29 May, 2023


Beyond Debts & Defaults

By Uditha Devapriya

Uditha Devapriya

Initially advocated by the neoliberal right, the argument to default on the country’s debts is now being promoted by sections of the Left. The government has indicated that it will not listen to either camp – it transferred funds for the repayment of a USD 500 million bond, the first of two that need to be settled this year, earlier in the week – but that has not muted calls to abandon its policy of doing well by our creditors.

The neoliberal right’s arguments are predictable enough. Whereas earlier they demanded that the government go for debt restructuring to make it easier to repay bondholders and regain lost credit ratings, now they advocate the same so as to shift focus to other priorities, such as importing essential goods. To be sure, the neoliberal right is not alone in saying this: Colombo’s economic think-tanks, in general, recommend that the government exercise that option. To give one example, Nishan de Mel of Verité Research has drawn a line between defaulting and going bankrupt, contending that the former is preferable.

Like the liberal and neoliberal right, Sri Lanka’s Left has not been uniform in its response to these issues. The Old Left, the LSSP and the Communist Party included, vehemently oppose any restructuring, a stance the Frontline Socialist Party also adheres to. On the other hand, the JVP or the NPP has failed to come up with a coherent response: while Bimal Ratnayake and Sunil Handunheththi have opposed going to the IMF, Harini Amarasuriya has argued that we need to abide by international credit rating agencies. It is a testament to the JVP-NPP’s want of vision that it may be one of the few parties identifying themselves with the Left which have openly, and publicly, described rating agencies as independent. In this it is as muddled up and confused as its attitude to China, a point I have noted before.

Not surprisingly, then, the Left’s argument to default is largely ideological. In an intriguing piece, Former Professor Sumanasiri Liyanage suggests that we don’t repay and that we “cut down the bigger portion of imports of consumer goods that is close to one billion dollars”, thereby saving USD five billion. Liyanage warns against opting for neoliberal debt reforms, namely rescheduling, restructuring, and moratorium, noting that they are “not the answer.” Though he doesn’t specify his preferred approach, he argues that it will entail a “necessary and unavoidable” paradigm shift that will lead to a “permanent solution.”

Liyanage calls all this a matter of “simple arithmetic.” As always, the truth is far more complex. Given the state of the global financial system, a default would invariably be followed by calls for restructuring. Should we opt for restructuring, economists recommend reaching a compromise between the country’s citizens and its creditors. Yet the experience of most countries that have undergone such reforms should tell us that this will entail more hardships for the people than for the debt holders.

That is why, regardless of the exploitative nature of the global financial system, we need to realise that the repercussions of a default will be felt most by the lower classes. We need to understand that they will be the first to come out to the streets. With a diminishing space for their aspirations, the middle-class will most likely follow them.

This is already happening here: the fertiliser crisis, import restrictions, and rising costs of living have heightened popular opposition to the government, and they have brought these groups together. Fuel, food, and gas shortages, not to mention the prospect of power cuts and the possibility of further downgrades by credit rating agencies, are burdening an already overburdened population. Any default-and-restructuring policy can only contribute to a further rise in protests and demonstrations.

The fundamental problem here is how mainstream economists are addressing these concerns. As Sumanasiri Liyanage, quoting Jerome Roos’s Why Not Default?, observes, neoliberal ideologues keep making two assumptions about international sovereign debt: one, that a government is a “representative” and thus free agent which negotiates on behalf of its people, and two, that a country constitutes a single entity.

Such assumptions gloss over the fact that societies are made up of various classes, that these classes mingle and clash with one another, and that in the event of austerity it is those who have the least resources who end up losing the most. Neoliberal economists leave out these points from their discussions, perhaps because that they believe that economics can be insulated from politics; that would explain why the more doctrinaire among them advise revisiting and re-implementing the policies of the J. R. Jayewardene regime.

What, then, would a viable Left strategy entail? Firstly, we need to acknowledge that debt restructuring would be painful, especially for those who have already been hit hard by the pandemic. Not all of us is in the same boat: as a recent Oxfam report notes, two years of the pandemic have resulted in a doubling of wealth among the world’s top 10 billionaires, yet another sign of how obscenely unequal the system is. To ignore these realities and call for a default would, in the long run, be to give into a “reform package” that brings more suffering and widens inequalities. This should be avoided at all costs.

Secondly, the State needs to prioritise relief to the masses. The Oxfam report debunks the myth that governments can’t offer such relief by printing money. The US Federal Reserve, for instance, has been printing trillions of dollars since the pandemic began, to revive the economy, and countries elsewhere have followed suit. This has had a significant impact on the poorer masses, though the record in some countries has been mixed.

To be sure, Sri Lanka’s upward-aspiring middle class may think that distributing financial relief by printing money is something only this country engages in, and bemoan it even as they indirectly benefit from it. But the potential of money printing to help the masses tide over – an objective Basil Rajapaksa’s relief package seems to be zeroing in on – should not be lost sight of. Modern Monetary Theory is not a long term solution, less so a sustainable one, but insofar as it facilitates relief, it should not be dispensed with.

Thirdly, the government should negotiate credit lines from as many countries as it can go to. As I noted in an earlier piece, the pandemic, and the depletions of the country’s foreign reserves, has become the primary determinant of our foreign policy. From snubbing India and Japan, for instance, we are now trying to obtain credit from them. While China has kept a low profile since of late, it may extend further credit as well, renegotiating what’s already due to it. We need to take advantage of these openings.

Printing money and fine-tuning foreign policy, though, are temporary solutions. They should be phased out in the long run, in favour of more radical reforms. This is the fourth step we should be taking, though it is one that is yet to be discussed and debated.

Take a very simple but radical proposition: printing money to build up local industries and promote exports. Critics of Modern Monetary Theory contend that more money leads to more inflation. They are not wrong: prices of essential goods have been escalating wildly over the last few months. Yet the real issue isn’t whether money should be printed at all, but for whom and for what it should be printed: a question neither advocates nor critics of money printing seem to be asking.

The fact of the matter is that money needs to be directed to productive investments, and the only way to do that is to prop up local industries and spur industrialisation. This is a policy few economists, from the Left or the Right, have prescribed, but it is one that one of the more brilliant among them, Howard Nicholas, has.

Howard Nicholas’s advice is simple enough. Countries that industrialised faster than others have managed to reduce trade deficits and achieve export-led growth. Vietnam is a case in point here. Though mainstream economists contend that it was its decision to liberalise trade which facilitated faster growth, it was actually its industrial policy, combined with the phased out opening up of its sectors, which did so in the long run.

Dr Nicholas’s argument is a rejoinder to advocates of free markets and of mere import substitution, which may be why he has come in for criticism from both sides. But as Dushni Weerakoon of the IPS has noted, industrialisation should form a crucial part of the solution, provided that it’s buttressed with a more enlightened tariff regime.

The bottom line to all this is that defaulting is not the answer to our problems. Defaulting may be the preferred way out for market fundamentalists and even certain leftists, but it’s definitely not the way out for the country. Opting for such a strategy would mean imposing greater austerity on the masses, which this government, mindful of its electoral prospects, will want to avoid at all costs. Dushni Weerakoon’s point, in that sense, is spot on: the debt restructuring option suits countries with a reputation for defaults, like Ecuador, but not so countries like Sri Lanka. Any “permanent solution”, then, would necessarily have to focus on the longer term. Industrialisation may well point us in that direction.

*The writer can be reached at udakdev1@gmail.com

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Latest comments

  • 5

    Maybe my English is good enough but I find your articles very dense making me feel like I am reading through a legalese of some business contract. I hope it is not intentional.

  • 6

    Osho, this is what they say-“if you cannot dazzle them with brilliance, baffle them with BS..”

    A whole lot of references and names to impress us, but no rhyme or reason !

    • 2

      a feeling of resent aroused by someone else’s abilities.

  • 3

    Don’t default….Transfer : Transfer the credit onto local industries. Creditors can wait another 10 years for their returns. Unfortunately, the the Gotabayan- Oligarchy want to invest mightily into Port-City project of the Global Takeover. Mad indeed!

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