Sustainable Debt & Unsustainable Democracy

By Ameer Ali –

Having monitored the level of financial stability and economic progress Sri Lanka had made since it started implementing IMF’s rescue package, which has resulted in a reduction of CBSL’s cash rate by 250 basis points for the first time, IMF Deputy Managing Director Kenji Okamura had drawn attention to the issues of “governance” and “debt restructuring” (DR), so that the country could reap the full benefit of IMF strategy. Although he did not specify what he meant by governance, besides IMF’s already communicated message to President Ranil Wickremesinghe (RW) about ending corruption, and about which there is already a bill waiting to be debated and passed in the parliament, it is not too difficult to read Okamura’s thinking on the matter especially in view of his reminder about “timely and transparent manner” to maintain “debt sustainability”.   

DR with foreign creditors is also tied up with domestic debt restructuring (DDR) with local creditors who are chiefly the local banks and institutional investors. Local debt is said to be around 55% of total public debt, mostly of government debt borrowed through Treasury Bills and bonds. Foreign creditors involved in DR would obviously insist on sharing the burden of restructuring with domestic creditors also on the basis of inter-creditor equity. And unless DR and DDR are negotiated smoothly, successfully and quickly IMF’s second tranche of EFF would be delayed and debt sustainability would be jeopardized. In addition, Okamura’s reference to transparency implies that there should not be any special deal with any of the foreign creditors, because IMF is aware of the fact that there are groups within RW’s ruling coalition that have special attachment with certain creditor nations. Perhaps it was for that reason RW had already announced that there would not be any private deal with China. However, China had already said that it would cooperate with restructuring efforts in the interest of friendly Sri Lanka.         

In a sense, more than DR it is DDR which is crucial because of its sensitivity to public confidence in the local banking sector. Also, without a stable and efficient local banking sector IMF’s recovery program cannot operate successfully. Already, when the CBSL Chief and treasury officials indicated without any clarification that there would be “voluntary debt optimization” for the banking in the course of DDR, implying thereby that there would also be involuntary debt optimization for state banks and pension funds, Bankers Association became worried. Voluntary optimization would involve a mixed bunch of options or a so-called haircut, as explained by a former CBSL deputy governor. Those options would include forgoing part of the principle; writing off a portion of interest income; and or working on a new instrument with low interest and longer maturity term. But the Association was wondering whether DDR would also involve any changes to capital adequacy ratio and liquidity coverage ratio, which will affect Banks’ asset structure and which are currently within regulatory requirements. Lack of transparency is a particular worry in this regard. Ultimately, DDR should not affect the confidence that market and people have on domestic banks. It appears that the Governor of CBSL has a strategy to tackle this issue but waiting for the government, the debtor, to come out with its own proposal. However, and at the end of the day, DR and DDR are going to introduce a new set of burdens on economic management so that the brief spring of hope enjoyed over the last couple of months and upon which RW was building his own hopes of political survival may turn out to be a winter of despair. This is why Okamura’s reference to governance requires serious thought.

Besides assisting economies that are troubled with budgetary and balance of payment deficits, IMF’s most important role is to protect the international monetary order of capitalism. Along with its two sister organizations, World Bank and World Trade Organization, IMF acts as a watchdog of that order. Institutional money lenders including governments are both IMF’s clients as well as shareholders. Therefore, the interest of those lenders must be protected, and in that role, IMF acts as their official debt collector. Therefore, any economic assistance provided by IMF to a debt burdened economy is, in the ultimate analysis, to enable that economy to recover and meet its debt obligations. Lending and borrowing are part of an economy’s ordinary business. According to the Institute of International Finance, the total world debt had reached $300 trillion in 2022. But what is important in this business is the credibility of the two parties involved. The capitalist world order will collapse without if debtors fail to honour their undertakings. It was that failure that made international credit agencies to down grade Sei Lanka’s credit worthiness and contributed to financial bankruptcy. IMF’s intervention has no doubt helped to restore that credibility somewhat. DR and DDR should help debt sustainability.

So far, RW was able to deliver a few economic goodies to the nation by way of reduction in prices and increase in supply of certain essential consumer items, because the revenue his government raised through stringent fiscal measures in combination with CBSL’s tight monetary policy was free of servicing and settling any debt.  But the moratorium that allowed it to happen has to come to an end soon. At the end of the day, DR and DDR would mean leakage of funds from the treasury to fulfil debt obligations which, in the absence of a trade surplus and massive inflow of investment, would mean continued belt tightening to the public. The newly introduced Revised Value Added Tax in the name of nabbing tax dodgers and other such revenue raising measures on waiting would increase prices once gain. RW’s promised Valhalla in 2048 is too far away to realize and obscured with uncertainties and unknowns. Public discontent is therefore unavoidable. It is in the context of handling that discontent and protests in the aftermath of DR and DDR that Okamura’s reference to governance gains significance. Debt sustainability is a must but is that sustainability compatible with sustainability of democracy?  

RW expects the clash between economic adversity and democratic freedom to become acute in days to come. It is to handle that clash and politics behind DR and DDR, that he wanted to bring in that draconian Anti-Terror Act which, because of the uproar created at home and abroad forced him to put it on the back burner. Now, a new bill called Broadcasting Authority Bill (BAB) to control the media has been introduced. Earlier, he also mentioned that people have lost the appetite for elections. His indefinite postponement of Local Government Elections is virtually a cancellation of it for as long as he is in power.  And the force he is prepared to employ to stop public protests, all indicate that democracy and democratic freedom are under attack and becoming incompatible with IMF-RW economic agenda. On the other hand, to make democracy bashing saleable to the masses he, with approval from IMF, decided to pump in Rs. 200 billion from the $700 million EFF loan on welfare projects. This is peanut when compared to the total welfare needs of the country – a country that was once an envy to many Asian countries in respect of its welfare standard. Public hospitals without doctors, nurses and specialists, educational institutions without qualified academics and teaching facilities are now the order of the day.  Brain drain has impoverished the nation intellectually and professionally.  Will the 200 billion rupees rectify this yawning deficit?  

IMF for its part neither raised any opposition to ATA nor has it expressed any criticism of BAB. This is not surprising because that institution has a record of supporting autocratic and dictatorial governments in the interest of protecting the capitalist order. There is yet to be an economy that has prospered under IMF’s intervention and reforms. Of course, the rich and the powerful had gained at the expense of the poor and they are gaining in Sri Lanka also. In short, IMF’s strategy is to transplant a mini-version of the parent giant model practiced in the US. The result there is that infamous ratio of 1:99 in wealth distribution between the super-rich and the rest. RW seems to be willing to go all the way with USA in search of his Valhalla. Democracy and democratic freedom have become a nuisance blocking his path. To maintain debt sustainability democracy has become unsustainable. The system has to change. 

*Dr. Ameer Ali, Murdoch Business School, Murdoch University, W. Australia

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