Bailing Out the Creditors

Sri Lanka entered its seventeenth loan arrangement with the International Monetary Fund (IMF) on 20 March 2023. Through a medium-term lending window known as the Extended Fund Facility (EFF), the IMF will disburse almost 3 billion US dollars to the bankrupt South Asian country over the next four years. This new financing, which signifies IMF endorsement of the Ranil Wickremesinghe government’s economic reforms, has been trumpeted as Sri Lanka’s only lifeline to salvage its sunken economy — but it will do nothing of the sort.

Although the ostensible purpose of an EFF is to “implement deep and sustained structural reforms”, what the IMF really intends is not to address the unequal and unfair international economic relations that make poor countries become highly indebted, nor to provide relief to the common people suffering in the island’s worst post-independence crisis, but rather to reinforce the market economy and bolster its integration into the global capitalist order.

In fact, the IMF loan paves the way for international creditors (including sovereign bondholders) to recoup their loans to Sri Lanka as much and as soon as possible. Once implemented, IMF conditionalities will also rehabilitate Sri Lanka’s credit rating and enable it to go back to the international money market to borrow more, adding to its total stock of debt and volume of debt-servicing, which already exceeded 36 billion dollars by late March 2023.

The agreement came almost one year after the government of Gotabaya Rajapaksa announced Sri Lanka’s imminent default on its sovereign debt, becoming the first Asia–Pacific country to do so in over two decades. This admission of inability to service external loans underlined the severity of Sri Lanka’s economic crisis that first broke in 2021 and sparked widespread and large-scale protests between March and July 2022.

According to the World Bank, last year the Sri Lankan rupee lost 78 percent of its value against the US dollar between the months of March and May alone, while at least 500,000 jobs in manufacturing and industry were lost on top of hundreds of thousands more during the COVID-19 pandemic. Double-digit inflation peaked at 69.8 percent in the month of September before slowing down to 57.2 percent in December.

Within a few months, the poverty rate doubled to 25 percent of the population, tripling in urban areas and exceeding 50 percent on rural plantations, meaning an additional 2.7 million people are now officially poor in a country of 21 million. In January 2023, the World Food Programme estimated that 32 percent of households in Sri Lanka were “food insecure”, while 17.1 percent of children under the age of five were underweight and 15.1 percent of babies exhibited low birth weights. These percentages have only grown since last year. Annual GDP, which was almost 89 billion US dollars in 2021, continued to contract by 11.5 percent in the first quarter of 2023.

This is the socio-economic context — alongside global warming, wars, far-right extremism, food shortages, and rising costs of living — in which the IMF orders states to target inflation, reduce their deficit, cut back on subsidies, retrench public sector workers, casualize the labour market, and dismantle domestic agriculture and industry to create new markets for foreign trade at crippling cost to large sections of the citizenry. In Sri Lanka as elsewhere, it can only end in disaster.

The Backdrop to the Agreement

What made Sri Lanka go to the IMF, after insisting for so long that it had no cause to do so?

The most obvious factor is that the country had nowhere left to turn. Sri Lanka had lost access to borrowing on the international financial market in 2021, an outcome of its sovereign credit rating being progressively downgraded from 2020 onwards, signalling international concern over likelihood of default on debt. Once a default occurs, all creditors (bilateral, multilateral, and private) freeze new lending.

As of March 2022, useable foreign reserves had plunged to 400 million US dollars, which was less than a week’s import bill. Meanwhile, the amount of debt to be serviced between 2022 and 2027 had grown to gargantuan proportions: on average, Sri Lanka had to find over 4 billion dollars each year to repay creditors, while a staggering 7 billion was needed in 2023 alone. The due dates for repayment of several international sovereign bonds were fast approaching, while the island’s useable foreign reserves had dipped all the way to 25 million dollars by April 2022. The state treasury consisted of loans and currency swaps, rather than income from revenue and investment. Its composition aside, reserves were nowhere near enough to meet Sri Lanka’s external obligations even for the following month.

This time around, the champions of neoliberalism in Sri Lanka hope that the severity of the crisis will override objections from within the state and civil society.

The IMF’s infusion of new credit is supposed to help Sri Lanka plug the foreign currency shortfall that restricts the purchase of foreign goods (from fuel to food to pharmaceuticals), without which the highly import-dependent country cannot sustain production nor society function. Sri Lanka’s expenditure on imports is chronically higher than its income from exports, creating a mounting deficit that has long been financed through spiralling international borrowing. However, the IMF loan is only nearly 3 billion dollars disbursed in tranches over 48 months, whereas the island’s balance-of-payments deficit in 2021 alone amounted to almost 4 billion. Thus, the first tranche of 333 million US dollars amounted to an almost nominal contribution to the balance-of-trade problem.

In fact, almost half of the first tranche was immediately used to service an Indian line of credit — a classic instance of taking out new loans to repay old ones. Sri Lanka’s Central Bank Governor subsequently confirmed that the IMF loan was authorized for debt repayment rather than only essential imports, as many Sri Lankans had believed. This illustrates how the real significance of IMF agreements is to indicate to creditors that the “gatekeeper and watchdog” of the international monetary system approves the debtor state’s economic plan to manage its debt crisis, making it worthy of fresh credit and renegotiation of its existing debt. Indeed, President Wickremesinghe admitted as much in his appeal for parliamentary support for the deal, explaining that Sri Lanka would “regain recognition in the international arena” and be able to form “the basis for obtaining credit from other international financial institutions”.

On the heels of the IMF agreement, two of Sri Lanka’s largest multilateral creditors, the Asian Development Bank (ADB) and the World Bank (WB), announced new lending of 350 and 700 million US dollars respectively to support “economic stabilization”. These new loans merely add to Sri Lanka’s mountain of existing external debt.

One-Sided Negotiations

The government of Sri Lanka began putting out feelers to the IMF in mid-March 2022, and made its interest in a new programme clear in April 2022 as defaulting on its foreign debt became unavoidable.

The IMF Staff-Level Agreement was finalized in September 2022, laying out “prior actions” to be taken by the government before approval by the IMF’s Executive Board, because the precondition for any IMF programme is that the government in question demonstrate its political commitment to implementing austerity policies, even in advance of new financing.

The Sri Lankan side did not put forward any demands in these negotiations. It had only one goal: an IMF loan, as soon as possible. There is no evidence that the government stipulated “red lines” based on the best interests of the people of Sri Lanka before or during talks with the IMF, both in Washington, DC and in Colombo. Nor did the government have any strategy to protect those suffering in the crisis from the austerity measures that are integral to IMF programmes. The IMF set out its conditions, and the government readily accepted them in toto. This much was confirmed by President Ranil Wickremesinghe’s remarks in late February 2023: “They assigned us fifteen tasks to complete … on February 15, we completed all that was expected of us and sent them to Washington.”

There was no disclosure around the specific measures of the agreement, neither to Sri Lanka’s parliament nor its people, in advance of its approval in Washington. That said, the actions taken in advance made it clear what the IMF expected: increased taxation, interest rate hikes, reducing the public sector, a freeze on capital expenditures, and market pricing of fuel, electricity, and water. There was no pushback in government circles against any of these “tasks”.

President Wickremesinghe’s administration, and many parliamentarians across government and the opposition, hold the same ideological opinions as the IMF as far as the sources of and solutions to economic failure in Sri Lanka are concerned. The current regime in Colombo is a willing partner in the framework and rollout of the neoliberal reforms promoted in the IMF agreement. Hardly any of the steps were not attempted or canvassed during Wickremesinghe’s previous stints in power (2001–2003 and 2015–2019).

Neoliberal to the Core

Previous efforts to deepen Sri Lanka’s neoliberal turn after 1977 stalled or could not be introduced, due to diverse factors, some generated by the policy reforms themselves and others derived from the country’s political economy. This time around, the champions of neoliberalism in Sri Lanka hope that the severity of the crisis will override objections from within the state and civil society.

Sri Lanka’s latest agreement with the IMF has at its core the same single-minded focus as the structural adjustment packages of the 1980s and 1990s: that is, to slash public spending and limit the role of the state in the economy. It amounts to a “politically driven” diagnosis of the economic health of the debtor, along with a prescription for the bitter medicine to be swallowed. This school of economics, generally known as “neoliberalism”, consists, in the words of Robert Brenner, of “two fundamental aspects — austerity on the one hand and politically driven direct upward redistribution on the other”.

A further continuity with this earlier period is the IMF’s claim that the sources of economic crisis are wholly endogenous or internal to Sri Lanka and its relations with the world economy. The reforms the IMF is pushing are solely designed to restructure the national economy in better alignment with global capitalism. However, austerity is about more than economics — it is a political choice. Socio-economic reforms must overcome public dissatisfaction and resistance from organized sectors.

Thus, the Ranil Wickremesinghe administration has also been clamping down on human and democratic rights, particularly the right to protest. The protests preceding the 2022 uprising were often met with water cannons and police violence. The repressive apparatus of the state came down hard on activists during the 2022 uprising and went on to harass them through the courts when they were released on bail. The proposed Anti-Terrorism Act and the enacted Bureau of Rehabilitation Act embed the military in state structures and entrench militarization.

The thrust of the IMF agreement is to reduce government expenditure on public sector wages and pensions, social welfare benefits, and subsidies on public goods, while divesting from state-owned utilities and enterprises through privatization or “public-private-partnerships”. On the revenue side, the IMF prioritizes an increase in tax revenue (direct and indirect) and efficiency of tax collection. Other aims of the new programme include financial sector stability through a shake-up of the banking industry (the island’s two largest banks are state-owned, and the Central Bank is perceived as more aligned with government than market interests), and a new focus on governance and anti-corruption legislation in particular.

China’s reticence to provide new financing has been an opportunity for India to seek advantage over its regional rival and recover lost influence over its island neighbour.

Finally, the Sri Lankan government is expected to enact a raft of reforms such as trade liberalization, labour market flexibility, land market liberalization, and risk insurance for climate-change and adaptation. While using language that implies opportunity and even wellbeing, these “growth-enhancing” policies aim to promote private — especially foreign — capital in export-import trade, agribusiness (through removing restrictions on arable land ownership and use), and financial services (for environmental harms) while lowering the cost of labour (through deregulation of working hours, introducing “hire and fire”, and restricting the right to strike) and greater exploitation of women’s waged labour.

Progress in these areas will be reviewed twice every year in June and December until 2027. If satisfied, the IMF will disburse loans of 333 million dollars every September and March until the programme ends. Should the programme go according to plan, there will be nine equal instalments — each tied to economic policy benchmarks — equivalent to 395 percent of Sri Lanka’s quota or contribution to the IMF’s capital fund.

How Austerity Hurts

The IMF’s programme for Sri Lanka essentially amounts to one large austerity policy, euphemistically described as “fiscal consolidation”, that shifts the burden of economic crisis onto the poor and the powerless. The damaging impacts of these policies begin well before the programme itself commences. The “pain” of socio-economic shock therapy must precede the “gain” of the loan. These actions — all of which disproportionately hurt women, the working class, the self-employed, and the poor — are being taken while Sri Lanka is embroiled in its worst crisis since independence was achieved from Britain in 1948, and after its economy contracted by almost 8 percent over 2022.

Measures promoted by the IMF include hiking interest rates and lowering government spending at a time when the state should be promoting economic production and growth of employment. The IMF has encouraged a rollback of universal social rights, to be replaced by a social safety net that catches only the fortunate few, abandoning many during a debilitating poly-crisis. This comes after years of crisis that devastated broad segments of the population, including the devaluation of the rupee, which nearly halved in value last year. This wiped out many Sri Lankans’ cash savings and significantly increased the cost of imported products ranging from food and fuel to medicines, raw materials, and intermediate goods, thereby reducing citizens’ overall purchasing power.

The value-added tax, which disproportionately squeezes the poor, was increased by 50 percent, while its scope of application was widened. The levy on telecommunications was raised by 15 percent. The personal income tax threshold was reduced to 100,000 rupees per month, even after the rupee devaluation wiped out 40 percent of the real value of wages and salaries, while inflation and prices of essentials became unimaginable. Formal sector workers and middle-class professionals on fixed monthly incomes have been badly hit amidst spiralling household expenses for rent, fuel, utilities, food, and out-of-pocket health and education expenses.

Electricity tariffs were hiked twice in just six months (75 percent in August 2022 and a further 66 percent in February 2023). With skyrocketing bills, almost 500,000 households have been disconnected from the grid, as they are unable to repay mounting arrears, and prioritizing scarce income for food, cooking gas and kerosene. Kerosene, which is a crucial fuel for farmers and fishers, has seen price increases of more than 400 percent within a 12-month period. This has made it too expensive for small-scale fishers to go out to sea daily. Consequently, the supply of fish has declined and its price has greatly increased, making regular consumption of this important source of protein unaffordable for many households.

The tragedy is that IMF conditionalities are being implemented even when there is no evidence that they succeed, even if one accepts the premise that economic growth alone is a sufficient condition for poverty reduction. Indeed, the evidence from across the world suggests that growth rates in countries with IMF programmes are mostly lower than in the period prior to their sovereign debt crisis, while wealth concentrates at the top and income inequality grows. Sri Lanka faced similar developments since the implementation of “open economy” reforms after 1977.

Between New Delhi and Beijing

Sri Lanka’s debt crisis also contains a geopolitical dimension, as the country finds itself trapped in the “great game” playing out between India and China in the Indian Ocean, as both regional hegemons are eager to keep Sri Lanka in their respective strategic orbit. The Mahinda Rajapaksa administration (2005–2018) exhibited a clear pro-China tilt, but India has displaced China as Sri Lanka’s top bilateral donor since the onset of the crisis.

The Indian and Western media have accused China of “foot-dragging” on restructuring its loans to Sri Lanka, therefore delaying the sealing of the IMF agreement. China holds 10 percent of Sri Lanka’s bilateral debt stock, and 20 percent of total foreign debt stock (the difference being loans from Chinese banks rather than direct government-to-government credit). Beijing’s practice in cases of severe debt stress or default is to oppose taking a “haircut” (that is, restructuring including reduction) in the loan to be repaid, and instead to extend the maturity period.

“There are two key arguments put forward by China for not taking losses in debt restructurings”, explains Dushni Weerakoon of the Institute of Policy Studies in Colombo. “First, that its loans are development-oriented, tied to projects that generate revenues for the recipients, and second, that multilateral banks should also participate, instead of the current preferred status of having their loans repaid in full.”

In both Bangladesh and Pakistan as in Sri Lanka, the so-called ‘Washington Consensus’ of market-based reforms are ratcheting up the pressure on millions already reeling from economic crisis and climate catastrophe.

Indeed, Sri Lanka has continued to service its multilateral debt post-default and not pressed for debt relief from those creditors, which places international financial institutions in a privileged position vis-à-vis bilateral and commercial creditors. However, China’s first claim ought to be scrutinized further, as there is domestic criticism of the return on investment of Chinese-funded projects, the “development” orientation of those projects (beyond large-scale infrastructure of limited value to the poor), and allegations of grand corruption attached to governing politicians and bureaucrats.

The stalemate between China and the IMF ended in early March 2023 when the Export-Import Bank of China, to which Sri Lanka owes 2.83 billion US dollars (equivalent to 3.5 percent of the central government’s debt), “provided ‘specific and credible’ financing assurances for a debt restructuring, with a specific link to the IMF program and clear language on debt sustainability”. What is apparently assured is a two-year (2022 and 2023) moratorium on debt servicing, as well as promise of expedited negotiations with the Sri Lankan authorities on “medium- and long-term debt treatment”.

China’s reticence to provide new financing has been an opportunity for India to seek advantage over its regional rival and recover lost influence over its island neighbour. Over the course of 2022, India provided “bridge financing” to Sri Lanka when the latter had no other source of new funding, which along with humanitarian assistance amounted to about 4 billion US dollars. The financial package included a 500-million-dollar line of credit from the Export and Import Bank of India to finance petroleum imports, a currency swap worth 400 million, deferment of Asian Clearing Union payments for Indian goods of over 1 billion, and a billion-dollar line of credit to purchase essential food and medicines.

India is not a traditional donor country, and is not a member of the Paris Club that coordinates the actions of bilateral donors. Since the 2022 economic crisis, however, India has become Sri Lanka’s third-largest bilateral creditor after China and Japan. Therefore, India’s assurance of support for Sri Lanka’s debt restructuring was required by the IMF. This was achieved on 17 January 2023.

Since then, India has joined Japan and France as co-chairs of a common platform of Sri Lanka’s bilateral creditors. Although invited, China informed Colombo that it will not join the group. This means Sri Lanka must negotiate separately with China, and that other creditors may wait and watch what China offers by way of debt restructuring before making their own commitment to ensure equality of treatment.

The foreign policy implications of these deals have not gone unnoticed at home. Sinhalese nationalists warn that India is pursuing ulterior motives vis-à-vis Sri Lankan sovereignty, particularly establishing control of the country’s Trincomalee deep sea port and oil storage facilities, preferential access to Colombo port’s Western Container Terminal and renewable energy projects for the Modi-linked Adani Group, and the liberalization of trade in services along with Indian rupee convertibility, which will advantage Indian business interests and increase their weight in the domestic economy.

Learning from Sri Lanka’s Mistakes

Elsewhere in South Asia, Bangladesh and Pakistan are also in debt distress, and their governments and citizens are anxious not to repeat Sri Lanka’s horrendous experience. Both countries sought external financing — including from the IMF — before either could default and wholly deplete their foreign reserves (although Pakistan’s had slumped to under 3 billion US dollars by February 2023). In the absence of a default, their negotiations with the IMF were more rapid than that of Sri Lanka (which took almost one year): six months for Bangladesh, and eight months for Pakistan.

In January 2023, the IMF approved 4.7 billion US dollars to Bangladesh over 42 months. Some 30 conditions must be satisfied for disbursement of the full amount. Given the IMF’s “one-size-fits-all” formula, it is little surprise that they are practically identical to those imposed on Sri Lanka. Power and energy prices are to be market-indexed, state subsidies reduced, tax exemptions scaled back, the banking sector reformed, and the government budget deficit reduced. As senior economist Rizwanul Islam commented, “In the current programme, mention is made of social spending, but there is nothing on how to protect the poor and low-income people from the fallout of the stabilisation measures like increases in the prices of fuel oil, electricity and overall food inflation.”

The IMF’s track record speaks for itself: after decades of neoliberal policies, the global debt crisis is worse than it was in the early 1980s.

Pakistan’s agreement with the IMF was concluded in June 2023, three months after Sri Lanka. Unlike Sri Lanka, the lending window for Pakistan is a short-term (nine months) Stand-By-Arrangement (SBA) reaching 3 billion US dollars (111 percent of its IMF quota).

Whereas in Bangladesh and Sri Lanka, the government appeared eager to adhere to IMF conditionalities, there was initially pushback from Pakistan. Pakistan’s foreign minister Ishaq Dhar claimed that the IMF was pushing his country towards defaulting on its debt so that it would be in a weaker position to bargain over IMF-imposed conditionalities, including the removal of subsidies on petroleum, natural gas, and electricity, and tax concessions to strategic sectors such as agriculture, export industries, and IT. “Pakistan is a sovereign country and cannot accept everything the IMF demands … Foreign hostile elements want Pakistan to turn into another Sri Lanka and then the IMF will negotiate with Islamabad”, he said, blaming the latter for obstructing a rapid conclusion to talks.

Nevertheless, the Pakistani authorities have raised interest rates, hiked energy and power tariffs, and planned cutbacks to the state payroll and pension expenditures. In both Bangladesh and Pakistan as in Sri Lanka, the so-called “Washington Consensus” of market-based reforms are ratcheting up the pressure on millions already reeling from economic crisis and climate catastrophe.

Is There an Alternative?

Outside of government, right-wing think tanks, and liberal commentators, how has Sri Lanka’s IMF agreement been received? What may surprise critics elsewhere is that opposition has been muted and also partial, spanning across political parties, trade unions, and organizations of the Left, feminists and environmentalists, small farmers and fishers. In 2022, hardly any voices against the IMF could be heard. That mood of resignation began to change this year, but not in a decisive manner.

The largest opposition party in Sri Lanka, Samagi Jana Balawegaya, was cautious not to be seen as a “spoiler” standing in the way of the IMF agreement. Recently, however, it has begun to make noises about revising its terms, particularly with regard to social welfare benefits. Initially, the leading left-wing parliamentary party, National People’s Power, remained silent, acceding to the general consensus that an IMF agreement was a precondition to economic recovery. Since then, however, both the party as well as trade unions in the private and semi-public sector have grown more vocal.

However, the left-wing alliance’s criticisms are still partial. While there have been protests on the streets, these are restricted to certain aspects of the government’s reform programme, such as personal income taxation and the adverse effects of domestic debt restructuring on workers’ superannuation funds. The demand for an audit of the external and domestic loans and cancellation of odious and illegitimate debt is still marginal. There is no force of any political or social weight in Sri Lankan society that has demanded repudiation of the IMF agreement and for the country to develop its own strategy out of the crisis.

Certainly, Sri Lanka needs the fiscal space to redirect state spending towards sectors that are in dire need of support. It needs to boost government revenue and eliminate wasteful spending in order to boost public service provisioning and a just transition from fossil fuel addiction. But it could begin by scrutinizing not the meagre social security benefits to the poor, but rather the lucre of the super-rich who evade domestic taxes at home and export their earnings abroad. It could impose a wealth tax and take on the financial services industry that made exorbitant profits during the pandemic. It could shrink the military budget that has grown exponentially even after Sri Lanka’s internal war ended in 2009 — current defence spending is almost as much as that of health and education combined.

The IMF’s track record speaks for itself: after decades of neoliberal policies, the global debt crisis is worse than it was in the early 1980s. Indebted countries lurch from one IMF agreement to the next, without any fundamental change to the causes of their indebtedness nor improved developmental outcomes for the majority. Sri Lanka has been no different. Implementing the same failed measures that exposed society to vulnerability and suffering cannot be the solution.