Debt restructuring, austerity and the IMF: a panacea
or an exacerbation?
Lionel Bopage
Part 1
An outline of the problem
Post-independent Sri Lanka
(Lanka) has suffered from recurrent economic crises; the more notable ones
being in August1953, in the late 1970s and most pertinently the current crisis
which essentially bankrupted the country. The trigger for the current crisis
was the prolonged pandemic that affected the world and the Russian – Ukrainian
war in February 2022. The government’s misguided policies on agriculture,
taxation and other sectors made the crisis worse. Post-independence, successive
Lankan governments, regardless of their political hue and rhetoric have made
more financial allocations to service its debt than it has allocated to education,
healthcare, water, power and other essential social necessities. The advent of
Covid-19 undermined trade and exacerbated this imbalance.
The pandemic resulted in a
downturn in the Lankan economy, which is dependent on remittances from abroad,
tourism and exports such as garments from the Free Trade Zones and agricultural
products such as tea from the Malaiyaha areas. Global public debt as a
percentage of GDP rose from an unacceptable 84 per cent at the end of 2019 to
100 per cent by the end of 2020. Even the world’s two largest economies China
and the United States (US) were not immune. Their public debt ratio to GDP
increased.
The conflict between Russia
and Ukraine led to a spike in global commodity prices, particularly fuel,
fertiliser and food. This adversely affected the poor and those who lived from
one paycheck to the next. Furthering their misery was the strengthening of the
US dollar - the “recognised” currency for world trade - thus making the
defaults of low-performing economies like Lanka and Ghana a seeming
inevitability. This becomes even starker when Lanka's debt is looked at
forensically.
Public Debt Situation
According
to the IMF figures cited for March 2023, total public debt of the government of
Sri Lanka was USD 83.6 billion of which the outstanding foreign debt was
USD41.5 billion, i.e., 63.5 percent of the public debt. Of the GDP,
multilateral debts were 17.6 percent and bilateral debts about 17.5 percent.
About 52 percent of the bilateral creditors were Chinese, about 25 percent
Japanese and 16 percent Indian.[i]
This is sadly not something new. Sri Lanka's economy
since at least the early 1950s has failed to produce sufficient foreign
exchange to meet the cost of imports. Add to this the fact that the vast
majority of the population, given the informal nature of employment and
business practices, do not pay tax. In addition, the largest share of
government revenue is devoted to the military, dwarfing expenditure on health
and education.
Successive governments were
able to hide this underlying weakness in the economy and their incompetence,
and corruption of the public purse when it came to accountability, the rule of
law and transparency by evoking the spectre of the “other” usually in the form
of minorities and they were thus able to shift the attention of the populace
from their own and the economy's shortcomings.
Hiding this fact that
governments in the past, regardless of their political hue like in the present,
have continued to borrow for non-productive and mostly wasteful and mismanaged
projects leading to a huge external trade deficit, without being able to meet
the country’s debt obligations; resulting in the country declaring bankruptcy.
Lanka still produces few of its avidly sought-after consumer goods making the
situation even more economically untenable. The top 20 per cent of the
population enjoy 42 per cent of the island’s income while the lowest 40 per
cent make do with 17.8 per cent.
“Free market” economy
The government as well as
those in opposition are still advocating a free-market economy combined with a
strategy of an export-led recovery process. So, the mantra of providing more
and more incentives to attract foreign direct investment, promote tourism, and
push local human resources abroad to make more foreign remittances continues.
They conveniently forget that “free” market economics created the crisis in the
first place and required the country to be bailed out by international
financial agencies on numerous occasions.
Sri Lanka defaulted on its sovereign
debt repayments last year and entered negotiations with the International
Monetary Fund (IMF) for access to a loan package on the premise of implementing
structural macroeconomic change. After obtaining USD 2.9 billion of financing
from the IMF, Sri Lanka was required to initiate and complete its domestic debt
restructuring process (reworded innocuously as debt optimization) in early
July. As this process will lead to serious economic shocks, the government
imposed a five-day bank holiday at the end of June 2023, to “facilitate” the
market in absorbing those shocks and to avoid a run on banks.
This sort of brutal
restructuring is not new to Sri Lanka. Since independence, Sri Lanka has had to
go to the IMF with cap in hand 17 times. This will be the tenth IMF loan Sri
Lanka received since the country
was made into a
free-market economy in 1977. The last loan was in 2016. The question the
country needs to ask itself is, are we going to be hoodwinked yet again as the
panacea offered by the IMF has been a systemic failure?
Restructuring and austerity
The impact of restructuring
will depend on what social layer one belongs to. To a majority, it will be
austerity once again, and once more people will be forced to demand economic
justice. Those who loudly advocate for the IMF-led restructuring have become
conveniently blind to tax avoidance and evasion, illegal siphoning of funds and
money laundering and corruption, mismanagement and wastage of resources in the
state sector. They have also been muted on the vital need to restructure the
economy to meet the needs of the populace, not a minority of very wealthy
individuals and families. Austerity has historically made the majority of the
population poorer and has increased income disparity.
This paper forcefully
challenges the economic mantra that debt restructuring needs to accompany
fiscal austerity. A blind obedience to the a priori dictates of neo-liberalism
is a sure fire recipe for disaster. The way the neo-liberal economy is designed,
tax evasion and avoidance have become a systemic issue. It allows the siphoning
off of taxable profits that corporations earn in developing countries like Sri
Lanka to tax havens around the world. In Lanka, the tax base is not wide enough
due to its extensive informal economy, and the large human resource component
in overseas employment, who make remittances.
Accepting the IMF package
requires cutting down of vital public expenditure such as on education,
healthcare and social safety nets. It will also promote direct and indirect tax
hikes, selling state-owned enterprises as well as natural resources to the private
sector, establishing public-private partnerships, liberalization of public
procurement and trade, increasing labour market ‘flexibility’ to hire and fire
and reduce wages and pensions, increasing interest rates etc. Nothing will be
done about corruption, cronyism and economic mismanagement.
The next
section will cast a critical lens at the neo-liberal approach the IMF has
adhered to.
Neo-liberalism
Neo-liberalism is not a
solution, but the principal cause of the problem. I would like to offer some
personal insights here from my working life with regard to the manner a non
performing entity can be made more efficient and responsive, without resorting
to the sort of tactics the neo-liberals are obsessed with. Neo-liberal tactics
of austerity make the working people more oppressed at the expense of tackling
key structural issues the country is faced
with, which are at their heart political and economic. One of the best early
examples in this regard was the top down approach used in 1970, after the
dictatorial coup in Chile, which rammed home an austerity program without the
consent of the people and the disastrous consequences its citizenry had to
endure as a result.
This article describes the
ideological frameworks underpinning the IMF's approach to a country's debt
crisis. Its economic statements about fiscal responsibility and debt repayment
pay little attention to the socio-economic and political causes that this debt
crisis allows to emerge from time to time in a country like Sri Lanka or Ghana.
Neo-liberalism is not the
solution!
When neo-liberal economy was introduced in 1977, successive leaders of
Lanka told people that their future was going to be free, successful and
marvelous. However, the future that materialized did not accord with what they
predicted. Instead, we have a society where social and economic inequality and
bad governance prevail and people’s freedoms are being taken away. This is the
same situation in other countries where neo-liberal economics have been imposed
on.
Neoliberalism focuses on economic regulation rather than economic
planning. It promotes competition and protects market orientation against any
controls. Neo-liberals encourage people to embrace entrepreneurship with the
belief that at the micro level it creates wealth for the individual and at the
macro level they need to accept socioeconomic inequalities deriving from such
behaviors.
Instead of human rights, rule of law, civil liberties, freedom from prejudice
and prosperity, what we have is a system that promotes authoritarianism, which
gradually erodes our rights and freedoms over the years and justified in the
name of a strident mono-cultural nationalism. The language and logic we hear
are about democracies, but in reality, what we have are economic dictatorships;
under the rhetorical guise of growth and productivity. Meanwhile the economic
fruits have increasingly flown into the hands of the top echelons of society.
Skewed economy a trap
If this untenable and unfair economic system is not modified, the
economic and political elite will continue to pay less tax for the riches they
have acquired from the productivity gains made through labour and other inputs.
The political elite who benefits from this inequitable system have no desire to
make them pay their fair share of tax; instead, the regime offers them tax cuts
on the erroneous premise that it is good for generating more employment
opportunities and humane working conditions.
Instead, people are trapped in working long hours just to put food on
the table for themselves and their families. They do not have much time for
socializing or relaxation, having forced many of them to endure poor working
conditions with no security. So, they do not have the luxury to quit the job
looking for alternatives.
The prevailing system and its supporters have blunted our ability to
choose what our prosperity will look like, or how to live our lives. We have
lost the right to pursue our freedoms in our own ways without depriving or
impeding the freedom of others. Enjoying that right is restricted to those who
can afford to purchase that freedom to love, leave, leisure, and creation. This
is not only unfair but is also irrational.
Running a business and
governing a country
Governing a
country is not like running a business entity or managing a home, though there
are situations where similar strategies can be used. Financially insolvent
situations can be considered as one. Let me start with my own business
experience so as to reinforce the point of a collaborative approach to
addressing the crisis. In 1987 I took over several business units of the
largest non-governmental organisation in Sri Lanka, that were running at a
loss, with the responsibility of transforming those into viable, profitable
units. I was able to show results within a year, but also expanded those units
and the workforce, and paid them better wages. This transformation was achieved
during an extremely tough socio-economic and political environment in Sri Lanka.
This was not a
unique situation as many face similar daunting tasks of turning around failing
business entities under the influence of many factors both internal and
external, such as project or market failure, diminishing sales and market
share, shrinking profit margins, lack of timely and correct information, a
disheartened workforce, lack of financial control, and inept management. I
believe that most of the time, such business failures are self-perpetrated.
Dealing with an insolvent
situation
If a business
is not solvent, its senior personnel in collaboration with their staff need to
come up with a plan on how to improve their economic survival. The best way to
do this, would be to openly discuss what has gone wrong so far and what
everyone, including the leaders could suggest making the economic prospects
better.
Leadership
needs to seriously consider and analyse the existing circumstances, decide on
certain lines of action that are fair by the owners, managers, and employees,
both consultatively and inclusively. They may seek advice of professionals with
demonstrated business experience. Then those decisions need to be implemented
proactively with contingency plans in hand in case of failure.
This is tough,
though not an impossible task. Otherwise, the alternative is to resort to
immoral and illegal ways through political patronage, corruption and black
money etc. By doing the right thing, many businesses bounce back, even
performing better and stronger. For the success is dependent on the leadership
of the organisation; whether they take advice on board, evaluate the advice,
and make tough but necessary decisions. Thus, they successfully implement the
turnaround plan, without creating bitter and hostile environments.
Addressing an insolvency
According to
my experience, businesses can continue to focus on producing and selling what
they have been selling well already. At the same time, they need to develop new
products/services to compete and survive in the market place. Here the focus
should be on what customers need and if what the entity provides can satisfy
their needs.
To regain
trust, existing products/services may need to be improved, or new
products/services, less expensive and of better quality can be provided in the
market place. Branding may also need to change and new marketing strategies
followed. Pricing needs to be competitive, but needs to generate reasonable
profits to ensure the financial viability of the entity.
Additionally,
human resources need be allocated to appropriate positions, so that skills of
each employee and their contributions are better utilised. The business should
have an adequate cash-flow to settle its bills in a timely manner, including the payments on
monies borrowed. The business must manage its finances well. Also, the business
should be accountable and transparent, and its transactions should be traceable. Bad
financial reporting practices can lead to bankruptcy and closure of the
business. Such
practices should be stopped immediately. Hence, maintaining better financial
reporting becomes crucial.
The next
part of this article will point out that the economic panacea in the form of
austerity is not only unfair but also has a detrimental effect on the unity of
state as it does not address the underlying structural causes of the crisis.
Part 3
A culture of innovation
Long term
survival of an entity depends on developing a culture of innovation. This needs
to be an organizational priority. Fostering such a culture consultatively and
inclusively needs a free flow of information, employee empowerment,
collaborative problem-solving and aligning values, policies, and procedures to
achieve business objectives.
An outward
looking worldview, merit-based employment opportunities, recognising employee
skills and knowledge, fostering life time learning and acquiring skills,
encouraging to dream big in terms of future, flattening hierarchies and
developing 3600 collaboration, fostering a climate conducive for
accepting and respecting diversity and promoting sense of belonging and new
initiatives are vital. These are crucial characteristics of an innovative
culture. Only then an entity becomes dynamic, responsive, adaptable, and
resilient.
Turning around a business
A business
entity cannot be turned around without the active engagement of the workforce.
Every worker needs to be convinced of and made accountable for the expected
performance with the assurance that beneficial outcomes will be shared across
the workplace.
If the entity
is already insolvent, the situation needs to be turned around immediately. In
this situation, it will be extremely difficult to get external funding. So, the
entity must start with cutting down costs, expenditure, wastage, and
mismanagement; expediently collecting what is owed to the business, and selling
available products and services to the best customers for generating money.
Tough
decisions in the turnaround plan need to be executed with full commitment and
dedication of the workforce, while continuously monitoring key results areas
and their performance indicators. Simultaneously, any contingencies that arise
in the process need to be handled by thinking decisively and taking appropriate
remedial action sooner rather than later.
What is
crucial is the adopting of a disciplined approach in analysing the situation,
developing a turnaround plan, and utilising the experience and expertise of
everybody and executing the plan for achieving the anticipated outcomes.
Dealing with a country-wide
economic crisis
Dealing with
an economic crisis country-wide is more complicated than just spending less
money, as politics plays a big role. Austerity, the key neo-liberal tool does not simply
represent spending cuts. It is a process of moving society away from
consumption and wages towards investment and profits. It strengthens financial
capital at the expense of security and certainty in people’s lives, and drives
increasing socio-economic inequality in society.
Private enterprise increasingly penetrates into the state and makes it
more punitive, coercive and less welfare oriented, driving a culture where
callousness and cruelty towards those in need and enforcing values of social
hierarchy, dependency and competition. There are better and fairer alternatives
as evidenced by what Chile endured and overcame.
Chile and neo-liberal
experience
If we recollect Chile in 1973, the elected government of Salvador
Allende was overthrown by the US backed and Augusto Pinochet led military
regime. The USA sent a team of economists[ii]
to introduce neo-liberalism in Chile and to counter the left movement that was
gaining popularity in Latin America. This was done prior to neo-liberalism was
introduced in Sri Lanka under the regime of President J R Jayawardene. Pinochet
worked along with the IMF and restructured the economy following their
conditionalities.
They reversed nationalizations, privatized public assets, introduced
unregulated exploitation of natural resources, privatized social security, and
facilitated foreign direct investment and free trade. The regime guaranteed
foreign firms the right to repatriate profits generated from such business
operations in Chile and favored export-led recovery over import substitution.
Despite these developments, Chile’s budget viability was dependent on
the income generated from copper, which was the natural resource that was held
in the hands of the state. All revenues from copper flowed into government
coffers. The results of structural reforms in Chile, such as growth rates,
capital accumulation, and high rates of return on foreign investment were
short-lived. With the Latin American debt crisis in 1982, everything went pear
shaped.
What an IMF package entails
and not
An IMF rescue package is
conditional on governments needing to enhance their incomes and shrink
expenditure. For IMF loans, this means national resources and public
enterprises will be privatised outright, or through public-private
partnerships. Direct and indirect taxes will increase with price increases of
all essential commodities including food, education, health, electricity, fuel,
and water. Nevertheless, people’s reactions to such unpopular policies will be
counteracted by the ruling elites pledging to create more employment by
boosting agriculture and industry, with the private sector assisting national
development. At the same time vital causes to the crisis such as corruption and
ineptness of the leaders, and wastage and mismanagement of resources are side
stepped.
IMF’s research arm in 2016
published a paper titled ‘Neo-liberalism: Oversold?’[iii].
IMF’s independent evaluation office has acknowledged that fiscal austerity has
not delivered the expected outcomes. Despite this, IMF does not promote
sovereign debt reduction to boost
economic growth, but insists on fiscal retrenchment and austerity. It appears
that when it comes to countries like Sri Lanka and Ghana, IMF ignores its own
advice. The IMF is still adhering to austerity measures that inhibit economic
growth, thus undermining efforts to reduce debt-to-GDP ratios.
According to the IMF,
unanticipated transfers to state-owned enterprises and unexpected exchange-rate
depreciations may undermine debt-reduction efforts. The IMF has not
acknowledged that such undermining occurs as an unintended consequence of its
own programs. This is because indebted countries are required to shift to
market-determined exchange rates, raise interest rates, and cut state
subsidies. Such measures also drive up business costs.
Further into debt
The IMF executive’s
emphasis is still on faster and more effective sovereign-debt restructuring.
These measures have led countries into further debt distress and re-seeking IMF
help to face excessive delays, geopolitical bullying, and unresponsive creditors.
Disregard for their own research has led to lending programs that include
onerous conditions that bring deleterious living conditions to these countries'
populations and economies.
For countries like Ghana
and Lanka, the IMF rarely looks at the socio-economic and political conditions
that lead to debt problems. The risk is not necessarily the size of the ratio
of debt to the GDP of a country. The issue really lies in what sources of
income such as manufacturing, agriculture, services, tax revenues, and the
amount of savings and reserve levels a country has. This overall picture will
indicate whether a government could service a certain debt level while
retaining lending agencies' confidence and credibility. If this manoeuvrability
becomes limited or vulnerable, there will be difficulties in addressing the
spending needs and any ensuing crises. Ultimately, these situations can
negatively impact a country's health, education, and other essentials, leading
to a crisis.
Part 4
National debt and human
rights
The implication of debt on
human rights is also of significant concern. Many countries in the world are
either already in a debt crisis or approaching it. This is not a new
phenomenon. Ability of many countries to service debt and meet the increasing
demand for health services was made worse during the Covid pandemic[iv]. According
to reports, some governments chose to borrow more funds to support at-risk
groups and build health infrastructure to respond to the pandemic. During this
period, many countries faced this tough choice.
Due to the pandemic, all
over the world tax revenues declined and debt repayments increased while demand
for expenditure rose. This had a negative impact on the provision of health
services everywhere. In particular, the focus on Covid-19 has often been at the
expense of other health concerns. Lockdown protocols also further aggravated
health disparities between
rural and urban areas, against a stark historical backdrop of existing health
services, often failing to meet universal human rights standards of availability,
accessibility, acceptability, and quality.
Obligations of state
The UN Committee on
Economic, Social and Cultural Rights (CESCR)[v]
has emphasised the obligation of states to respect, fulfil, and protect the
right to health of their populations. This right is guaranteed under various
international and regional treaties that many states have
ratified, including Article 12 of the International Covenant on Economic,
Social and Cultural Rights (ICESCR). This requires states to ensure the highest
attainable standards of physical and mental health. Implementation of these
obligations, however, has been hindered by budgetary constraints, corruption,
and a lack of political will to prioritize health, even in countries that have
ratified these agreements.
To
hammer home the point, let me highlight the situation in Ghana, which is
undergoing a similar process of restructuring as Sri Lanka is experiencing.
Ghana as
a valuable lesson against austerity
Ghana has a similar
economic and political trajectory to Lanka. It has been bailed out a number of
times by the IMF, without tackling its structural issues of wastage of
government revenue, corruption, nepotism and incompetence. It is a country
whose economic model is based on products that are prey to global price
fluctuations, and also suffering from a seeming inability to build an economy
that meets the needs of the majority of its population, not a well-heeled
minority.
Ghana is one of the world's
biggest cocoa producers and the leading gold producer in Africa. The price of
goods has been on the rise at an average of 41% in the past year. Ghana
overspent like Lanka during its good times. It did not save much to help when
facing downturns or external shocks, which were largely caused by price cycles
for its exports, oil, cocoa and gold, and also due to excessive fiscal spending
during elections.
Ghana’s poly-crisis
Like Lanka, lacking fiscal
discipline, and its practice of depending on foreign financing left Ghana
vulnerable to investor speculation and investment selloffs. Starting in early
2022, Ghana faced a poly crisis, a complex of economic, financial and social crises. The real growth in GDP
declined due to rising price pressures, mainly because of food and petroleum
imports, and global supply chain bottlenecks that also contributed to rising
inflation. To tame inflation, interest rates were hiked from 4.5 percentage
points to 19%. The local currency, the Ghana cedi depreciated by almost 20%
against the US dollar, making imports more expensive, thus escalating prices of
goods and services.
Ghana technically defaulted
on its domestic and international debt in February 2023. Ghana's unsustainable
debt levels forced it to seek an IMF bailout in July 2022. In mid-May 2023, the
IMF granted Ghana a three-year loan package of USD 3 billion to help it restore
macroeconomic stability. Its conditions were to reduce public debt from an
estimated 105% to 55% of GDP by 2028. This was the 17th loan package Ghana had
received from the IMF since 1957. So, every four years Ghana had to go to the
IMF with the begging bowl.
Balance of payment crisis
This deficit in the balance
of payments is supposed to be addressed partly by the IMF loan package. Ghana
was forced to seek IMF assistance in dealing with global and local economic
shocks, such as the economic slowdown in China, the global commodity price
slump, irresponsible spending made during the elections in 2012 and 2016, and a
protracted domestic electricity crisis. Of course, there were external economic
shocks due to the COVID-19 pandemic and the Russo-Ukraine war. Yet,
domestically, the regime was inefficient, and irresponsible in managing its
finances. The country was burdened with excessive borrowing and led to a
looming debt crisis.
Ghana’s debt comprises
domestic dollar bonds, cocoa bills, pension funds and debt owed to the central
bank. Ghana has reached an agreement with banks to restructure 15 billion Ghana
cedi ($1.36 billion) of locally issued U.S. dollar bonds and cocoa bills[vi].
About 85 percent of eligible bondholders participated in this process. Ghana
wishes to reduce its external debt interest repayments by $10.5 billion over
the next three years under the IMF bailout secured in May this year.
Ghana received its first
instalment of USD 600 million to be used to boost the country’s foreign
currency reserves, help stabilise its currency, and support the budget.
However, many believe that despite this IMF deal, Ghana is still not out of
trouble. The receipt of further loan instalments depends on how Ghana performs
in terms of external debt arrangements; socioeconomic reforms – austerity and
necessary trade-offs; and central bank reforms.
Governance and “Winner
takes all” approach
Ghana has deep structural
economic problems that require a multi-stakeholder approach to resolve.
Unfortunately, the entrenched pervasive system of governance of Ghana, like in
Lanka, based on ‘winner takes all’ approach distorted a broad national dialogue
on what has to be done and how it needs to be done. It must fix structural
problems, such as over-reliance on exports of physical and human commodities,
utilizing strategy of "export-led recovery." In addition, society,
particularly the privileged classes, needs to live within its means.
The country had virtually
no foreign reserves, so it did not have any means to pay in USD for its
imports. So, it's no wonder many Ghanaians have been nervously waiting for the
IMF bailout. As usual, to qualify for the IMF bailout, it had to undergo debt
restructuring with its creditors. Ghana is going through lengthy negotiations
with its creditors. Other leading agencies such as the World Bank have pledged
to help the country come out of this messy situation. Investors are expected to
return without fear of losing their money.
Ghana’s IMF experience
Given the country’s past
experience with the IMF, it is doubtful to what extent its latest cash infusion
will help solve Ghana's long-term economic problems. As mentioned earlier, the
most recent IMF assistance came in 2019. Like in Lanka, this need for regular
assistance is the result of wastage and mismanagement and an inability to
enlarge the economy for the benefit of all, by successive governments over many
years. If there is no system change, the question remains whether the situation
will get messy again. It could happen at the end of the three-year IMF bailout.
Given past loans and an inability to bring in transparency, the rule of law,
accountability and create an economy that benefits the majority of the
population, the country could expect another bailout in the near future. This
is a bleak scenario for Ghanaians who barely survive economically.
To better understand what
this means for Lanka, let’s now look at what an IMF package contains for the
island.
Part 5
The IMF program in Lanka
and its implications
The IMF agreement with Sri
Lanka emphasises fiscal consolidation, which requires the government to achieve
a budget surplus within two years. It also conditions its funding on increases
in energy tariffs and flexible exchange rates that will likely lead to currency
devaluation and higher interest rates. In addition, the program projects
unrealistically high revenues without imposing wealth taxes or restricting
illicit financial flows.
Loan conditionality and
austerity measures are regressive in nature and have a disproportionate impact
on the most vulnerable members of society, and Sri Lanka is no exception. For
example, the elimination of fuel subsidies will make transport for people in
remote areas more costly, thereby reducing access to the services they receive.
Similarly, increases in electricity tariffs will lead to higher healthcare
costs, forcing those less well off to the Hobbesian
choice between food, electricity, medicine and education for their
children.
A better public sector
The rationale
for a government to provide some services to the public is that profit-making
or profit-maximising will not deliver those services to all who need them at an
affordable price. A fundamental difference between a government and a business is that a
government's goods and services will be available to everyone who should get
them. The wellbeing of an economy depends on certain resources being available
to everyone who requires those resources in the population, irrespective of
one’s ability to pay.
The
efficiency of a government enterprise should not be assessed by whether it
makes profits or not. For example, a public utility provider such as one
delivering electricity, water or public transport can increase profits by
raising the price of the good or service it delivers. But the result is that
some people, usually the low-income consumers, will be deprived of their
necessities.
Slashing the public service and making
government smaller have been a repetitive mantra sold as a political panacea
for addressing many economic challenges. In practice the results have been
disastrous in numerous cases around the world. For example, in Australia, after
several rounds of slashing the Federal Public Service and an increasing
dependence on unaccountable, expensive private consultancies, the government
has recently been forced (much to its ideological chagrin) to take tentative
steps to reversing that trend. The reason is that instead of providing better
services at lower cost, privatisation of public services often delivers massive
profits for rich corporates while increasing overall costs to the government,
providing lower quality-higher cost services to the public, and fostering
political corruption.
It is true that the public sector often fails to
meet basic service standards. What is needed then is to improve the quality of
the services and the efficiency with which those services are delivered by
undertaking investments in the sector that are needed to increase the skills, understanding, and capacity for providing such services to the population.
Austerity and inequality
Austerity as demanded by
the likes of the IMF will disadvantage the poor consumers, who already pay a
large and unsustainable amount of their household income towards essential
items, even further. The Governor of the Central Bank has rejected the
assertion that almost the entire burden of debt restructuring will be borne by
the working class. He states that it is a misrepresentation of reality[vii].
However, the government is pushing ahead with the offensive by taking measures
such as privatising public assets and targeting superannuation funds of working
people. A hand-in-glove approach is used to provide more and more relief to the
corporate sector, such as debt reprieves, tax holidays, and flexible labour
laws. Finally, the government and IMF supported by their media outlets and
think tanks have launched a ruthless assault on any alternative financial and
fiscal routes.
There are alternatives
which the next section explores, and which are being sidelined by supporters of
the IMF package.
A non-austere path to
addressing the crisis
As the Italian theoretician
Antonio Gramsci remarked in the early part of the 20th century, when
Italy was enduring one of its periodic economic and industrial crises:
“The crisis creates
situations which are dangerous in the short run, since the various strata of
the population are not all capable of orienting themselves equally swiftly, or
of reorganizing with the same rhythm. The traditional ruling class, which has numerous
trained cadres, changes men and programmes and, with greater speed than is
achieved by subordinate classes, reabsorbs the control that was slipping from
its grasp. Perhaps it may make sacrifices and expose itself to an uncertain
future by demagogic promises; but it retains power, reinforces it for the time
being, and uses it to crush its adversary and disperse his leading cadres, who
cannot be very numerous or highly trained.”[viii]
IMF reforms focus on
deregulating the economy and privatising resources available in the economy.
For example, Sri Lanka has never been asked to industrialise by utilising its
own natural resources. So, the country became dependent on exporting commodities
of which prices vary, depending on global supply and demand based on the
vagaries of the corporate world.
Securing vital sectors of
economy
The sectors of the economy
vital to Sri Lanka and its people are not secure. Like many developing
countries have done, Sri Lanka has also bypassed strengthening of its manufacturing
base. Instead, all those countries including Sri Lanka are relying on service
sectors, built on a foundation of an unstable, vulnerable and manipulated
economy based on speculation.
For example, almost all
neo-liberal countries have secured food and energy sufficiency, while Sri Lanka
is still overly dependent on food and energy imports[ix].
Ignoring the fact that Lanka can easily become self-reliant and secure in terms
of food, energy and water has led to an ever-increasing foreign exchange
deficit problem, forcing the country to borrow foreign exchange with no end in
sight.
Developing countries like
Sri Lanka are in structural dependency due to their external debt. Of course,
almost all countries in the world carry some form of debt. However, the cost of
borrowing depends on how economically advanced the country is. Developed
countries can borrow at a much lower interest rate, as such loans are
classified as “low” risk.
International experience
with austerity
There is no historical
evidence that austerity measures have worked in getting countries out of a debt
crisis. Examples over many decades and spanning from Greece to Indonesia to
Egypt and Tunisia show that austerity does not work. Reducing the fiscal deficit
and servicing debt by squeezing the public sector have made the economic
recession and crisis more severe by exacerbating inequalities. The need to have
austerity measures in place has nothing to do with fixing a country’s long-term
structural issues but ensures that its debt repayments will be prioritised to
pay back international lenders and institutions.
Instead of repeatedly
relying on measures that do not work and penalise the majority of the country’s
citizenry, other financial steps ought to be put in place in indebted countries
like Sri Lanka. Sri Lanka needs to assure the fiscal responsibility of the
government by enforcing the laws against corruption, mismanagement, and
wastage. In a country like Lanka, the ruling elite and its dependents eschew
such fiscal responsibility by violating all transparency and accountability
provisions. The country needs to find a fair economic pathway to live within
its means. One way forward for this could be the electorate to hold politicians
to account during election campaigns, by demanding them to provide concrete
funding plans for their campaign promises in their election manifestos.
Fiscal transparency and
accountability
The country needs to
develop an Integrated Financial Management System (IFMS), so as to ensure each
and every public transaction is fully captured allowing auditing agencies to
trace back if and when necessary. At the moment, nobody knows what happens with
the finances the government receives from lending institutions. This opaqueness
has paved the way for many opportunities for collusion, corruption and money
laundering. Limits should be placed on the government’s overall borrowing from
domestic and international capital markets. Another significant measure the
government can take is to reduce public expenditure. This will include cutting
down the size of the government, in particular the large and untenable security
apparatus.
The government needs to be
transparent in its dealings with the IMF. All information between the IMF and
the government needs to be fully disclosed to the populace, particularly the
indebtedness of all state and semi-state agencies. Any measure that is implemented
needs to be subjected to broader consultation within a wide national
stakeholder forum on the economy. This should include all key representative
groups including business and political entities, civil society, and trade
unions, among others. Such consultative forums will generate valuable and
innovative ideas for economic reforms. In turn, any reforms proposed would
thereby enjoy better societal support.
Part 6
Conclusive remarks
The IMF programme needs to be used to negotiate debt restructuring with
commercial and multilateral creditors. It would create space to spend on
priorities such as food and fuel. However, the country needs to urgently
reinstate its fiscal responsibility, with a prescribed annual cap on fiscal
deficits. A medium-term debt management plan updated
for a certain period should be formulated and implemented with that cap
limiting the expansion of non-concessional loans.
Necessity of Inclusivity
Stakeholders need to stop over-politicising economic issues, as populism
has deeply clouded effective decision-making. What we need is the development
of an inclusive, consensus-based and egalitarian approach towards a national
development framework. The country needs to aggressively diversify its open
economy, especially those that are mostly dependent on primary commodities,
primitive value-added products, exports of human resources and tourism.
Currently, the open economy is dependent on the export earners that are subject
to significant volatility due to price fluctuations and regional instabilities.
A green and sustainable approach
Sri Lanka has a great potential for greener and sustainable economic
development by utilizing its renewable energy sources and value-added
industrial clusters such as for minerals processing. However, IMF debt
restructuring, while not improving the country’s economic conditions, will only
prolong its indebtedness. Instead, policies need to be formulated and
implemented so as to ensure the population’s basic needs are met by
guaranteeing the safety of food, energy and water. Significant cuts to
unnecessary handouts and wastage in government and public service delivery will
be necessary. This can include cutting down the size of the government
including both the executive and legislature.
Performance evaluation
Performance targets need to be established in key result areas such as
public finance, education, energy, health, and transport. Aggressive
restructuring of state-owned enterprises can be carried out without selling
them to the private sector. For example, hiring competent managers and firing
inefficient ones, providing subsidies to those most in need of assistance, and
trimming government expenditure by cutting down on excess political
appointments. Education, health and energy need to remain as state flagship
initiatives but be made efficient and result focused.
Alternatives and national dialogue
To come out of the current poly crisis, there are certain possibilities
that could be adopted as alternatives; for example, progressive taxation, open
governmental transactions, independent debt audits and prioritising social
protection. However, all of these should be underpinned by a national public
dialogue. This is about national social movements genuinely leading the
national public dialogue in a transparent manner, where the behaviour and
agenda of vested interest groups, both domestic and external, are curtailed.
This involves sitting down together with civil society organisations, trade
unions, government members, feminist collectives, human rights groups, NGOs,
and community development organisations.
Vital role of government
The government’s guiding role in the economic and social development of
a country is vital. As such, promoting a small government in developing
countries where public services are essential and in extreme demand is
misplaced. Instead of a bloated public service, there should be a service which
is a productive, effective and people oriented. In the long term, we need to
establish a skilled public service, where public servants bound by service
charters will treat the general public fairly, with respect and courtesy, while
catering towards satisfying people’s socio-economic needs. As demanded in many
developing countries, Sri Lanka needs to implement a rights-based approach
towards economic and social development.
Assured failure
The panaceas of neo-liberal economists do not eliminate periodic crises
but generate worst ones over time. In the short term those panaceas reduce
budgetary income received via tax receipts. However, businesses will demand
governments reduce taxes on profits and investment, while the public will
demand more services and provisions. Thus, such unplanned, competitive and
antagonistic production relations will allow the state coordinated long-term
regulative and growth strategies to fail.
Rights busting
Neoliberalism has succeeded in union busting and restricting workers
from participating in political and institutional decision making. Throughout
the world, union memberships have fallen and continue to fall. Another factor
in this equation is the power within trade unions being moved away from
grassroot workers to a growing bureaucracy. This bureaucracy receives increased
privileges under a conservative form of leadership with its display of
political timidity as their main characteristic. Trade unions do not represent
politics of protest anymore.
Paralytic left
Though the Left works in the belief that capitalism has been always
weak, decadent, and is in its final death throe, capitalism has survived under
many guises. Yet, if able to unite under a single banner, workers may have more
power than ever before. We are aware that capitalism is moving from one crisis
to another, but it has not broken down yet and has not lost its political
control. Moreover, the working class and the Left have not seen much of a
surge. Rather neoliberalism has strengthened, pretending to be the best
solution to the crisis generated by itself.
Diversity and exclusion
Instead of working together, activists in Sri Lanka try to undermine
each other. Unfortunately, this is also a global experience. If everyone worked
together instead of undermining each other, the situation could have been made
better. Thus, people do not have any other choice to come out of this
poly-crisis, but to confront this catastrophe holistically. Instead of dwelling
solely on current issues, activists may need to focus on where it makes an
impact, honestly acknowledging the challenges society is faced with and working
towards long-term solutions for addressing the root causes of inequality and
injustice.
A shared burden
Therefore, it is imperative for us to unite and bring to power a
government with the political will and commitment that will share the burden of
debt restructuring with those who can bear that burden without destroying the
lives of people who are already at a disadvantage due to existing systemic
issues. It is the affluent and the elite that are the most astute at using
loopholes in the existing system to evade taxes. They then launder their
ill-gotten gains in offshore tax havens. They need to be compelled to pay their
fair share of tax. They also need to be held accountable for the lax in many
cases of criminal and corrupt activity they have partaken in for many a decade.
Everyone must keep in mind that the revenue and expenditure of a government are
the commonwealth of all the people, not of a select few. Fiscal and monetary
policy must be adapted accordingly.
This article is not arguing for building a socialist economy or a
self-sufficient economy. However, it rejects the prevalent neoliberal model of
capitalist production that is accompanied by corruption, mismanagement, waste,
and lack of transparency and accountability and the sacrifice of national
interests and sovereignty to satisfy international financial interests.
Sri Lanka needs to pursue an economic development strategy that is
efficient, sustainable and equitable. The priority must be to produce in the
country, the maximum amount of its essential commodities, i.e., goods and
services necessary for the well-being of its inhabitants that can be
sustainably and efficiently produced, while also utilising global markets to
optimise the use of its resources to enhance overall national welfare.
Sri Lanka should avoid unsustainable imports and associated
international indebtedness that result in ‘boom and bust ‘ cycles while
undertaking appropriate investments and implementing appropriate policies to
harness and enhance the natural and human resources needed for the country’s
sustainable long-term development.
The end
4 August 2023
[i] International Monetary Fund March 2023,
IMF Country Report No. 23/116, Sri Lanka Annex 11. Public Debt Sustainability
Analysis, Pp 53-54, available at: https://www.elibrary.imf.org/view/journals/002/2023/116/002.2023.issue-116-en.xml
[ii] Chile was the testing lab for the
neo-liberal model. The economists (Chicago Boys) asked Pinochet to withdraw
government involvement in all private sectors at once so as to bring back the
Chilean economy to equilibrium. This move backfired with inflation escalating
above 700 percent. These policies were so destructive, and difficult to
implement under a democracy. Mostly, this was done through military
dictatorships and state terror campaigns against any resistance emerging
anywhere against it. Aggressive deregulation of economy needed aggressive
regulation of the political sphere. Refer: https://www.hoover.org/news/chiles-chicago-boys-and-latin-americas-other-market-reformers and https://www.promarket.org/2021/09/12/chicago-boys-chile-friedman-neoliberalism/
[iv] How does public debt affect the right to health: Case studies in
East and South Africa at, https://www.amnesty.org/en/latest/campaigns/2023/05/how-does-public-debt-affect-the-right-to-health-case-studies-in-east-and-southern-africa/
[v] https://www.ohchr.org/en/treaty-bodies/cescr
[vi] Kwadjo N June 2023, Government, banks agree to restructure GHS
15bn of cocoa bills, local dollar bonds,
https://www.businessworldghana.com/government-banks-agree-to-restructure-ghs-15bn-of-cocoa-bills-local-dollar-bonds/
[vii] Discourse on Development (Devdiscourse)
7 July 2023, https://www.devdiscourse.com/article/headlines/2515211-sri-lanka-central-bank-governor-dismisses-concerns-over-projected-losses-for-epf-due-to-domestic-debt-restructuring
[viii]
Antonio Gramsci, ‘State and Civil Society’, in Quintin Hoare and Geoffrey
Nowell Smith, eds., Selections from the Prison
Notebooks of Antonio Gramsci, Lawrence
& Wishart, London, 1971, pp. 210-11.
[ix] For example, the Australia is demanding
the European Union to offer significantly more generous concessions to
Australian agricultural producers in order to ink a free trade agreement
between like-minded partners at a time of mounting geopolitical uncertainty.
Refer Australian Financial Review, 9 June 2023, https://www.afr.com/policy/economy/trade-deal-unlikely-unless-eu-lets-in-australian-farmers-20230709-p5dmv7
