• The need for debt cancellation over asset-stripping

BY Dr. Darini Rajasingham-Senanayake In the glare of the global media, Sri Lanka became the poster child of the International Monetary Fund’s (IMF) spring meetings this week in cherry blossom-lined Washington, D.C. This strategic Indian Ocean island’s pathetic plight, featured on major global media and television channels, with images of people in queues amid food, fuel, and medicine shortages due to its crashing currency, soaring cost of living, and Arab Spring-style protests. Despite being one of the wealthier nations in the South Asian region and listed as a lower middle-income country (MIC), the media imaging of Sri Lanka, served to affirm the relevance of the Washington Consensus and the IMF albeit as the lender of last resort. For the first time in its history, Sri Lanka, with a population of 22 million people had just defaulted on debt payments. The timing of the Sri Lankan rupee’s crash against the “exorbitantly privileged” US dollar (USD) was as conspicuous as the Easter Sunday attacks that were mysteriously claimed by the Islamic State, which targeted the Chinese-owned Shangri La and other luxury oceanfront hotels and the island’s tourism-dependent economy, three years ago. Meanwhile, Oxfam called on the IMF to “abandon demands for austerity as a cost of living crisis drives up hunger and poverty worldwide”. Its spokesperson noted that “87% of the IMF’s Covid-19 loans require developing countries facing some of the world’s worst humanitarian crises to adopt tough, new austerity measures that will further exacerbate poverty and inequality”. In its report, titled “Inequality Kills”, the organisation noted that “the wealth of the world’s 10 richest men doubled since the pandemic began, while the incomes of 99% of humanity are worse off because of Covid-19. A total of 263 million people could be pushed into extreme poverty in 2022, due to the combined impact of Covid-19, inequality, and food and energy price inflation – accelerated by the war in Ukraine.” Sri Lanka’s total debt is $ 51 billion and the country must pay $ 7 billion this year to international sovereign bond (ISB) traders based in New York, as noted by senior economist and Institute for Policy Studies Head Dr. Dushni Weerakoon. For a comparative perspective, entrepreneur, investor, and business magnate Elon Musk offered to buy Twitter for $ 43 billion, in the same week! The greatest transfer of wealth in human history transpired over the past two years while much of the world was in Covid-19 lockdowns and global trade was disrupted, also resulting in speculation in commodities futures, which were also partly responsible for the spike in global food and fuel, as noted by economist Jayati Ghosh. Has the USD been weaponised against the poor and emerging economies as some have suggested? Staged dollar shortage, downgrades, and Arab Spring protests Back on Colombo’s Galle Face seafront, Arab Spring playbook-style protests by youth enjoying their freedom after two years of Covid-19 lockdowns unfolded as part of the push to propel the Colombo regime’s pivot to Washington, D.C. Usually, anti-Government protests happen at the iconic Independence Square, but the current protests were staged close to South Asia’s busiest sea port – the Colombo Harbour – and notably near the Chinese-built Colombo Port City. While the protests, anonymously organised via social media, called on the Sri Lankan President Gotabaya Rajapaksa to go home, they did not say “Gota go home to America”. The President after all was a US citizen until 2019. Nor was debt cancellation or a debt jubilee on the agenda of the protestors, some of whom held posters calling on the Government to go to the IMF in the hope of better financial management. The IMF had been painted as a savior by various economists and local think-tanks, as the drum beat to default intensified! But the protestors had other creative solutions to the island’s crisis of corruption and economic mismanagement, such as a “buy local products” campaign to encourage citizens to support local manufacturing and industry and stop consuming expensive, imported, luxury goods. Some suggested a permanent halt of the practice of providing duty-free car permits to politicians, doctors, university lecturers, and the privileged “professional” class, as well as abolishing various special health insurance schemes. Other protestors wanted to reverse the privatisation of the national healthcare and education systems and the sale of the Yugadanavi Power Plant to a dubious American company called New Fortress. The latter had compromised Sri Lanka’s energy security. Several protestors suggested marching to the US Embassy to call on the US Government to return all the assets of the dual US citizen and former Finance Minister Basil Rajapaksa in Los Angeles to pay off the national debt. Others called for accountability for those responsible for the Central Bank bond scams. Long-term suggestions to grow the economy and develop the country were setting up research and development working groups on energy security, and ocean and mineral resources. Some academics supporting the protests suggested debt cancellation and cited the debt jubilee project that had earlier called on the IMF and the World Bank to offer an immediate cancellation of all principal interest and charges due to the deadly economic toll of the World Health Organisation‘s Covid-19 lockdowns in poor countries. The jubilee project had also recommended that the Group of 20 support moves by any country to stop making payments on debt to private external lenders, and that new IMF and World Bank finance should be in the form of grants, not loans, and require other lenders to re-profile the debt where sustainability is uncertain, or restructure their debt where it is unsustainable, to help ensure that money is used to support public policy priorities in response to the Covid-19 crisis, rather than to repay other lenders. One of South Asia’s wealthiest nations in an ISB debt trap Like Lebanon, once known as the Paris of the Middle East, Sri Lanka is a relatively wealthy country in South Asia and listed as a lower MIC. The strategic island is ahead of India, Pakistan, Bangladesh, Nepal, and Afghanistan on the South Asian Association for Regional Co-operation (SAARC) regional poverty count. The country had always paid its debts, and had no previous history of default. Likewise, its debt-to-GDP (gross domestic product) ratio, another metric to determine the solvency of a country, at 110% was not off the map. Indeed, the top 10 countries with the highest debt-to-GDP ratio, according to the world population review, include Japan, Singapore, Italy, Portugal, Bahrain, and the US. But the drum beat and narrative of and for Sri Lanka’s default was in the air for some time, and at least since the Millennium Challenge Corporation (MCC) Compact was rejected in 2019: As Prof. Howard Nicholas of the Institute of Social Studies recently suggested in a lecture organised by the Economic Students Association of the Colombo University, alluding to geopolitics and the recent visit by US Undersecretary of State for Political Affairs Victoria Nuland, the Colombo regime’s default seemed to followed a systematic, deliberate, and planned route to deliver Sri Lanka into the clutches of the IMF and Washington D.C. From a longer and wider perspective, the question arises: Was the strategic island “pumped and dumped” by the Washington Consensus, which upgraded it to a lower MIC in 1997, and then an upper MIC in 2019, thus making it ineligible for low-interest development aid, which compelled borrowing on capital markets – like other countries that are placed in the MIC trap – leading now to default? Under most metrics, Sri Lanka should not have been downgraded to the point of default by rating agencies like Moody’s and Fitch. The downgrades were principally due to the $ 7 billion payments due to US-based bond traders like Goldman Sachs, BlackRock, and Vanguard, especially since there is a distinction between illiquidity and insolvency. While China has often been identified as the source of Sri Lanka’s debt trap, it is US-based ISB traders, whose names are kept secret, that are mainly responsible for the default at this time. The colour coding in Figure 1 may be misleading, since it is the green-coded ISBs and other financial markets that are the cause of Sri Lanka’s debt default at this time. Sri Lanka’s bilateral and multilateral donors (coded in red in the chart) have indicated willingness to delay debt payments that are due, and donated food, fuel and medicine to the cash-strapped island. While the names and proportions of the national debt owned by various bilateral donors and multilateral agencies, such as the Asian Development Bank, the World Bank, Japan, China, and India, were known, the names of the US and EU-based ISBs that own over 55% of the island’s debt, and which are part of the shadowy international financial system where black money is parked in offshore accounts, who are primarily responsible for the “debt trap”, are never disclosed. While ISBs are the root cause of Sri Lanka’s default at this time, this appears to be a well-kept secret due to the “Chinese debt trap” propaganda narrative, and local economists and think-tanks funded by the US Agency for International Development (USAID) and EU grants. In the final analysis, downgrades by rating agencies are based on various and subjective considerations of “confidence” in the ability of a county to sustain debt, as stated by Dr. Nishan de Mel of Verite Research.  “When the IMF determines that a country’s debt is not sustainable, the country needs to take steps to restore debt sustainability prior to IMF lending,” IMF Country Director Masahiro Nozaki said recently in a statement regarding Sri Lanka. Arguably, under most metrics, Sri Lanka should not have been downgraded to the point of default by rating agencies like Moody’s and Fitch at this time. The downgrades were principally due to the $ 7 billion payments due to US-based bond traders like Goldman Sachs, BlackRock, and Vanguard. Rating agencies and sovereign bond traders work in concert with the Washington Consensus and the Organisation for Economic Co-operation and Development Paris Club of Western aid donors, and do not recognise the difference between illiquidity and insolvency. It is increasingly evident that the island/s debt crisis has many external dimensions and is not entirely internally driven. At this time, asset managers BlackRock Inc. and Ashmore Group PLC are said to be among the creditors organising in a group ahead of IMF talks, and have hired the law firm White & Case for advice. Ayres Investment Management LLP, Decision Boundaries LLC, and Perella Weinberg LP are among the firms seeking to provide financial advice to Sri Lanka’s creditors, sources said, as the country heads towards a revamp of its $ 12 billion of external debt. Recent filings show major asset managers such as Fidelity, T. Rowe Price, and Teachers Insurance and Annuity Association of America also hold some of the country’s outstanding USD bonds. The debt numbers slide around as new actors come on the scene, since initially, the debt for 2022 was $ 7 billion and $ 12 billion! Indeed, from a different perspective, this island at the centre of the Indian Ocean’s sea lanes of communication (SLOC), may suffer from a “paradox of plenty” and a form of geostrategic “resource curse”, since the IMF does not differentiate between illiquidity and insolvency. Part 2 of this article will be published in The Morning tomorrow. (The writer is a social, medical, and economic anthropologist) ………………………………………… The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication.