Sri Lankan Debt Crisis to Get Worse if IMF Prescription Is Heeded
C.P. Chandrasekhar
On July 1, Sri Lanka’s parliament approved, through a majority 122-62 vote, a plan to restructure the government’s domestic debt, which totalled 15.4 trillion Sri Lankan rupees at the end of March 2023. That is not all of Sri Lanka’s public debt, though. At that point in time, of the government’s total debt of $86.5 billion, $46.9 billion was domestic debt denominated in Sri Lankan rupees; external debt in foreign currency amounted to $36.1 billion.
Sri Lanka’s crisis stems from its inability to service external debt, whose interest and amortisation must be paid in foreign exchange. As a result, past profligacy leading to excessive aggregate debt was not the actual problem. The crisis was precipitated by excessive foreign currency debt and a pandemic-induced collapse in foreign exchange receipts from tourism, exports, and remittances, and a spike in the outflow of foreign exchange because of a speculation-driven rise in the prices of fuel and food. As a consequence, foreign reserves shrank, as did the country’s ability to meet foreign debt service commitments.
In response, an illegitimate government and discredited elite turned to the IMF, while presenting that turn as the only “solution” to the crisis. Any real solution required an immediate reduction in the volume of external debt owed, involving substantial losses or haircuts for foreign creditors. However, the programme that came with the IMF’s $3 billion loan included a commitment on the part of the Sri Lankan government that it would reduce all debt, domestic and external, and not just the external debt that was the source of the crisis.
The obvious difference between domestic and external debt was ignored. While the former can be serviced with domestic currency, which is controlled by the government and the central bank, the latter has to be repaid in foreign currency, which has to be earned through foreign revenues or new foreign borrowing (which the government cannot control).
The IMF’s support was made contingent on major bilateral creditors offering “financing assurances”. But bilateral support alone does not help, since multilateral creditors, like the World Bank and the Asian Development Bank, and private creditors together account for an overwhelming share of the external debt of the government. This confounds the problem.
On the one hand, the multilateral development banks are unwilling to accept any haircut whatsoever as it will lead to a loss of their AAA ratings. On the other hand, private foreign creditors are unwilling to accept losses or haircuts of a magnitude that can make a difference.
A solution worse than the problem
The IMF solution does not seek to address these issues. Rather, in the curious turn referred to earlier, it has decided to make all public debt—external and domestic—the source of the crisis. The problem, according to this perspective, is the unsustainable gross financing needs of the government—its overall new borrowing requirement plus debt maturing during the year—in the coming years.
To address that, the IMF’s debt sustainability assessment makes a case for a reduction of the ratio of public debt to GDP from 128 per cent in 2022 to less than 95 per cent by 2031, for which it recommends reducing the gross financing needs figure from 34.6 per cent of the GDP to an annual average of less than 13.6 per cent over the 2027-32 period. As compared with this 60 per cent reduction in gross financing, the outflow on account of foreign debt servicing is expected to fall from 9.4 per cent of the GDP to 4.5 per cent of the GDP. This is because the haircut required of foreign private creditors is limited to a modest 30 per cent.
In addition, the government is expected to begin issuing new sovereign bonds in about five years from now, suggesting that repayments of reduced foreign debt would be sustained with new foreign borrowing.
Of the Sri Lankan government’s total domestic public debt, around 30 per cent has been mobilised through the issue of short-term Treasury bills and around 60 per cent through Treasury bonds. The central bank holds much of the Treasury bills (62 per cent at the end of 2022), with banks and superannuation funds (like the Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) accounting for 19 per cent and 5.5 per cent respectively.
But in the case of the Treasury bonds, the banks account for around 44 per cent and the superannuation funds for around 37 per cent. In sum, since it is domestic debt that is to be disproportionately cut, the banks, the central bank, and the superannuation funds must bear the brunt of the burden.
However, the banks are in no shape to accept a reduction in the value of their holdings. Non-performing loans on their books have spiked over the period of the crisis, and any further loss would result in insolvency, which would hurt their large depositor base. So, they have been excluded from the restructuring.
Burden on retirement funds
Hence, a substantial share of the burden of adjustment must be borne by the superannuation funds, especially the EPF and ETF, which are the repositories of the retirement savings of employees falling in their jurisdiction. The adjustment is to occur largely through a reduction in the interest rate paid on these bonds, from an average of above 20 per cent currently to 12 per cent until 2025 and 9 per cent thereafter until maturity. This is expected to reduce the outgo on interest paid by the government by 0.5 percentage point of the GDP every year.
According to Ahilan Kadirgamar, a Sri Lankan academic and incisive analyst of development policy, the average value of all retirement funds over the last five years stands at 17.7 per cent of the GDP, and with 0.5 percentage point of the GDP loss in value each year, the total value of the retirement funds will decline to 12.5 per cent of the GDP over a decade. That spells a loss of 30 per cent in the value of funds cashed a decade from now.
The inflation that has accompanied the Sri Lankan crisis has already substantially eroded the value of savings of Sri Lanka’s citizens. The imposition of this additional burden is nothing less than administering a dose of shock therapy that hurts those who had in no way contributed to the external debt crisis.
What is more, it is no solution to the crisis. It is merely a way of reducing the losses of foreign creditors who have already earned large profits on the debt they channelled to the Sri Lankan government without due diligence. The entirety of that debt, which markets have been treating as near worthless, needs to be written off.
(C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US. Courtesy: Frontline magazine.)
Thousands Protest Sri Lankan Government’s Attacks on Welfare Subsidies
S.K. Irangani
Protests have erupted across almost all Sri Lankan districts during the past two weeks over the Wickremesinghe government’s exclusion of thousands of people from its new “Aswesuma” welfare program. Poor people excluded from the scheme gathered outside Divisional Secretariats, the government’s regional administrative units, demanding that they have access to the assistance.
Aswesuma was introduced by President Ranil Wickremesinghe in May to replace the previously existing “Samurdhi” program. The International Monetary Fund (IMF) demanded the government cut welfare and other social spending as part of its $US3 billion bailout loan in March. The welfare program, the IMF declared, should only assist “vulnerable sections.”
Most of the protesters previously received Samurdhi but are excluded from receiving Aswesuma. They accuse the government of not accepting their applications for the new program.
Sri Lankan governments have implemented various relief programs—Janasaviya (Empowering people) and Samurdhi—in previous decades, falsely claiming that the measures would eliminate poverty. These programs, however, have nothing to do with ending poverty but are desperate attempts to dissipate popular opposition to Sri Lanka’s capitalist ruling elite.
World Socialist Web Site (WSWS) reporters spoke to those impacted by the new scheme who angrily explained the desperate situation they now confront.
Ashoka Herath, from Handessa in the Kandy district, told the WSWS that she no longer receives the 2,500-rupee ($US8) monthly Samurdhi subsidy and now faces enormous difficulties.
“My husband does not have a job but we have twin girls who are both studying for their advanced level exam. Their expenditure has gone up several fold,” she said.
Herath explained that officials surveying homes for the Aswesuma program had been instructed by the government to remove poor families like hers from the new welfare list.
“If you have a motor bicycle, small stall or a small chicken farm, your name is cut from the list. Does the government worry what you have to spend on your childrens’ education and medicine?” she said.
A woman who used to work at a private hospital in Kandy but lost her job because she was blind in one eye, endorsed Ashoka’s comments. “I received 3,500 rupees under Samurdhi but that has been cut under Aswesuma. We’ve been thrown into a desperate struggle to try and live,” she said.
A widow with three children from Dambaathupathana, Heeloya in Bandarawela explained that she will not receive Aswesuma welfare because she has done various odd jobs and received a daily wage.
“It’s been four years since my husband’s death and we do not have any permanent income. With Samurdhi I was just able to live and give my children porridge, even though I had an empty stomach. Now we’re being forced to die. In my village there are several people who are suffering even more than me after having been removed from Aswesuma,” she said.
H. Dhammika from Uthuru Kabillawela in Bandarawela worked as a housemaid for a monthly wage of 12,000 rupees and previously received a Samurdhi subsidy. She has been excluded from the new program. Her husband is incapacitated and cannot move following surgery on his back.
“I’m also a patient,” Dhammika explained. “My husband and I need medicine from Badulla general hospital but we now have to spend a lot of money buying it because it’s no longer available at the hospital. How can we live if we are spending large amounts of money on medicines while the prices are skyrocketing? How does it become aswesuma [relief] if the subsidies to extremely poor people like us are being gutted?” she asked.
Confronted with island-wide protests over the new welfare program, the government announced that those excluded from Aswesuma would have until July 10 to appeal. By Tuesday over 550,000 people had submitted appeals in a telling indication of the extreme poverty in Sri Lanka.
While the presidential media unit reports that over 3.3 million people have qualified to receive Aswesuma, Wickremesinghe’s so-called relief program is such a pittance that it does not even cover the bare minimum expenses of a family for a day. Under the scheme, benefits will be provided to four distinct groups: transitional [those on the verge of being poor], vulnerable, poor and extreme poor.
Accordingly, 400,000 transitional beneficiaries/families will receive a monthly allowance of 2,500 rupees ($8) from July 1 to December 31; 400,000 vulnerable beneficiaries will get a 5,000-rupee monthly allowance until March 31, 2024; and 800,000 poor and extreme poor persons will receive 8,500 and 15,000-rupee monthly allowances respectively for the next three years.
According to the Department of Census and Statistics June survey, the poorest 40 percent of the population earns only 26,931 rupees a month, which is not enough to provide a family of four with three meals a day, let alone pay for other living costs. The poorest 20 percent earns a paltry 17,532 rupees per month.
Hyperinflation slashed real income in Sri Lanka by 40 percent over the past year. Amid these desperate conditions the government has replaced the limited Samurdhi welfare program with its criminally inadequate Aswesuma grants. This measure, which will throw millions more Sri Lankans in to poverty, further underlines what IMF officials meant when stating that their bailout loan would be linked to a “brutal experiment” in Sri Lanka.
Sajith Premadasa, leader of Samagi Jana Balawegaya (SJB) and the parliamentary opposition, denounced the government, declaring in parliament that only 1.2 million people would receive Aswesuma benefits even though Sri Lanka’s poor had increased from 3 to 7 million in recent years. He failed to mention that the new welfare program is a direct response to IMF demands, policies which he and his party fully support.
Vijitha Herath, a Janatha Vimukthi Peramuna (JVP) parliamentarian, recently told a media conference that many of those not qualifying for Aswesuma failed to receive it because of “errors” in the selection criteria. He also claimed that Aswesuma was part of the IMF austerity program, and insisted that the JVP opposed it. These claims are false. The JVP is thoroughly committed to the IMF and international capital. In fact, Herath told parliament on March 24, 2023 that the JVP was not opposed to seeking an IMF bailout.
The trade union bureaucracies, which are busy suppressing workers’ opposition to government privatisation measures and attacks on jobs, wages and pensions, are maintaining a deathly silence about the vicious assault on Sri Lanka’s poor.
The Sri Lankan working class must come to the defence of the poverty-stricken masses and rally them in a unified political struggle against the government’s IMF austerity measures, which will throw millions more into abject poverty.
The Socialist Equality Party (SEP) is urging workers to form action committees in every workplace, plantation, in other major economic centres and among the poor and rural masses, independent of the trade unions, the capitalist parties and their political apologists.
Poverty can only be eliminated by reorganising the economy for the benefit of the majority, not the profits of the few. This requires seizing control of the means of production and distribution from the hands of a tiny wealthy elite and placing resources under the democratic control of workers.
That is why the SEP is calling for the building of an independent political movement of the working class and the rural poor to fight for a workers’ and peasants’ government to implement socialist policies as part of the struggle for international socialism. The SEP’s call for the convening of a Democratic and Socialist Congress, based on democratically elected delegates from these action committees, is in order to create a powerful centre to advance the struggle for this program.
[Courtesy: World Socialist Web Site (WSWS), the online publication of the International Committee of the Fourth International.]
