Committee for the Abolition of Illegitimate Debt

The absence of an informed collective response vis-à-vis the external debt problem is more palpable in South Asia compared to Latin America or Africa. This article is a preliminary attempt to bridge the gap by analysing South Asia’s debt crisis. While contextualising the new debt crisis affecting South Asian countries, I argue that cultural explanations of the debt crisis of developing countries, undermining the political economy dimension of corruption, have not just diverted our attention away from addressing the structural weaknesses of the South Asian economies, making us accept poison as medicine. They have also stopped us from holding the 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 and the WB World Bank
WB 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.

responsible for failing to ensure the stability of the global financial order, particularly in the interests of developing countries.

External Debt Profile of South Asia

Spillovers of the global to the local, alias the ‘new debt crisis’, are also evident in South Asia. Following Sri Lanka’s default on its external debt in April 2022, the IMF reported that Pakistan and the Maldives were in high debt distress, signalling that their public debt levels were unsustainable. In addition, both Nepal and Bangladesh sought financial assistance from the IMF in 2022 and 2023 to address their 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 needs.

A comparison of the external debt profiles of South Asian countries in Table 1 suggests a correlation between the regularity of engagements with the IMF and the degree of debt distress. Except for Maldives, India, and Nepal, all the other South Asian countries have engaged the IMF more than ten times. While Pakistan leads with 25 engagements with the IMF, Sri Lanka ranks second with 17 rounds. Incidences of interactions with the IMF insinuate the extent of the transformation of national, political, and economic regimes after the structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/ reforms that the IMF and the WB promote. Instead of pro-growth policies aligned with local interests, developing countries are compelled to adopt the free market economic model catering to the interests of global capital. With time, productive sectors of the national economies, in manufacturing and agriculture, dissipate by limiting the economy to low-end primary exports. They borrow heavily to finance essential imports, including basic food needs. Consequently, financial dependency, fiscal austerity, chronic balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. crises, inequality, and poverty are permanent characteristics of these economies. Instead of exiting the vicious cycle of dependency and crises, the policy orthodoxy of the IMF and the WB has retained these countries within their grip.

Table 1: External Debt Profile – South Asia

Source: IMF, Ministries of Finance (respective countries)

Structural adjustments accompanied by austerity policies, the ‘bitter medicine’ that the IMF and the WB advocate for countries grappling with economic hardships, have become poison to developing countries worldwide, making them debt-dependent (Fischer and Storm 2023). Even though a minority of financial and political elites benefit, others in the productive economy, such as women, peasant farmers, fishers, small and medium entrepreneurs, manufacturers, and industrialists, do not. Often, they incur losses from the liberalisation of trade, capital, labour, and land markets, the deregulation of environmental laws, and the dismantling of state-owned enterprises and public services such as education, health, and social security.

Budget deficits, fragile currencies, declining government revenue as a 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 gross domestic product (GDP), heavy reliance on capital markets, and corruption could be attributed to the reforms that the IMF and the WB advocated over the years (over 17 and 25 rounds of engagements in case of Sri Lanka and Pakistan respectively). However, the economic failure of these countries continues to be explained by cultural factors attributed to poor developing countries such as corruption, nepotism, and mismanagement, ascribing a sense of superiority to advanced capitalist countries in the Global North.

For example, post-default economic reforms in Sri Lanka, as advocated by the IMF and the WB, demonstrated zero reflection on the economic policies practised over 45 years since the liberalisation of the economy in 1977. There is a revolving door linking deregulation and restructuring policies and corruption – the close nexus between the political and economic elites has meant that deregulation and restructuring abet private profiteering. Even though the political elites concur with the IMF and the WB in enacting structural reforms and embracing good governance, neither party have extended their 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. to explore the illegitimacy of public debt due to corruption or illicit financial flows. Trade unions in Sri Lanka pointed out an estimated 40 billion USD was lost to the national economy between 2009 and 2018 due to illegal financial flows linked to trade and offshore accounts (Arulingam, 2023).

Austerity policies – cutting down government expenses (budget) forces governments to pursue short-term spending plans instead of designing development in the long run. Budget cuts not only neglect to tend to long-term effects from economic crises on women, children, peasant farmers, and other working people, thereby delaying the return to normalcy – ‘pre-crisis conditions of living’ – but also exacerbate the vulnerabilities. Ortiz and Cummins (2022), studying the impact of austerity policies for over a decade, document the deteriorating conditions of social security, education, and health of the people, increasing violence against women. Public sector reforms aligned with fiscal consolidation policies slash jobs for women more than men. As in Sri Lanka, Kenya, and Bangladesh in recent times, social unrest, tensions, and upheavals have been directly attributed to austerity policies.

Budget cuts create debtors’ prisons. Rather than prioritising productive investments needed to break free from the debt trap, short-termism built into austerity policies compels governments to honour debt servicing, often through new loans. Developing countries unable to pursue planning and restructuring the economies to graduate from low-end export products due to limited fiscal space have experienced lost decades in development. As the small- and medium-scale enterprises, agriculture, fisheries, dairy, and manufacturing sectors representing the productive economy tumble, working people in these sectors lose their livelihoods and incomes. An increasing share of foreign debt, denominated in foreign currencies, wields pressure on dwindling government revenue. Debt Service Debt service The sum of the interests and the amortization of the capital borrowed. Watch 2024 covering external and domestic debt service obligations of 145 countries ranks Sri Lanka and Pakistan second and third place, with Egypt first in the rankings of countries with the highest debt service/ revenue burdens in 2024 (Martin and Waddock 2024). Total debt service as a share of government revenue in Sri Lanka is 202%, and 189% in Pakistan. Bangladesh ranks tenth with 102%. India and Maldives are featured in 25^th and 29^th place, with 64% and 62% share, respectively. Calculating foreign debt service as a share of gross foreign exchange earnings of these governments will paint a darker picture of the debt sustainability even in the intermediate term.

In addition, high debt distress also corresponds with accessing capital markets. Sri Lanka, Bangladesh, Pakistan and Maldives have sourced much-needed development finance through international sovereign bonds (ISBs) sold to bondholders such as BlackRock, JPMorgan, and HSBC in the capital markets. The high volume of debt owed to commercial lenders, a distinct feature of the debt crisis affecting developing countries, is associated with the policy of financial de-risking by pursuing blended finance promoted by multilateral lenders such as the WB and the EU. Reductions in institutional funds allocated to development projects were expected to be chipped in with private finance, blending multilateral aid and loans with private finance and dispersing the risk. However, the theory of financial de-risking was proven false when private creditors “pull[ed] out US$185 billion more in principal repayments than they disbursed in loans” (World Bank 2023: X) after the interest rate hike in the US and EU in 2021.

The inherent implications of the crisis-instigating policies are concealed under the much-hyped hearsay on debt-trap diplomacy linked to Chinese loans. The real debt trap is in the IMF-WB loans, which impose structural reforms that deny development and the policy-making autonomy of developing countries, and high-interest ISBs issued by private bondholders in capital markets prioritising debt extraction over development.

Straitjacket Responses to the New Debt Crisis

The International Debt Report 2023, published by the WB, documented a debt crisis of an unprecedented scale. Eighteen developing countries have defaulted since 2021, surpassing the number of defaults over the last two decades. Twenty-four countries eligible to borrow from the International Development Association (IDA), the lending arm of the World Bank to low-income countries on concessional terms, are reported as high debt distressed, while 11 others are listed as debt distressed. The same report indicates that debt has become a “paralysing burden” (World Bank 2023: IX), making servicing debt difficult in 2023. Three South Asian countries are undergoing debt crises, with Bangladesh and Nepal receiving IMF assistance along with Sri Lanka. Taking the volume of external debt or debt to GDP as an indicator of the debt crisis, one may wonder how Maldives, with a little over 3 billion USD debt volume, ended up in debt distress. How many countries undergo debt crises can only be explained if we look at the problem vis-à-vis several developments since 2021, i.e., 1. the interest rate hike in the US and EU in 2021, 2. the Covid-19 pandemic (2021-2022), and 3. the Ukraine-Russia war. It is impossible to understand the current debt crisis without putting it in perspective of these global developments.

1. Interest rate hikes in the US and EU in 2021: The US Federal Reserve FED
   Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.
   
   FED – decentralized central bank : http://www.federalreserve.gov/ reduced 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. to 0% to tackle the global financial crisis in 2008. Lower interest rates were expected to make managing and refinancing public debt in Global North countries easier while keeping the financial markets afloat. Low interest rates made developing countries that would otherwise have avoided capital markets (due to high interest rates) borrow from them at an unprecedented scale. Countries like Sri Lanka, disqualified from concessional borrowings after graduating into the middle-income countries category, had to turn to capital markets to source their external financial needs. Sri Lanka borrowed 17 billion USD from capital markets between 2007 and 2019 at 5-8%. In 2021, the US Federal Reserves and EU 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 increased interest rates by 4-5%. With the US dollar’s value appreciating, investors repatriated their capital to countries in the Global North. Amidst capital flight from the Global South, developing countries had to incur extremely high costs to refinance their loans. For example, Zambia and Egypt paid coupon rates as high as 26% (they borrowed at 6-8%).
2. Covid-19 pandemic (2020-1): The Covid-19 pandemic brought the world economy to a standstill. It was particularly hard for developing countries that were excessively dependent on tourism, remittances, and primary and low-end exports to source foreign exchange needed to finance essential imports and service dollar-denominated foreign debts. For example, the tourism sector in Sri Lanka encountered a hard blow too soon after the Easter Sunday bombings in 2019. On top of declining foreign remittances, Sri Lanka also lost 24% of its export revenue. The Maldivian economy, which heavily depends on the tourism sector, has contracted by 33.5% (Asian Development Bank 2022).
3. Ukraine-Russia war (2023): Speculations around the sanctions on Russia and disruptions to global supply chains against the backdrop of the Ukraine-Russia war led to price hikes in oil, food grains, and fertiliser, which affected developing countries by drastically increasing their import costs (Ghosh 2022).

Overlapping emergencies like the Covid-19 pandemic and Ukraine-Russia war at a global scale, along with the interest rate hikes in the US and EU, have created systemic shocks destabilising economies of developing countries like Sri Lanka, Pakistan, Maldives, and other countries in debt distress in the Global South. As a result, the cost of debt refinancing Debt refinancing Taking out new loans to reimburse current debts. has multiplied, pushing some countries like Sri Lanka, Zambia, Ghana, and Suriname to default. The impact of these external causes on debt distress is more significant than internal causes. However, responses from the IMF and the WB do not reflect a cognisance of the new nature of the debt crisis. Instead of factoring in the impact of these external shocks and enacting their responsibility to create a mechanism to smoothen the vulnerabilities aggravated by these external shocks, the IMF and the WB blame developing countries and impose harsher structural reforms.

There is a clear gap in understanding the crisis and its scale, as manifested in the interests of the international financial institutions (IFIs) and interventions that developing countries need. Economic reforms such as deregulating capital markets and exchange rates, privatising state-owned enterprises, and reducing government expenditure on public services will only deteriorate the structural vulnerability of developing countries. Not only are these reforms incompetent in tackling the problems trickling down from developments in the global North explained above, but they also suggest that developing countries should bear the burden of problems created as a result of policy-making in the global North. One wonders about the purpose of the IMF and the World Bank, created as financial and development arms of the UN, to foster stability and development of countries across the board.

Collaborated and Coordinated Action against Debt in South Asia?

Against the backdrop of the Asian financial crisis in 1997, Asian countries affected by the crisis, like Thailand, Malaysia, and Japan, proposed to create a mutual supporting system, an Asian Monetary Fund (AMF), to ensure “domestic, regional, and Asian strength, not necessarily to compete but to have a buffer zone” (Takahashi 2023). Even though the AMF never saw the light of the day due to strong opposition from the US and the lack of commitment from China, the Association of Southeast Asian Nations (ASEAN), in the Chiang Mai Initiative, has moved along critical ideas behind the AMF (Takahashi 2023). Jubilee 2000 was another instance when developing countries gathered to demand debt justice. Social movements of working people, peasants, women, students, environmental activists, and academics have underscored the dangerous consequences of IMF and WB policies and have advocated reforms for a long time (e.g., the World Social Forum, the La Via Campesina, the Bretton Woods Project, the Committee for the Abolition of Illegitimate Debt). Thomas Sankara, the former President of Burkina Faso (assassinated in 1987), outlining the predatory and imperialist nature of debt, called for a united front against debt (Sankara 2018).

The urgency of developing countries coming together to propose collective solutions to the new debt crisis while holding international financial institutions accountable is evident. However, the IMF and the WB are using their mediation to tighten their grip over indebted countries. Rather than encouraging indebted countries to pursue collective solutions, IMF-WB mediation has only trapped them in structural reforms and debt restructuring processes that favour the creditors. Argentina, a long-time client of the IMF, is experiencing recurrent debt crises and has repeatedly been subjected to debt restructuring, manifesting the destiny of countries following the IMF route.

Debt crises, debt distress, and defaults have systemic impacts. People’s livelihoods are decimated. Economies regress years into the past. Women, children, and other vulnerable people assume a disproportionate burden. Working people are made to pay more in the process of economic recovery. The overwhelming impact of economic crises indicates that such crises should not reoccur. However, ensuring that debt crises are a thing of the past demands innovative interventions rather than structural reforms and debt restructuring favourable to creditors. The ‘United Front Against Debt’ and ‘Global South Alliances for Development’ will empower developing countries and enable a collective vision to transcend debt distress.

References
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Asian Development Bank. (2022). “BML Supporting Recovery of the Small and Medium Enterprise and Blue Economy Tourism Sector Project: Report and Recommendation of the President.” Available at https://www.adb.org/projects/documents/mld-55156-001-rrp

Fischer, Andrew M. and Servaas Storm. (2023). “The Return of Debt Crisis in Developing Countries: Shifting or Maintaining Dominant Development Paradigms?” Development and Change, 54(5): 954-993.

Ghosh, Jayati. (2022). “Putin’s War Is Damaging the Developing World.” Project Syndicate (11 March). Available at https://www.project-syndicate.org/commentary/ukraine-war-economic-damage-for-developing-countries-by-jayati-ghosh-2022-03

Martin, Matthew and David Waddock. (2024). Resolving the Worst Ever Global Debt Crisis: Time for a Nordic Initiative? Oslo: Norwegian Church Aid.

Ortiz, Isabel and Matthew Cummins. (2022). End Austerity: A Global Report on Budget Cuts and Harmful Social Reforms in 2022-25. Initiative for Policy Dialogue (IPD), Global Social Justice (GSJ), International Confederation of Trade Unions (ICTU), Public Services International (PSI), ActionAid International, Arab Watch Coalition, Bretton Woods Project, Eurodad, Financial Transparency Coalition, Latindadd, Third World Network (TWN), and Wemos.

Sankara, Thomas. (2018). “A United Front Against Debt (1987).” Viewpoint Magazine (01 February). Available at https://viewpointmag.com/2018/02/01/united-front-debt-1987/

Takahashi, Toru. (2023). “Asian Monetary Fund Idea Revived amid U.S.-China Row.” Nikkei Asia (20 April). Available at https://asia.nikkei.com/Economy/Asian-Monetary-Fund-idea-revived-amid-U.S.-China-row

World Bank. (2023). International Debt Report 2023. Washington, DC: World Bank.