By Ameer Ali –
At the Paris Conference of 22-23 June 2023, French President Emmanuel Macron called for “a new consensus for the planet … detailing a shared political view structuring the way toward a profound reform of international financial architecture and governance”. He also added that the conference was to put forward an agenda to “fight against inequalities and climate change”. How many times before has the world listened to such lofty ideals before they become vacuum in action? But Macron’s call for a new international financial architecture itself is a tacit admission that the current system is in crisis and needs change. When the entire world is in debt to an amount exceeding $300 trillion and is destined to increase further how on earth could one dream of a debt free planet and equitable development? Lending and borrowing are normal state of what economics defines as “ordinary business.” But it is the responsibility of the borrower to choose the cheapest lender and use what is borrowed wisely and profitably so that repayment could be made promptly while enhancing development. Sri Lanka failed on both counts, and President Ranil Wickremesinghe without insisting on a “separate process” had pleaded for a special deal for the issues of debt stressed middle-income countries before they become bankrupt as his.
The urgency for this special deal arises because SL is scheduled to start soon negotiations for debt restructuring with its international creditors, which include the Paris Club (Club de Paris), India and China. It was on that undertaking that IMF agreed to extend $2.9 billion loan under EFF over four tranches. With the first tranche already released the SL economy had achieved a modicum of financial stability and economic comfort. But that stability and comfort could evaporate soon if the outcome of restructuring negotiations becomes too onerous. There are two aspects in particular that could endanger a favourable outcome. One is the conflicting geopolitical interests of the parties concerned, and the other is the insistence of foreign creditors to share the burden of restructuring with SL’s domestic creditors. Because, one of the key principles of the Club is burden sharing with “all creditors”.
Of the three parties among SL’s foreign creditors, the 22-member Paris Club is an organization that reinforces US foreign policy objectives, and the debtor country that approaches the Club for debt-renegotiation must have in place an IMF approved economic stabilization program. The entire economic reform package that IMF demanded RW and his government to implement was a leaf taken straight from the US textbook on free market economy, and the primary objective of that package is to enable SL to honour its debt obligations once the expected benefits come to fruition, and then continue to be a faithful disciple of the system. What it really means is that that there is no economic independence for the debtor country at the end but continued dependence on the US and its allied patrons. This was the reason why RW did not ask for a “separate process” but for a special “deal”.
The other two, India and China, are geopolitical enemies rather than rivals in the Indian Ocean each vying to dominate if not control that Oceanic Highway, and Sri Lanka is caught between the two. China that had lent to SL over $7 billion understandably had been too benevolent and that benevolence, which is actually going back to the China-Ceylon Rice-Rubber Pact of 1952, paid off in winning a 99-year leasehold over SL’s Hambantota Harbour. Although China agreed to support SL’s debt restructuring effort, which allowed IMF to sign the EFF deal, China still remains un-committal to any outcome. RW is scheduled to visit India soon followed by one to China. US and the Paris Club members know that RW was the man who signed off that lease. US in particular would also be worried over Russia’s increasing interest in SL. All these factors would certainly play a role in the restructuring drama.
More than the geo-political issues interfering with negotiations with foreign creditors, it is the burden-sharing element that IMF promotes would prove more costly to the local economy. SL’s total domestic debt is equivalent to about $36 billion. The largest portion of it is government debt accumulated through short-term treasury bills and long-term T-bonds. Unlike the sovereign bonds which are mostly held by international creditors, these two are default-free risk instruments and are held mostly by the local banks, insurance companies, and the five main Employment Provident Funds. The so-called hair-cut means a partial default which involves the choice of one or more of three options to holders of these assets: foregoing part of the principle lent; writing off a portion of interest income; and accepting a new set of instruments with less attractive terms. How deep or light the hair-cut at home would depend on how little or great the concessions SL would receive from foreign creditors. However, the partial default at home is bound to affect customer confidence on local banks and financial institutions. That would in turn affect the expected financial stability and economic recovery from IMF program. The government’s predicament on domestic debt is depicted by its vacillation and contradiction. At first it agreed with the IMF to go through this painful exercise. Later it contradicted and said that it had not made any decision and that there would be no need for a hair-cut. Lately, according to the Acting Finance Minister, whatever restructuring that government undertakes would be to maintain debt sustainability, as pointed out by Kenji Okamura, IMF Deputy Managing Director.
At the end of the day, there is one thing that is unavoidable. The post-restructure financial sector and economy would impose more burdens on the ordinary people in terms of high living cost and increased taxes and tariffs. Interest rate would remain fairly high and inflation would continue to persist because of economic slowdown abroad. What would be the consequence of that in terms of public discontent is anyone’s guess. In the final analysis, debt could only be settled by earning a surplus. To earn that surplus local economy needs a concrete plan to mobilize domestic resources and channel them into a carefully studied and identified set of productive ventures into which foreign investment should be directed. The market bird should be allowed to fly inside that plan-cage. Such a plan is unfortunately not there, because the man at the top, like his uncle JR, believes in unbridled free enterprise, which in combination with government corruption and absence of accountability, led to debt and bankruptcy in the first place. This is why a system change is imperative.
*Dr. Ameer Ali, Murdoch Business School, Murdoch University, W. Australia