19 April, 2024

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Debt Restructuring, Austerity, & The IMF: A Solution Or A Worsening Of The Problem?

By Lionel Bopage

Dr. Lionel Bopage

Introduction: Sri Lanka has faced recurring economic crises since gaining independence, including the current crisis that has left the country bankrupt. The pandemic and the Russian-Ukrainian war exacerbated the situation, along with misguided government policies in agriculture, industry, taxation, and other sectors. The pandemic caused a downturn in the economy, that is heavily reliant on foreign remittances, tourism, and exports. The global debt-to-GDP ratio increased, affecting even major economies like China and the United States.

Debt and Imbalance: Sri Lanka’s sovereign debt is owed to Japan, China, India, and private lenders. The country has consistently failed to generate enough foreign exchange to cover import costs. Additionally, a large portion of the population, engaged in informal employment, does not contribute to tax revenue. Government spending heavily favours the military, overshadowing investments in healthcare and education. Income inequality is pronounced, with the wealthiest 20% holding a disproportionate share of the country’s income.

Blame Shifting and Economic Mismanagement: Governments have historically concealed economic weaknesses and mismanagement by diverting attention to minorities and other distractions. They have borrowed for non-productive projects, leading to a substantial external trade deficit and eventually declaring bankruptcy. The government and opposition still advocate for a free-market economy and export-led recovery, ignoring the role of free-market economics in creating inequity, the crises and the repeated failures of IMF interventions.

IMF and Austerity: Sri Lanka defaulted on its sovereign debt and sought assistance from the IMF for a loan package. The IMF’s prescribed solution includes implementing structural macroeconomic changes and domestic debt restructuring. This process is expected to cause economic shocks, prompting a five-day bank holiday to manage the impact. However, Sri Lanka has had to approach the IMF numerous times in the past, and the effectiveness of the IMF’s interventions is questionable.

Social Impact of Restructuring: The impact of debt restructuring and austerity measures varies across different social strata. The majority of the population, already vulnerable, will experience further austerity, leading to demands for economic justice. Advocates of IMF-led restructuring overlook issues such as tax avoidance, corruption, and mismanagement in the public sector. Austerity policies have exacerbated income disparity and worsened the overall well-being of the population.

IMF’s Flawed Approach: The IMF’s focus on fiscal austerity and debt repayment overlooks the socio-economic and political factors underlying debt crises. Austerity measures hinder economic growth and fail to address a country’s long-term structural issues. The IMF’s insistence on market-determined exchange rates, interest rate hikes, and state subsidy cuts can lead to unintended consequences, further burdening businesses and exacerbating economic challenges.

Debt Crisis in Ghana: Ghana shares a similar economic and political trajectory with Sri Lanka, facing multiple bailouts from the IMF without addressing issues of waste, corruption, and an economy that serves the majority. Ghana’s economic model heavily relies on commodity exports, making it vulnerable to global price fluctuations. The country defaulted on its debt and sought an IMF bailout, undergoing debt restructuring and negotiations with creditors.

Implications for Sri Lanka: The IMF agreement with Sri Lanka emphasises fiscal consolidation, budget surpluses, and austerity measures. Energy tariff increases, currency devaluation, and higher interest rates are expected. The IMF program lacks wealth taxes and restrictions on illicit financial flows, disproportionately affecting the most vulnerable members of society. Austerity measures disadvantage poor consumers who already spend a significant portion of their income on essential items.

Exploring Alternatives: Rather than relying on ineffective measures that prioritize debt repayment, Sri Lanka should enforce fiscal responsibility, address corruption, and manage resources efficiently. Transparent financial management, a cap on borrowing, and reductions in public expenditure can help stabilize the economy. The government needs to engage in inclusive national dialogue, diversify the economy, prioritize social protection, and implement rights-based approaches to economic and social development.

Conclusion: Solving Sri Lanka’s debt crisis requires a government committed to sharing the burden of restructuring with those who can bear it without adversely affecting the disadvantaged. The affluent and elite must pay their fair share of taxes and be held accountable for corruption and illegal activities. Fiscal and monetary policies should prioritize the common good, and alternatives to austerity measures should be explored. By promoting transparency, accountability, and inclusive development, Sri Lanka can work towards a sustainable and equitable economy.

I intend to expand on this article soon.

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Latest comments

  • 5
    0

    Lionel Bopage is taking a thorough look. He hasn’t finished. He’ll expand.
    I am in agreement with his theory. But, wish to disagree, in part.
    Going to IMF was not a theoretical solution. It had practical necessities. We needed a bailout!
    As regards to stipulations (of the Lender), our choices were limited. Almost nil.
    However, we, as a country can and should do better.
    We show no signs of changing the structure that lead to our present plight.
    The President is more worried about his political future than about the economic revival of the country. He is yet to show that he understands that the people are the best asset he has.

    • 2
      1

      Sarath,
      “As regards to stipulations (of the Lender), our choices were limited. Almost nil.”
      Spot on!!
      When a ‘spoilt child’ in this case the “NOT THAT well-educated, ill-informed, conceited Politicians” becoming arrogant after the Loan or temporary Resuscitation or Oxygen is infused for recovery, to slash and burn T & C’s of Loans by International and national lenders!!!???
      That is the underlying reason for such stringent Laws and Regulations and also if I ma correct, ‘tranche’ Payment of the funding on PROGRESS AND OUTCOMES!!!???
      We deserve this for electing imbeciles for the past 72 years and misusing and abruptly deviating from the Loan Terms abruptly like “Vadihiti Kanda” Monkeys ‘plucking from devotees’ their ‘Puja Wattiya’ from the descending Pilgrims!!!???

      • 1
        0

        America, India, Japan & China are in extensive fear of how the others are going to make Langkang push them off the cliff in this competition. So, they all are so naïve to talk to Langkang ministers or Presidents even though it is all they who complained about the Lankan President depositing the people’s money in their countries’ banks. Then tell me please, how is bailing out going to work? The bailing out must change the country’s basic structure from labor exporter to the manufacture and products exporter. When one after other Langkang garment factories were closing, I heard that Rowdy Royals had opened a factory in Andhra with 13,000 local girls. It was a story about a factory. But the $19 billion must have many others in India, Pakistan, Bangladesh, Africa and in Western democracies. The IMF has no plans or policies to bring back workers and the money to work for the country once more. You wash any beggars and borrow penny loans from them; but if the country has no law and order, not maintaining competitiveness in the open world space, if it does not have highly skilled and educated labor, no FDI will come to Lanka. That means you have no real & honest way of repaying the loans. Period.

    • 1
      0

      Nathan,
      Taking a thorn out with another thorn is not bailing out, but it can practically work, occasionally, under some conditions. If the person trying it is careful enough not to leave the tool thorn too in the muscle broken, then it can turn out to be a good deal. Remember, the IMF said only interest free, but never contended to any haircut, like all other creditors of Langkang so far. … Don’t forget that in recent years we were only obtaining loans to pay back old ones and additionally fund the free feeding (Biriyani & Arrack), rapist Army maintenance and more dollars for foreign banks deposits. The main solution Lionel Babbage proposes is Fiscal Consolidation. Yes, it is the most used grandma’s home remedy medicine. Langkang ministers and presidents don’t like it because it doesn’t give anything to foreign bank deposits. The IMF has no political control mechanism or the countries on the top of it this time behind IMF loan for Langkang has no appetite to impose any political restructuring for Langkang, because the cunning way Langkang ministers and presidents have well managed to set and balance the main players on each other.

      • 1
        0

        America, India, Japan & China are in extensive fear of how the others are going to make Langkang push them off the cliff in this competition. So, they all are so naïve to talk to Langkang ministers or Presidents even though it is all they who complained about the Lankan President depositing the people’s money in their countries’ banks. Then tell me please, how is bailing out going to work? The bailing out must change the country’s basic structure from labor exporter to the manufacture and products exporter. When one after other Langkang garment factories were closing, I heard that Rowdy Royals had opened a factory in Andhra with 13,000 local girls. It was a story about a factory. But the $19 billion must have many others in India, Pakistan, Bangladesh, Africa and in Western democracies. The IMF has no plans or policies to bring back workers and the money to work for the country once more. You wash any beggars and borrow penny loans from them; but if the country has no law and order, not maintaining competitiveness in the open world space, if it does not have highly skilled and educated labor, no FDI will come to Lanka. That means you have no real & honest way of repaying the loans. Period.

      • 1
        0

        You may like me or hate me the way I talk. It’s just part of reading and commenting on CT’s essay, nothing more. But you are still obligated to believe my honest talk on that. Because that is where all talks which have purpose must end.
        The whole European history of colonizing Ceylon was importing Tamils Nadu labor to do the excess work the Ceylonese were facing those days. Almost 1 ⁄ 3 of the population of Ceylon came from Tamil Nadu, mainly, during the European colonial time. Then why, now, are the workers going out of the country and the money going out of the country and businesses finding it better to move out their business to other growing countries? What was the solution the IMF gave for these problems? That is the main problem, Langkang needs somebody to bail it out. By the Foreign Exchange Fraud Amnesty Act (2017) Evil Attempted to encourage Rowdy Old King to bring back the foreign deposits he had. But that was an illegal practice for the international community and then the EU and FTFA immediately blacklisted the Yahapalanaya government. That was when the first foreign Exchange problem started, around the end of 2017.

      • 1
        0

        All what I had come to know so far about this bail out is EPF/ETF people are Colombo and the Evil Emperor for the faults of White Elephant projects, Lazy and excessive government workers, maintaining the 10th Largest (rapist) Army in the world only to keep Tamils under the Jackboot of Colombo, and tapping every possible last drop the country’s money for foreign deposit.

      • 1
        0

        The loan that needs to be paid by Langkang is $85B. No other need for money is estimated and added in that number. So, I don’t know how much this will grow in the next 4 years. The IMF’s whole loan is only $750M for a year. Then some of it is said to be budget balancing for things like too (Like rapist Army maintenance, buying Biryani and arrack for voters…, so not all of it is loan bailing out. Now let’s see, out of our 85B, we are getting help from the IMF, for all the stringent monetary controls and belt tightening is only 3B helping and it is we who are going to come up with some ways to pay the remaining 82B. Then why don’t you want to think of leaving out the IMF 3B too and its roasting conditions in the lower income class, but pay the whole 85B loan back by the real management of the country? What is the difference between 82 & 85? Last 1 ½ years that anything came out of the Presidential house, Cabinet, Parliament, CBSL have nothing to with the word called “truth”. In that case how are you expecting the puny 3B to settle all your 85B loan?

      • 0
        0

        Mallaiyuran,
        Usually, I respond when a comment is addressed to me. However, I have to disappoint you. Your comment is too bulky for me.
        I promise to respond, if you would condense it for me.
        Thank you.

    • 1
      0

      “We needed a bailout!”
      As a country Sri Lanka need a bail out. But more than bail out, the country need a change of attitude and structural, political, social, and economical changes. Without such change whether it is IMF bail out or any other bail out will not help the country to get better than now. Unfortunately not a single political leader including RW did not tell the truth to the people about the changes that need for the country. RW said in a meeting with Tamil MPs yesterday that “he is not Rajapaksa and you should not ask me to make changes in relation to solving ethnic problems”. The fact is that he is now playing a game before going to India instead of telling the truth that he cannot solve the problems.

  • 2
    1

    A rehash of the recent history of our bankruptcy and its solutions is a bit of a yawn. Rephrasing what’s already out there in the public sphere cannot enlighten anyone. Anyway, let’s see if the author has anything new to say in his further expansions.

  • 1
    0

    You may like me or hate me the way I talk. It’s just part of reading and commenting on CT’s essay, nothing more. But you are still obligated to believe my honest talk on that. Because that is where all talks which have purpose must end.
    The whole European history of colonizing Ceylon was importing Tamils Nadu labor to do the excess work the Ceylonese were facing those days. Almost 1 ⁄ 3 of the population of Ceylon came from Tamil Nadu, mainly, during the European colonial time. Then why, now, are the workers going out of the country and the money going out of the country and businesses finding it better to move out their business to other growing countries? What was the solution the IMF gave for these problems? That is the main problem, Langkang needs somebody to bail it out. By the Foreign Exchange Fraud Amnesty Act (2017) Evil Attempted to encourage Rowdy Old King to bring back the foreign deposits he had. But that was an illegal practice for the international community and then the EU and FTFA immediately blacklisted the Yahapalanaya government. That was when the first foreign Exchange problem started, around the end of 2017.

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