The IMF in Debt Restructuring, the Resurgence of Austerity, and the Urgency of Fiscal Justice

27 May 2022 by Bhumika Muchhala

As Sri Lanka officially defaults on its sovereign debt repayments, and enters negotiations with the International Monetary Fund for access to loans in return for structural macro-economic change in response to the ongoing economic crisis, the Women and Media Collective, the Social Scientists’ Association, and the Feminist Collective for Economic Justice jointly organised an online talk with Bhumika Muchhala on 18 April 2022, to inform a critical understanding of these developments and alternatives that are preferential to dominated classes and oppressed groups. Polity magazine is pleased to publish an expanded and edited version of her talk, transcribed by Treshan Fernando.

Today [18 April 2022], discussions will start in Washington D.C. between the new Sri Lankan Finance Minister and his senior officials and 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.
on yet another IMF loan. Sri Lanka has been through several IMF loans, approximately 16 since the 1960s. So, this is a moment when the country has had to resort to another IMF loan in the context of its debt and economic crisis. This loan will have a repayment period of about two to five years and will have policy conditionalities attached to it.

Fiscal Consolidation = Austerity

My talk will look at the resurgence of austerity in the era of Covid-19. By austerity I am referring to fiscal consolidation measures which the IMF has been recommending in both its loans to developing countries as well as in its economic surveillance reports. Austerity measures take the form of cuts to the public budget, particularly social protection, social safety net measures, and essential public services of healthcare and education; regressive taxation such as Value-Added Tax (VAT), indirect taxes, and general sales taxes; privatisation of state-owned enterprises as well as of public services and public goods, and putting in place public-private partnerships; further liberalisation of government procurement and trade; labour flexibilisation in terms of reducing wages and loosening labour rights regulations; facilitating corporate access to natural resources; increased independence of the 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.

; pension reductions; and tightening monetary policy by increasing 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.
, including on consumer loans.

These measures have the key impact of intensifying social, economic, and particularly gendered inequalities and undermining the social contract between the citizens and the State. The public sector that is already eroded, under-financed, and under-invested, can then become even more broken, laying the groundwork for the argument to be made — “Oh look, it’s so inefficient, we need the private sector to make our health services more efficient”. It opens the road for the privatisation of the public sector.

Each country is provided with its own specific menu of recommendations on fiscal consolidation, where the pressure is explicitly placed on carrying out some or many of these measures in order to receive the loan money. As we all know from decades of adverse impacts of austerity measures, the effects on the majority of people in society, and particularly on the poor and poor and rural women, as well as on the marginalised and the discriminated is very serious.

While fiscal consolidation was also imposed in the aftermath of the 2007-8 Global Financial Crisis, the measures that are being pressured onto Global South countries in the Covid-19 era are even more aggressive and concentrated. I will then talk of the possibilities, alternatives, solutions, and strategies that can be employed, including independent debt audits, national dialogue, and advocacy within the negotiation process with the IMF that has commenced to ensure that there are real, universal, unconditional, untargeted social protection measures as a key demand to help minimise the enormous negative impacts of debt restructuring on poverty, labour, and wellbeing.

Resurgence of Debt and Austerity

To start with, I want to 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. that in the Covid-19 era, we are seeing a resurgence of austerity measures, even though ironically, austerity measures gave rise to a crisis of public systems and services during the pandemic. Yet, we see a consensus among political and economic elites around the world—from Wall Street to the biggest commercial banks to private debt creditors, investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
, as well as most of the finance ministries and central banks of developing countries—that has normalised a bias towards fiscal austerity, in that restraining public expenditure has become a normative characteristic of prudential economic governance, rather than being only a repercussion of unsustainable external debt.

Developing countries have for decades been in and out of cycles of debt because their resilience and economic independence have been eroded due to centuries of colonisation. There is now a structural dependency on external debt. Debt in terms of borrowing money from foreign lenders or creditors is not necessarily a bad thing in and of itself. It’s how individuals, nations, and corporations have financed themselves; it’s a part of the economic machine. But the nature of debt dependency, and the deep asymmetries in the world economy mean that rich countries can access external financing at rock bottom (near zero) 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. rates, while developing countries have no choice but to borrow at high interest rates. For example, Sri Lanka’s interest rate is on average 7%, whereas the rich world has interest rates of less than 1%. This is a huge difference in the cost of borrowing.

Moreover, countries like Sri Lanka encounter serious constraints in securing sovereign self-reliance through a diversified economic sector that produces a broad range of products and services, with technological development and where raw materials and primary commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. are vertically linked to the manufacturing and services sector. What has happened, in great measure due to the pressures by international financial institutions like 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.

as well as donor governments of the North to liberalise, deregulate, and privatise the national economy, is that developing countries have been constrained from implementing industrial policies and efforts to support and protect new sectors, skills, and labour markets. The importance of the latter is that they create domestic revenue and a back-and-forth flow between that revenue and employment generation, productive investments, and technological development that alleviates poverty and supports the economic and social rights of people.

In the absence of a robust and sustained industrial policy and national development priorities, there is a disproportionate reliance on a narrow range of resources, commodities, and sectors that are often overwhelmingly linked to exports and foreign corporate control, such as in the case of the garment and footwear export processing sector. This leads to a reality where national expenses are often greater than national revenues, thus creating a structural need to borrow foreign exchange to meet domestic financing needs, which often includes repaying old debts and the interest on it.

Role of the IMF

Since the onset of the Covid-19 pandemic, the role of the IMF has heightened to an unprecedented level, with 221 loans being arranged with 88 developing countries as of August 2021. Through both loans and country surveillance reports, the Fund has advised 154 developing countries in 2021 and 159 in 2022 to commence fiscal tightening measures, following a brief duration of fiscal spending in 2020 to respond to the immediate health and economic damage inflicted by the pandemic. The austerity measures are more premature and severe than in the aftermath of the global financial crisis of 2007-08. It is important to note that 80% of the affected population are in developing countries across the Middle East and North Africa, Sub-Saharan Africa, South and East Asia and the Pacific, and Latin America and the Caribbean.

Yet another era of austerity will no doubt generate multi-dimensional and layered fractures and inequities from the individual to society to economy and on the registers of gender, race, sexuality, ability, ethnicity, caste, and citizenship. Critics, advocates, and social movements for global economic justice warn that with an additional 100 million pushed into poverty as a direct result of the pandemic and an economic recession exacerbated by the war in Ukraine, a ‘lost decade’ for the Global South is imminent.

However, empirical, data-based evidence across time, geography, and context, demonstrates that austerity has neither restored income growth nor reduced unemployment. Indeed, academic research illustrate how the economic methodology in support of austerity is conceptually flawed. Reams of impact analysis literature illustrate how austerity has led to structural inequalities, material deprivations, intergenerational cycles of poverty, intensified discrimination, and a subterranean stream of social fissure and emotional-spiritual alienation. Mass protests and counter movements have surged across the globe over the course of decades, decrying austerity’s devastating toll and castigating it for deepening social injustices.

The IMF, in the beginning of the pandemic between March to May 2020, made a rhetorical statement to the effect that it will not impose austerity and will let governments spend. That was true for the first couple of months of the pandemic in 2020. However, as soon as December 2020, all austerity measures were back in place. This flexibility to spend was temporary, it was targeted, and wholly insufficient. Usually, it is during an economic downturn, during a time of crisis, that countries should be spending in a countercyclical manner, meaning spending more than usual in order to support economic and health recovery through social provisioning. In fact, this is exactly what rich countries did through amplifying their existing social welfare systems and enacting huge fiscal stimulus programmes, which most developing countries did not have the public funds to do.

While the IMF is being positioned as the primary international institution enforcing austerity, we have to remember that we are actually talking about the finance ministries of the rich countries: of the G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. countries in particular. And we are also then talking about the financial players, from big global banks to investment and equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. funds to multinational corporations, that have an entrenched influence over these finance ministries’ positions, decisions, and overall political will. Governance power in the Fund’s Executive Board is disproportionately skewed towards rich countries, which hold over half of the voting power; developing countries, which together constitute 85% of the world’s population, have a minority share. For example, for every vote that the average person in the Global North has, the average person in the Global South has only one-eighth of a vote. This has been called ‘economic apartheid’ by some critical voices.

Indeed, the key point here is that that the IMF is merely the messenger. The actual players are the finance ministries of the US, the European countries, and Japan. Perhaps even more importantly, the movers and shakers that determine the IMF’s mission are the financial and banking sectors of these countries. So, as you can now see, the IMF is governed by the finance ministries and Central Banks of the rich countries, who are in turn largely governed by Wall Street, the City of London, commercial banks, investment funds, and in particular, asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). management firms (AMCs) that have risen in the last 10-20 years. These asset firms are the key actors that buy a huge amount of government bonds.

For a sense of the scale of AMCs, the ‘Big Three’ asset management firms—BlackRock, Vanguard, and State Street—manage over $15 trillion in combined global assets, an amount equivalent to more than three-quarters of the US domestic economy (Gross Domestic Product 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.
). The outsized footprint of a few large financial companies and the concentration of their political power poses serious issues for the world economy and for global financial stability, which more severely affects the rights of working people and women across the Global South much more than they actually affect the global rich.

In Sri Lanka’s debt composition, it’s striking that China has 10% of Sri Lanka’s sovereign debt Sovereign debt Government debts or debts guaranteed by the government. , India has about 3%, but private creditors possess almost 40-50%. So first and foremost, we have to see the IMF not as the perpetrator of austerity, but as the messenger of private creditors and lenders in the international financial markets through the channel of finance ministries. At the same time, these financial markets are providing fast and significant credit to developing countries attached to high interest rates with one hand, while the other hand is siphoning national money through debt repayments and those same high interest rates.

To return to the point about austerity, there have been innumerable campaigns, protests, resistance efforts, and international petitions to the IMF over the years. At the outset of the pandemic in 2020, over 500 organisations and individuals signed a petition calling on the IMF to immediately stop advising austerity measures to developing countries, and instead advocate policies that advance human rights, sustainable development, climate justice, and gender and income equality. The petition emphasises that fiscal consolidation driven austerity will undermine the achievement of economic and social rights while deepening poverty in a context where the UN estimates 70 to 100 million people will be pushed into extreme poverty. The consequences are grave. Many developing countries are in danger of facing “a lost decade” as their pathways to achieving the Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Change are effectively derailed.

The petition also said that we must protect the developmental role of the State in guiding economic development and social policy, by retaining ownership of key sectors like industry and banking and allocating fiscal resources to meet the social and economic needs of people. First and foremost, through a rights-based economic framework that prioritises economic and social rights of the people, such as through maximising available resources, doing no harm, and having an ex-ante human rights and gender equality assessment process. This petition really laid the groundwork for some of our civil society advocacy, campaigning, social media work, and messaging to policy makers.

Extended Fund Facility (EFF) Loan Programme of the IMF

Sri Lanka will most probably sign onto the Extended Fund Facility (EFF) loan facility granted by the IMF. These EFF loan programmes are the bread and butter of the IMF. They are for serious medium-term 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. They are of three to four years duration and have to be repaid within four and a half to 10 years. You can pay it in semi-annual instalments. The difference between the EFF programme and the other longer programme of the IMF, called a Stand-by Arrangement (SBA), is that the EFF has to be paid back in four to ten years, but the SBA which is usually used when there is no crisis, is about three to five years. It has a much shorter repayment period.

Unfortunately, the EFF is not a concessional loan. Concessional loans, where the interest rates are lower, are usually the Poverty Reduction and Growth Trust facility which is for low-income countries only. Sri Lanka, as a middle-income country, is probably going to sign an EFF type of loan. The problem with the EFF is that it is the key loan programme that focuses on structural reforms, in that there are numerous types of policy conditions that are recommended or pushed by these loans.

I provide here a quick snapshot of Ecuador’s EFF signed in 2019 and renewed in 2020. In most cases across the Global South, signing a loan with the IMF is a pre-condition in the process of carrying out a restructuring of a nation’s sovereign debt. Ecuador’s sovereign debt restructuring involved USD17.4 billion, where its creditors de facto required that country to sign onto a USD6.5 billion loan with the IMF in order to restructure the debt.

Some of the key measures in Ecuador’s EFF included:

  • Reduction of public expenditure by 4.2% of GDP between 2022 and 2025;
  • Privatisation of State-Owned Enterprises (SOEs), mainly gas because Ecuador is a petro-economy;
  • Labour flexibilisation through a decrease in the official minimum wage;
  • Reduction of pensions, as pensions were deemed to be excessively generous relative to the contributions to social security;
  • Liberalisation of public procurement, allowing all kinds of government procurement of infrastructure by foreign companies;
  • Increasing VAT and Customs Duties;
  • Increasing interest rates from borrowers but without necessarily placing any responsibilities on the lenders;
  • Expansion of foreign investments and facilitating resource extraction.

However, these recommendations needed to be passed in the Ecuadorian Parliament. So, the silver lining is that not all of these recommendations may get passed, even though the pressure is always present to reduce the fiscal deficit through public expenditure reductions and regressive taxation increases.

Many of these conditions that the IMF provides in the loan agreement often also go against the Constitution of the nation. That is one of the key things to monitor. What is being proposed in the EFF package for Sri Lanka? Which parts are against the very Constitution and very laws of Sri Lanka? Look at the details. Are there any provisions, measures, recommendations that will directly go against the laws of your country? Get the human rights and pro-bono lawyers to make a case that these are constitutionally illegitimate and illegal and not within the remit of the national Constitution. So that is one of the key things from the beginning of the loan proposal being put in place: to do a thorough legal check.

Gendered Implications of Austerity

Another key thing is to demand that there has to be an ex-ante overall economic and social rights assessment, including a gender assessment. You have to demand such an assessment be done before the loan is put in place. I think all of you know very well that the gendered nature of austerity means that women become the shock absorbers of these austerity measures. We know that the care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. economy upholds the social services and public services that the State is failing to provide. We know that our feminist political economy lens is about going from viewing women as individuals to instead seeing gender as a system that structures power relations and seeing fiscal austerity as a system that violates collective rights. The predominant channels that women are affected by are: diminished access to essential services, loss of livelihoods and workers’ rights violations, and increases in unpaid work and time poverty. So let me just quickly expand on these.

You know well that reductions and eliminations, freezes to the public wage bill, and budget cuts to public health, education, and social protection systems, are going to affect the very programmes and services that benefit women. The IMF will put in place temporary, targeted, and conditional social protection programmes rather than universal and holistic programmes. Ever since the global financial crisis of 2008, the IMF has been putting in place something called social safety nets. That’s their language. They will say that the budget cuts are this much percentage of GDP, but you can also implement social safety nets that are temporary, conditional, and targeted. They have a very robust language on why it needs to be targeted and conditional; it is to prevent inefficient spending, so as to make the investment into social protection programmes more efficient, to make sure there’s no wasted funds.

They’re very concerned about any kind of inefficiency in spending when it comes to human needs, but not necessarily when it comes to debt servicing and all the debt payments that will be made from squeezing the public sector. You see where the priorities are! And of course that fiscal contraction will displace women into unemployment and precarious work. Women are already in precarious work, already migrant workers, already in the informal economy, and this exacerbates and intensifies that kind of loss of livelihood and worker’s rights violations.

Time Poverty

The key aspect here is time poverty. We know that women, especially in a nation like Sri Lanka, form the backbone of the economy from migrant workers to apparel and garment workers in the export processing zones to tea plantations. Women are the absolute economic foundation of your economy. But also when it comes to the care economy, they take care of your households, domestic work, and children. The cuts on social welfare will impact low-income women especially, their physical and mental health, and emotional wellbeing. It will also lead to the complete erosion of their time.

Time poverty is really a key issue when it comes to a feminist analysis of austerity measures because it is often misunderstood. Time poverty is often understood as not having enough leisure time available, or not having enough time for socialising or personal self-care. No. Time poverty means there’s not enough time to sleep, there’s not enough time to do the care provisioning for the children, the cooking for the household, the cleaning and maintenance, getting of groceries for the household. It means more than just loss of leisure time. It is about the material deprivation to the household because of the loss of time for women, because they have to work overtime and do many different kinds of employment. This material deprivation of the household points to the fact that the unpaid care economy has a huge macroeconomic role. It is subsidising the wage economy. It is subsidising the formal economy. And the children and the household depend on the provisioning that is done by the care economy. Time poverty has to be looked at as a real violation of the care provisioning for the household.

The other way to look at the care economy in developing countries is that, unlike in rich countries, where the care economy is often outsourced, the care economy in developing countries is linked to public services, social policies, and social protection. So, all the care-related infrastructure is also about water and sanitation and gas and fuel. All the things that austerity hits, hit the care economy directly. The care economy is not a side consideration, it’s not a footnote. It’s at the centre of what is being attacked by austerity measures.

The Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) has been ratified by Sri Lanka. It is possible to invoke CEDAW to argue that fiscal and macroeconomic measures cannot override CEDAW. The State has a fundamental obligation to protect women’s human, economic, and social rights.

Regressive Taxation

On the very important issue of tax, the IMF and World Bank, and donor governments in the Global North, often point the finger at tax and tax compliance. But they don’t look at the way the economy is structured. Most developing countries are, as you know, based on remittances and informal sector labour. So, income tax is not the same story as it is in wealthy nations where a majority of the workforce is in the formal sector, where income tax payment is reciprocated by the government through access to social security and various other types of welfare system benefits.

Furthermore, and very critically, the IMF has long imposed regressive taxation, such as value-added taxes and general sales taxes, which are flat taxes that hurt the most, those who have the least purchasing power. There is a significant and ever-growing amount of evidence that also points to how poor women are hurt the most from regressive taxes, as they are often responsible for household purchases of food and commodity items. The antidote to such harmful regressive taxes is progressive taxes, such as taxes on income that target high-net-worth individuals, focusing on financial assets, income from capital investment and real estate, big domestic firms, and particularly foreign multinational corporations.

It’s unimaginable that, with Sri Lanka’s economic situation—where there’s double digit inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. , shortages of fuel, many hours of power cuts—there would be regressive taxation that would be imposed on the food commodities that are already so expensive, already in shortage. So regressive taxation measures have to be resisted, and we need to talk about progressive taxation measures that are direct, not indirect, that are investment and capital based, not consumption based.

It also has to address illicit financial flows and tax evasion and tax avoidance. Corporate taxation is a significant elephant in the room, precisely because the systematic tax evasion and avoidance they commit result in literally billions of dollars of taxable profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. being siphoned into tax havens around the world. Profits produced by economic activities of companies in the actual physical sites of production, should be liable to tax within those countries. Measures to combat such tax evasion and avoidance could yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. massive sums of money to countries like Sri Lanka and many others across the developing world.

However, the core question is really that of the political will to tax the actual holders of wealth rather than squeezing the poorest. The power politics at hand is about the influence and sway of financial and economic elites to create entire architectures of tax loopholes that allow them to hide their profits in tax havens, as well as a strong hold over local politicians to avoid paying their fair share of taxes, often a guarantee demanded by foreign companies in return for investing or manufacturing in the country.

Moreover, political elites including the Rajapaksas, are reported to have quite a lot of money in tax havens. The rich and the elite across the developing world have so much money in tax havens, whether it’s the Cayman Islands, Switzerland, you name it. This has to be addressed. These are huge amounts of funds that are actually the people’s funds, which is why an independent debt audit is very necessary to really look at which parts of the debt ledger are legitimate, and which are not. Which were used for corrupt deeds? Where did the money go to? What did it finance? Has it been repaid? If not, why not? That kind of audit must be done.

Role of the Central Bank

A key part of policy recommendations within many IMF loans, which often falls outside the rubric of fiscal austerity, is that of encouraging the independence of the Central Bank from the national government. This debate of whether Central Bank policies should or should not be influenced by the government is critical. Economic justice advocates say that Central Bank independence reduces or even erases the accountability of the Central Bank to the government, and that taking monetary policy out of the hands of elected politicians is undemocratic.

As economist and former Minister of Finance for Greece Yanis Varoufakis argues, “so-called independent central banks are independent only of their parliaments and the people and, thus, fully in the pockets of the financiers and the broader oligarchy”. While IMF staff have commented that Central Bank independence is aimed at “politics-free monetary policy decisions”, as Varoufakis suggests, removing government authority over Central Banks does not make them free of politics, only free of democratic accountability.

The argument of the rich country finance ministries that govern the IMF is that Central Bank independence controls inflation by taking interest rate management out of the hands of “short-sighted politicians”. As IMF staff write, “if politicians manipulate monetary policy to bolster their pre-election popularity, their prioritization of short-term political gains could invite long-term pain for the economy, in the form of higher inflation or even hyper-inflation”.

However, this very “political interference” means that governments will not have the ability to encourage or mandate their Central Banks to lower interest rates to support the domestic economy, for example. Indeed, interest rates are central to the stability of the domestic economy. Lower interest rates make it cheaper for businesses to borrow and expand, thereby creating employment. Accountability between governments and Central Banks also allows national policymakers to be able to turn to Central Banks to fund their public spending in times of crisis. On the other hand, there are real risks of higher inflation and increasing public debt to unsustainable levels. This does not mean that the Central Bank should not help the local economy; it just means that there must be careful management and moderation of policy moves, through channels of accountability.


Let me conclude by saying that austerity has no evidence supporting it. There is four decades of evidence from Greece to Indonesia to Egypt and Tunisia during the Arab uprising, that austerity does not work. During times of crisis and recession, you cannot reduce the fiscal deficit and keep servicing debt by squeezing the public sector. It only makes the economic recession and crisis worse. It exacerbates inequalities and deepens the crisis. This is the evidence provided by Greece just recently in 2013, and Egypt and Tunisia in 2011. In fact in 2016, the IMF’s own research staff penned a paper called ‘Neo-liberalism: Oversold?’; and the IMF’s independent evaluation office has produced various reports, all of them acknowledging that fiscal austerity has not delivered as expected. They know it doesn’t deliver. They know it has no moral grounds. They know it is precisely about private creditors and international lenders and the finance ministries and Central Banks, wanting to see austerity measures in place, so that their debt repayments will be prioritised, that they will be getting their resources back.

The number one issue around this is the absence of a multi-lateral mechanism to restructure the debt, to burden share the debt; private creditors need to be put in a position where they are regulated. Where private creditors are purchasing sovereign bonds at attractive interest rates, it means that they are profiting very well from those bonds, like in the case of Sri Lanka. In turn, when there is an economic downturn, they have to take a loss, they have to take a haircut, and they have to share the burden of losses from a fair debt restructuring.

This type of debt restructuring is not what is happening in Sri Lanka and many other developing countries. What is happening in Sri Lanka is a reprofiling of debt, not a burden sharing of debt in a more legitimate, multilateral manner that avoids austerity. We need the kind of debt restructuring and careful assessment of the debt ledger, the auditing, that really looks at how to burden share, how to do responsible lending and borrowing. Debt justice advocates, as well as developing countries within the UN General Assembly, supported by UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

, international civil society and various policy institutes, have long called for a binding debt workout mechanism within a multilateral framework for debt crisis resolution. Such a mechanism can address unsustainable and illegitimate debt, and provide systematic, timely, and fair restructuring of sovereign debt, including debt cancellation, in a process convening all – bilateral, multilateral, and private – creditors.

Real debt restructuring should not come with fiscal austerity. Fair, accountable, and effective debt restructuring should free up fiscal space for economic and social rights, for the needs of the people, for provisioning socially, for food distribution, for public services. Real debt restructuring would also work in tandem by addressing tax evasion and tax avoidance and getting that money back and doing progressive taxation as well as reallocating public expenditure. Real debt restructuring will take out all the corporate giveaways and corporate tax holidays and all the ways in which the businesses, especially foreign businesses, are not being regulated properly. It has to be accompanied by the political will to spend, through the public budget, specifically for social protection and public services and goods. During times of crisis, there should be a countercyclical agenda on spending on welfare and the public sector, in order to support social and economic recovery and specifically to ensure protection against hunger and malnutrition and other deprivations related to poverty and lack of access to basic needs.

It also needs to be stressed that national public dialogue is essential to generate consensus and political will within Sri Lanka. Public dialogue strengthens citizen awareness of their rights and entitlements and regulates the behaviour of vested interest groups–both domestic and international.

For example, expansion of social security coverage by increasing the number of people that contribute into the system tends to be welcomed politically; however, increasing the contribution rates may face resistance by employer groups. Similarly, raising revenues through higher tax rates may face challenges by those who have to pay more, just as certain groups will oppose proposals to reallocate the government budget away from defence or fuel subsidies. On the other hand, using fiscal and Central Bank reserves and issuing government bonds are relatively less contentious options since they are under the sole discretion of most governments, unless fiscal restrictions were in place. Ultimately, successfully creating fiscal space for economic recovery in times of crisis requires understanding the winners and losers of a specific option and effectively debating the pros and cons in an inclusive public national dialogue.

These are just some of the ways of thinking about alternatives, of rethinking the possibilities of prioritising social protection and progressive taxation, independent debt audits. All of this should be underpinned by national public dialogue. This is about national social movements really leading the national public dialogue sitting down with trade unions, government members, feminist collectives, human rights groups, NGOs, community development organisations in a transparent manner, where there is an open dialogue, where the behaviour and agenda of vested interest groups, both domestic and external, are checked.




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