• SL needs to consider external global factors pertaining to international debt, bankruptcy, bond market restructuring and economic diversification, in facing domestic economic revival challenge

The debt crisis that Sri Lanka is going through is not a mere result of domestic factors or a crisis that only Sri Lanka is facing. With drastic changes in global politics, financial systems, and trade among many other factors, a large number of countries are on the brink of bankruptcy or have already gone bankrupt, which has created an overall economically unfavourable situation for many countries. In this context, even though Sri Lanka was granted the International Monetary Fund’s (IMF) Extended Fund Facility (EFF), the country needs to take into account the external factors that are likely to make the country’s economic revival challenging.

The challenges Sri Lanka is to face internationally during its recovery process, and how debt has become a massive challenge in the global context were discussed during a recent discussion titled “Colombo Consultation on Debt Restructuring” organised by International Development Economics Associates (IDEAs) and the Law and Society Trust. Among the speakers were political economist and Senior Lecturer at the University of Jaffna, Dr. Ahilan Kadirgamar, Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts, Dr. C.P. Chandrasekhar, Senior Advisor on South-South Cooperation and Development Finance at the South Centre and the Co-Chair of the Debt Relief and Green Recovery Initiative, Yuefen Li, and development economist and the current Executive Director of IDEAs, Charles Abugre.

Debt crisis: A global issue

According to some speakers, although Sri Lanka is new to debt restructuring – especially given the fact that the country defaulted on its external debt for the first time in its history – there is a global dimension to the debt crises.

Noting this, Dr. Kadirgamar added that while Sri Lanka’s main understanding is that the prevailing debt crisis was caused by corruption or economic mismanagement, which he said is undeniable to a great extent, the global situation of debt shows that there is also a global political, economic and structural issue behind many countries defaulting.

Dr. Chandrasekhar added: “This is not just a Sri Lankan problem. Debt is not something new for countries which have been at the losing end of this global exchange. Whether it is in terms of flows of capital, or flows of goods and services, debt has been a problem which is persistent. You have debt in developed industrial countries too. But, in particular, the kind of debt difficulties which have plagued the world has been something which has lasted virtually right through the period in which capitalist development produced inequalities worldwide.” 

He opined that there appears to be a substantial degree of synchronisation of the current debt crisis across the developing world, and that one reason for that synchronisation is the absence of adequate economic diversification in countries, which he said basically means that these countries could not earn too much from the exportation of their commodities and services, while on the other hand, they had to be dependent on imports for a large volume of the commodities which they used in production and consumption. 

According to him, Sri Lanka was import dependent because it did not have diversification, and was not able to earn enough from exports again because of the absence of economic diversification. “Therefore, there has been a tendency for debts to accumulate,” he said, adding that the IMF is not an entity that is going to be the principal factor in resolving Sri Lanka’s debt crisis in terms of access to finance, and that instead, it is determined by the policies.

Debt stricken Africa and Sri Lanka

Abugre compared debt crises, their impacts, and debt restructuring efforts faced by various African countries, including Ghana. He said that the two countries – Ghana and Sri Lanka – are quite similar in many aspects and that many lessons could be learnt from Ghana’s debt restructuring struggles. He said that most of the African economy is caught in what he called a “commodity trap”, adding that when the economy grows, it means that countries tend to borrow more. 

“In the 1980s and 1990s, and in the early 2000s, the African Continent went through an IMF-led restructuring process. But, at that time, the international world order was still sympathetic to the idea of debt reduction and this is how the multilateral debt relief initiative came in. So many of the countries, after a very painful adjustment process, did manage to get rid of a lot of that debt, and it was largely official debt. So, by the early 2010s, many of these countries had quite a bit of space to borrow some more and also to spend domestically.” 

In the African Continent, he added, that the reentry into the African development scene by China, among other reasons, led that economy to grow, making it even more attractive to borrow, and issue national private bonds. He noted that the debt profile of Ghana fundamentally changed when a large proportion of the debt portfolio became bond related. “We have on the Continent where nearly 14 countries are at a high risk of debt default and even more are at a moderate rate of debt default, while the default risks are increasing across the Continent. The driver of this debt stress is not so much domestic expenditure, because many of them have very low expenditure compared to the gross domestic product rates. Only Ghana, Zimbabwe, and Kenya have been stubborn even throughout the period of structural adjustment to maintain budget deficit levels higher than 5-6% for many years. But, it is also one of the reasons why Ghana, Kenya and later on Ethiopia became the success stories of adjustment. This is partly because public expenditure was maintained and also there was an attraction of investment largely from China and others into the infrastructure area. So now, we have a situation where Ghana, like Sri Lanka, defaulted on its debt which started with its external debt,” he said. 

However, according to Abugre, unlike Sri Lanka, Ghana has only a staff-level agreement, which has not been achieved. One of the key steps that have been taken by Ghana is a radical domestic bond market restructuring, which he said is important to Sri Lanka, because it has been suggested that the Government of Sri Lanka is open to undertaking a domestic bond restructuring process.

Relying on IMF’s support

Meanwhile, pointing out the notion shared by many Sri Lankans that Sri Lanka’s economy would drastically change for the better as a result of the receipt of the IMF’s EFF, Li opined that that is an erroneous understanding, and that Sri Lanka should not rely on, or be complacent about the IMF’s assistance, although it is important. “This is just the start. You have a lot of suffering to go through. The citizens, or the ordinary people, should know where you stand, what you are going to do, and what kind of role you can play, because the citizens of the country do have a role to play. For instance, when it comes to the IMF’s bridge financing, it will cover four years and will have six-month reviews, eight times. So, each time, if the IMF feels that you have not done your job, you will not have your money, and the amount of money is not even a huge amount. It is $ 330 million that is given each time,” she explained. 

She also added that the said reviews and controlled nature of the IMF’s assistance is tantamount to the IMF keeping Sri Lanka on a short leash. In the event the IMF decides to halt its assistance if Sri Lanka fails to fulfil its obligations, Li said that then, internationally, Sri Lanka would receive a very negative opinion from investors. It will restrict Sri Lanka’s access to the international market to borrow money, regarding which she added that Sri Lankans should be vigilant about and understand the role that they have to play in the entire process. In addition, Li expressed concerns about Sri Lanka not reaching out to private investors, who make up the largest share of the country’s overall debt issue, and therefore urged the country to take the initiative to hold talks with those parties as well. Quoting a recent study, through which Li said that it was found that there are about 68 developing countries either in debt distress or at high risk of experiencing debt stress, she opined that quite a number of such countries would follow suit and default.