Austerity, Dispossession and Injustice: Facets of the debt crisis in Sri Lanka

By Ahilan Kadirgamar on IDEAS, 26 April 2024

Sri Lanka defaulted on its external debt for the first time in its postcolonial history in April 2022. The International Monetary Fund (IMF)-led process of recovery that followed has not only been disastrous in terms of the economic policy package proposed by the Government. The underlying analysis of the causes of the debt crisis itself is also flawed. Sri Lanka provides lessons about both the broken global financial system and the widespread consequences of an unjust debt resolution architecture affecting other countries in the Global South.

While debt problems accelerated particularly with the COVID-19 disruptions and the war in Ukraine, the roots of the crisis, different from dominant narratives, go back to the way Sri Lanka was integrated into global capitalism. Sri Lanka’s post-war development policies of financialisation that began after May 2009 coincided with the global financial crisis where great flows of capital from the West flooded countries in the Global South. Sri Lanka’s two IMF agreements in July 2009 and June 2016 encouraged such external borrowings and particularly the floating of International Sovereign Bonds.

Sri Lanka is one of the first countries to restructure its debt in the post-COVID-era. Given its complex creditor profile, it is a test case for the international community and the current global debt restructuring regime. Debt restructuring is fraught with difficulties given the different interests of the multilateral agencies, bilateral donors and commercial lenders. Multilateral agencies are exempted from debt restructuring on the basis of their claimed preferred creditor status, which is being challenged by Sri Lanka’s major bilateral donor, China. Next, there is little coordination between the two major camps of bilateral donors with China on one side and Japan along with India on the other, particularly given their geopolitical rivalry to control Sri Lanka in the Indian Ocean. The commercial lenders, including major investment funds which hold Sri Lanka’s international sovereign bonds, are reluctant even to provide the minimal haircut proposed by the IMF’s Debt Sustainability Analysis (DSA). Instead, they are negotiating hard to gain their pound of flesh.

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