Debt Restructuring, Austerity, & The IMF: A Solution Or A Worsening Of The Problem?

By Lionel Bopage –

Introduction: Sri Lanka has faced recurring economic crises since gaining independence, including the current crisis that has left the country bankrupt. The pandemic and the Russian-Ukrainian war exacerbated the situation, along with misguided government policies in agriculture, industry, taxation, and other sectors. The pandemic caused a downturn in the economy, that is heavily reliant on foreign remittances, tourism, and exports. The global debt-to-GDP ratio increased, affecting even major economies like China and the United States.

Debt and Imbalance: Sri Lanka’s sovereign debt is owed to Japan, China, India, and private lenders. The country has consistently failed to generate enough foreign exchange to cover import costs. Additionally, a large portion of the population, engaged in informal employment, does not contribute to tax revenue. Government spending heavily favours the military, overshadowing investments in healthcare and education. Income inequality is pronounced, with the wealthiest 20% holding a disproportionate share of the country’s income.

Blame Shifting and Economic Mismanagement: Governments have historically concealed economic weaknesses and mismanagement by diverting attention to minorities and other distractions. They have borrowed for non-productive projects, leading to a substantial external trade deficit and eventually declaring bankruptcy. The government and opposition still advocate for a free-market economy and export-led recovery, ignoring the role of free-market economics in creating inequity, the crises and the repeated failures of IMF interventions.

IMF and Austerity: Sri Lanka defaulted on its sovereign debt and sought assistance from the IMF for a loan package. The IMF’s prescribed solution includes implementing structural macroeconomic changes and domestic debt restructuring. This process is expected to cause economic shocks, prompting a five-day bank holiday to manage the impact. However, Sri Lanka has had to approach the IMF numerous times in the past, and the effectiveness of the IMF’s interventions is questionable.

Social Impact of Restructuring: The impact of debt restructuring and austerity measures varies across different social strata. The majority of the population, already vulnerable, will experience further austerity, leading to demands for economic justice. Advocates of IMF-led restructuring overlook issues such as tax avoidance, corruption, and mismanagement in the public sector. Austerity policies have exacerbated income disparity and worsened the overall well-being of the population.

IMF’s Flawed Approach: The IMF’s focus on fiscal austerity and debt repayment overlooks the socio-economic and political factors underlying debt crises. Austerity measures hinder economic growth and fail to address a country’s long-term structural issues. The IMF’s insistence on market-determined exchange rates, interest rate hikes, and state subsidy cuts can lead to unintended consequences, further burdening businesses and exacerbating economic challenges.

Debt Crisis in Ghana: Ghana shares a similar economic and political trajectory with Sri Lanka, facing multiple bailouts from the IMF without addressing issues of waste, corruption, and an economy that serves the majority. Ghana’s economic model heavily relies on commodity exports, making it vulnerable to global price fluctuations. The country defaulted on its debt and sought an IMF bailout, undergoing debt restructuring and negotiations with creditors.

Implications for Sri Lanka: The IMF agreement with Sri Lanka emphasises fiscal consolidation, budget surpluses, and austerity measures. Energy tariff increases, currency devaluation, and higher interest rates are expected. The IMF program lacks wealth taxes and restrictions on illicit financial flows, disproportionately affecting the most vulnerable members of society. Austerity measures disadvantage poor consumers who already spend a significant portion of their income on essential items.

Exploring Alternatives: Rather than relying on ineffective measures that prioritize debt repayment, Sri Lanka should enforce fiscal responsibility, address corruption, and manage resources efficiently. Transparent financial management, a cap on borrowing, and reductions in public expenditure can help stabilize the economy. The government needs to engage in inclusive national dialogue, diversify the economy, prioritize social protection, and implement rights-based approaches to economic and social development.

Conclusion: Solving Sri Lanka’s debt crisis requires a government committed to sharing the burden of restructuring with those who can bear it without adversely affecting the disadvantaged. The affluent and elite must pay their fair share of taxes and be held accountable for corruption and illegal activities. Fiscal and monetary policies should prioritize the common good, and alternatives to austerity measures should be explored. By promoting transparency, accountability, and inclusive development, Sri Lanka can work towards a sustainable and equitable economy.

I intend to expand on this article soon.

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