International Implications of Sri Lanka’s IMF Solution

8 November by Ahilan Kadirgamar

Last year, Sri Lanka exploded into international attention with severe shortages of fuel and food, and tremendous protests. While the uprising chased away the President, the Rajapaksa-led illegitimate parliament elected Ranil Wickremesinghe as president, who in turn used the security forces to unleash tremendous repression on the protesters. On the economic front, close to eighteen months of austerity based on the IMF’s recommendations and its subsequent agreement in March 2023 have been devastating for the working people. The world is watching how the crisis will play out in Sri Lanka, and if the IMF solution underway here can be the way forward for over 50 other countries in the Global South facing severe debt problems.

The US$ 3 billion 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.
package for Sri Lanka to be released over four years will only service three percent of the country’s import bill, and it covers just five percent of the external debt stock Debt stock The total amount of debt . The IMF claims it is more of a signal to obtain additional financing. However, given Sri Lanka’s default on external debt last year, the US$ 4 billion over a four year period from the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and Asian Development Bank are likely to be the only additional sources of external funding to address the continuing balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of payment problems.The fact remains that Sri Lanka is sustaining its US$ 20 billion annual import bill mainly through its own foreign earnings generated by its exploited workers; the very people that the Government is abandoning for the IMF.

This political economic trajectory with market reforms and debt restructuring can drastically transform the relationship between state and society in Sri Lanka. It also has implications on political economic changes in other parts of the Global South, where hyper-financialized global debt has led to repeated and deepening crises over the last few decades. Such crises reflect the need for fundamental changes in the global financial architecture.

What is at stake are questions like the ones during the Great Depression of the 1930s. Will the answer for the Global South be international co-operation strengthening self-sufficiency with social welfare? Or polarization that intensifies exploitative extraction through further dispossession?

Budgets and debt restructuring
The IMF package for Sri Lanka has a twofold focus. First, it demands a primary budget surplus, or higher revenues than expenditure in the budget. Second, it demands debt restructuring, to ensure the creditors receive agreed upon repayments.

Austerity, pushed by the IMF, have led to cyclical downturns around the world, undermining economic recovery and growth. The unsaid trade-off in the Sri Lanka IMF package are the returns of external creditors and the interests of future financiers as opposed to economic growth and relief to its people.

As per the IMF agreement, external debt servicing over the next ten years for Sri Lanka will amount to 4.5% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
per year. However, GDP growth over the coming years is only expected to be 3%. Such paltry future growth cannot rectify the massive contraction of 7.8% last year and the continuing downturn this year. Indeed, 50 percent more than the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of Sri Lanka’s growth in output will go towards repayment of external debt. Such constraints on investment will lead to a lost decade of development.

Next, the IMF claims those most affected by the crisis will qualify for targeted support. But the amount allocated for social protection is a meagre 0.6% of GDP per year. Not only are these allocations inadequate, but this targeted social protection with cash transfers approach is a direct attack on the legacy of universal social welfare in Sri Lanka. Indeed, targeting is likely to narrow even further, and the cash transfers will be inflated away. This is what happened with Sri Lanka’s poverty alleviation programme, Samurdhi.

Here, to add insult to injury, the Government, with the goal of pleasing international creditors, has completed domestic debt restructuring in line with the IMF’s gross financing targets. This involves extracting 0.5% of GDP per year over the next 16 years from working people’s retirement savings, amounting to a loss of 47% percent of their accumulated retirement funds. The cutbacks impact some of the most exploited working women in sectors such as garments and tea plucking.

The IMF and its proponents in Sri Lanka claim corruption as one of the central causes of the crisis. But the current crisis is widespread across the Global South and cannot be explained away with corruption. Furthermore, the corruption narrative claiming to change economic governance seeks to accelerate privatisation and entrench technocratic rule. These “anti-corruption” recommendations are oblivious to the fact that corruption peaks when countries privatise, particularly with the fire sale of public assets. The latter is the likely scenario, given the IMF’s budgetary conditions for Sri Lanka. Furthermore, technocratic solutions undermine democratic control of the economy and betray class biases against the working people as evident with the recent process of domestic debt restructuring.

Markets and international fixes
The IMF, however, appears uninterested in the political consequences of its austerity package. Its solution is to reinforce the logic of the market in the 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. of global capital. Financiers seek returns, regardless of the great market turmoil and the related suffering. But as we see periodically with such international solutions, the hubris of the powerful actors can lead to the emergence of opposing forces that thrive on xenophobia and polarization.

Two decades ago, Sri Lanka came into the global limelight with one of the most internationalized peace processes after decades - long protracted armed conflict. Norway, backed by the United States, the European Union and Japan, promised a whopping US$ 4.5 billion in donor aid, which was conditioned on advances with conflict resolution and neoliberal development policies. In a revealing coincidence, President Wickremesinghe,who was then the Prime Minister, championed the flawed neoliberal peace package.

Great power arrogance and disregard for local democracy created the momentary respite for both sides to re-arm. Meanwhile, the Prime Minister was thrown out in the next elections. The resumption of a more vicious civil war led to its catastrophic end that cost tens of thousands of lives. This was also the political context for the emergence of the authoritarian and chauvinist Rajapaksa regime.The same hubris of Western powers today is leading to experimentation with an IMF solution that can lead to a protracted crisis that pummels the working people in Sri Lanka, and also forebodes the rise of fascist forces in reaction.

The current wave of debt crises in the Global South calls for approaches different from the usual technocratic and finance capital-centric solutions. Instead, it demands a programme to democratize the economy. In other words, not more austerity, but the redistribution of wealth. It is time for the global finance capital, which has extracted so much from countries such as Sri Lanka,to write off or cancel debt. The global financial system is broken, and if development finance is to really contribute to development, then it should be concessional, long-term and meaningful investment, rather than the short-term speculative flows that characterises the current regime of accumulation by global finance capital.

The wealthier domestic classes in the Global South that have gained from rising inequalities and extraction should also be made to pay through measures such as wealth taxes.Policies of self-sufficiency to avoid the pernicious impact of food crisis should be the priority over the luxurious consumption of the elite classes that comes with the trade liberalization push of the Western powers. Only a solution on this scale can ensure that working people do not lose yet another generation, manifest in a range of consequences, from the destruction of livelihoods to child malnutrition and even mortality. Today, both democracy and economic survival are at stake as the world confronts the worst debt crisis in recent times.

Source : Daily Mirror

Other articles in English by Ahilan Kadirgamar (14)

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