Committee for the Abolition of Illegitimate Debt

 Economic woes

The Sri Lankan economy is in crisis. A crisis generated by a fall in government revenues where the wealthy in this country are hardly taxed and a higher level of imports than what can be paid with the sum of exports, remittances and tourism-generated foreign income. And to make matters worse the prospects don’t look good, the global economy is stagnating this year and it has been aggravated by the Coronavirus. All this will have a disproportionate impact on the Sri Lankan economy with the fickle tourism industry undermined by the reduction in tourist travel with the Coronavirus, and that too following the significant tourist slow down after the Easter Sunday Attacks.

These recent problems aside, Sri Lanka’s economic problems were long in the making, with mounting national debt for decades, and efforts to roll over debt with consecutive IMF IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org agreements. The IMF Standby Arrangement in 2009 and the IMF Extended Fund Facility in 2016, are the 15^th and 16^th IMF agreements reached by Sri Lanka. Such IMF agreements that come with stringent conditionalities have prescribed market friendly neo-liberal policies including to increase imports and the rapid flow of finance capital that have only thrown the country further into debt.

In this context, a debt ridden and stagnating economy raises the cost of capital and reduces demand of goods, in effect crippling SMEs, which are major employment creators. Next, when the economy slows down, rural incomes are also affected as the rural population increasingly depends on a mix of incomes combining rural livelihoods with incomes from urban, industrial and service sectors. Furthermore, rural women in particular get squeezed not just by falling household incomes but the extremely high interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. charged by microfinance companies and money lenders.

 IMF squeeze

The alternative to this crisis should begin with barriers against the onslaught of market forces that not only entrap rural women in debt, but wipe out small businesses and even paralyse states like Sri Lanka. But when the Government seeks away out through the IMF, mandated to relieve governments from short-term financial problems, the IMF imposes long-term prescriptions that are to further open market forces.

This was the subject of a recent public discussion organised by the Jaffna People’s Forum for Coexistence with activist researchers from the international network of the Committee for the Abolition of Illegitimate Debt (CADTM). The analysis of CADTM was spot on showing how for example the tremendous corporate and banking debt is often bailed out by governments increasing the tax burden of citizens. Furthermore, when government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. increases, there is a push towards austerity where social services and welfare are cut. Sadly, such cuts are coupled with microfinance schemes and the myth that people can both increase their incomes and pay for private services including healthcare and education with such small loans.

“The alternative to this crisis should begin with barriers against the onslaught of market forces that not only entrap rural women in debt, but wipe out small businesses and even paralyse states like Sri Lanka”

Exactly two years ago, with a major protest against predatory microfinance schemes, the Jaffna District Co-operative Council made the following demands: “all microfinance companies that use unethical and illegal practices be banned, an interest rate cap with an effective annual interest rate not exceeding 25% be imposed, so that all predatory loan schemes are immediately stopped, cancel all existing predatory microfinance loans or provide a moratorium for two years necessary to restart sustainable economic activity and expand low interest government credit schemes that could generate sustainable rural livelihoods and rebuild the economy.” Eventually, a Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx interest rate cap of 35% was imposed in December 2018, but even that high rate has been effective in flushing out a number of the unscrupulous microfinance companies, as most of them were charging between 40% and 240% annualised interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. . Indeed, the rural indebtedness situation in the North has been slowly improving with the co-operatives actively providing lower interest small loans.

Into this mix, the IMF after a recent staff visit to Sri Lanka, had the following to say in a statement on February 7, 2020: “Caps on lending rates and the loan repayment moratorium for small and medium enterprises should be temporary, to avoid unintended distortions and inefficiencies in financial intermediation.” That is a worrying signal from the IMF, which is only concerned about so-called market distortions to the detriment of the economic lives of people, and it should be closely watched whether the Government will buckle under such pressure.

 Struggle for the people

When Third World countries go to the IMF with a begging bowl for its blessing, so that global finance capital will flow in with an IMF guarantee, the vicious cycle of austerity and market forces can shred economies to bits. It is like the Tamil saying of the beggar who goes to a house and then cries, “pichchai vendaam naayaip pidi” (don’t want your charity, hold the dog which is about to bite me). That has been experienced with the IMF from crisis to crisis around the world over the past many decades.

During the engaging discussion with CADTM in Jaffna, one local co-operative leader involved in the major low interest credit scheme underway in the North,and now reaching over ten percent of the population, put forward an insightful challenge.

He said there is a major struggle now between finance companies and co-operatives to engage the people, one to entrap them into predatory loans and the other to provide productive credit. He asked if we are ready for that struggle in our communities. Drawing from that there is also a major struggle to be fought against the IMF, which is about the freedom of the market to exploit people and the democratic freedoms of the people to collectively chart their economic lives.