people did not really want war, until the war was claimed to be against terrorism– and the LTTE produced sufficient reason to support the claim, when the mood changed.
        There were besides vested interests, including the media and external powers, that wanted war to wreck the fragile peace talks.

        • 2
          0

          China’s Man in Sri Lanka is confused

          Out of love for all the Pol Pots in the world the China’s man takes it upon himself to defend the indefensible rotten LTTE.

          On April 19, 1995 the LTTE Shotdown military plane in Sri Lanka with SAM 7 missiles. The 1994 – 95 peace process came to an end.

          There you are now find out as to what happened after LTTE shot down planes.

    • 1
      0

      Chiv,
      These instances are many to list, by medical profession in SL!! there was a famous cardiologist, i remember in the 1980’s, loudly proclaiming at his practice for all and sundry in the waiting room to hear, “If you fry and eat food in COCONUT OIL, don’t come to see me about your ailments!!!”
      however, when he retired and NOW WRITNG ABOUTTHE MERITS OF COCONUT OIL and promoting it’s attributes for one’s good health, Especially vis-a-vis PALM OIL claiming it was due to US backed propaganda!!!!

  • 2
    2

    Let us be clear that Sri Lanka is wealthy nation that suffers from a Geostrategic Resource Curse and hence is today caught in the Euro-Amercian proxy war on China, just like Ukraine is trapped in a proxy war on Russia, with its US backed puppet Zelinski. So too US citizens of the Ranil Rajapakse Govt. are puppets of the crashing empire in this Asian 21st Century.
Let us also be clear that the $26 billion Default was Staged for Washington and EU to Re-colonize Sri Lanka’s economy and society also with Digital Colonialism. Indian and China with Saudi Arabia and other Asian Countries and the BRICS will need to help Sri Lanka and stop BlackRock and J.P Morgan , Allianz and Amundi asset stripping and privatizing the strategic island, with their debt collectors – the Washington Twins and Colonial Club of Paris.
In the long run (as Sri Lanka is in a US Dollar Debt trap, although the US with 30 trillion dollar debt is a most indebted country on the planet), De-Dollarization is the solution to the Global South Debt crisis as most of the countries that are in the US-Eurobond Debt trap are resources rich and have ample mineral and marine wealth!


    • 2
      0

      OC, according to media, world’s biggest sapphire remains unsold and has been brought back to Lanka. Now our National gem and jewelry chairman says “Queen of Asia ” bears more of museum value than commercial”, just like “miracle of Asia. Wealthy nation ????? more of Lankan hype.

      • 1
        0

        LM,
        Many things in this country are claimed to be the biggest, best, oldest, unique, etc. The trouble is that, like with our ancient agriculture, we are reluctant to change with passage of time.

        • 0
          0

          OC
          I am not sure about our agriculture. Some of the changes like to crops ‘responsive’ to agrochemicals has had serious adverse consequences.
          Excessive use of chemical fertilizer has for example made water non potable in several regions of France.
          There is a difference between modern agricultural science and the pseudosciences of agro businesses.

  • 5
    2

    India and China and Russia have realized this and have offered to trade in INR, Yuan and Rubles and Sri lanka will barter its Green Gold tea for Russia’s Black Gold or oil.
The Euro-American empire will die the faster for its hybrid economic proxy war on China and Asia’s booming economies!
Sri Lanka must urgently get rid of American Economic Hit Man, Ranil Rajapakse and his MCC advisors like Shanta Devarajan and Sharmini Cooray who talk about fake “binding constraint” to growth!
    Sri Lanka is caught in an Euro-American ECONOMIC PROXY WAR on China, the BRICS and Asia Rising.
    Look at what the CIA is doing in Brazil after already subjecting Lula to years of LAWFARE, and in Peru and, Pakistan where like Sri Lanka a regime change op was staged to further the Dollar Debt trap COLONIALISM.. But the world is wise now–
    Check out Russel Brand on BlackRock and J.P Morgan and the military business industrial complex:
    https://youtu.be/4v_aC1ZTlOg

  • 2
    1

    Dear All,
    .
    This has come on about 10 a.m. today, 17/01/2023. All in Sinhala.

    Cabinet Decisions – 17-01-2023
    .
    https://www.youtube.com/watch?v=UgcvY33-BPA
    .
    This is a 1 hour 2 minute press conference by the Minister Bandula Gunewardena, speaking, no doubt on behalf of our villainous President. About two thirds of it is his prepared statement, but that is followed by more than 20 minutes of questions, which Bandula G. tries to fend.
    .
    I won’t try to analyse it; could somebody else try to do so.
    .
    Important things are said about the payment of government salaries, expenditure on elections, and on the “celebration” of Independence Day next month.
    .
    Panini Edirisinhe of Bandarawela

    • 2
      0

      https://www.youtube.com/watch?v=lrajyHKWRWE
      .
      A BBC reporter speaking of the contradictions she sees. 6 minutes, five days ago. 463 comments, all in English, and counting.
      .
      https://www.youtube.com/watch?v=1dVUwH7eUJA
      .
      This is 27 minutes of the erudite young Dr Nishan de Mel. being interviewed today just four hours ago; all in Sinhala. I’ve only sampled.
      .
      https://www.youtube.com/watch?v=K4RGAOKp5SY
      .
      Food insecurity as seen by the BBC five days ago – 6 minutes in English

    • 4
      0

      Panini:

      Just a piece of friendly advice:

      1. Abandon forthwith this funny practice of posting under the pseudonym “Sinhala Man” and then signing off with your real name (and sometimes adding even your ID number as if the readers doubted the authenticity of your identity). Just change your pseudonym to your real name and, if this is not now possible, reregister under a different email address.
      2. Put a stop to this endless linking to other web sites. Links to other sites is justifiable only if they support a point already made in your comment. And how many do you think actually click or tap your links?
      3. Above all see that your comments are RELEVANT to the article under which they are posted. 😊

      • 2
        0

        LJ
        That is a tall order.

      • 1
        0

        This comment was removed by a moderator because it didn’t abide by our Comment policy.

        For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2

      • 2
        0

        Dear Leonard,
        .
        My earlier response may have been too long and detailed.
        .
        Paraphrasing it: thank you very much for your sincere advice.

        • 3
          0

          Thumbs up for being humble.

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