Deplorable debt: Is Sri Lanka caught between IMF and IIF?

 Still, the country is reeling from its socio-economic and political debacle without a clear visionary leadership putting the country on a recovery path

Sri Lanka is battling with the current crisis because of irresponsible borrowing and investment in wasteful projects. The Supreme Court has given a ruling pointing out the responsible policymakers and concerned Government officials who contributed to the mismanagement of the economy. But it is good to remember stupidity is not a crime in the eyes of law, hence marginalised and vulnerable populations sacrifice future prosperity for sins of the corrupt and greedy

The greatest challenges confronting the nation-states in the current era revolve around; deplorable debt, depleted natural resources, and degraded environment. Economic growth and future prosperity for all living beings are stalled due to the varying degrees of the 3D problems emerging out of ill-conceived policy divergences propelling the linear economic activities for centuries in many countries.

Sri Lanka hit its worst economic setback in 2021 since independence, experiencing near bankruptcy short of a failed state. Still, the country is reeling from its socio-economic and political debacle without a clear visionary leadership putting the country on a recovery path. Showing resilience alone will not take us anywhere. Amongst many shortsighted policy debacles including unmanaged debt without a semblance of fiscal discipline remains unresolved. The unbridgeable mismatch between Government revenue and expenditure is one such burning issue. Not a single political party gearing for elections to secure political power squarely addresses this challenge with viable options proposed. 

Debt restructuring talks are dominating the media as the second IMF tranche of the Extended Fund Facility with access to SDR 254 million (about $ 337 million), subject to the IMF Executive Board’s review in due course. 

Time, Information, and Power (TIP) are critical elements for persuasive negotiations

The delegation from Sri Lanka for debt restructuring with the Official Creditor Committee (OCC) which consists of the majority of the private sector creditors, and sovereign bondholders faces critical challenges. The author aims to highlight the various challenges and obstacles to unfold during the tough negotiations Sri Lanka faces in this essay. All Sri Lankans should endeavour to negotiate favourable terms in putting Sri Lanka’s debt on the path towards sustainable economic growth in a medium and long-term time frame. 

As a nation, we should not burden those private creditors who hold our sovereign bonds, and it is our supreme responsibility to pay all our dues with reasonable compensation. Those who invested their money in Sri Lankan sovereign bonds are not at fault for the economic mismanagement of the corrupt politicians and their cronies. Sri Lanka, a sovereign nation should take ownership to honour our commitments to settle all our creditors. Unless Sri Lanka shows clear policy directions to revive and grow the stagnant economy – no one will be ready to put good money behind wasted bad money. Instilling trust and confidence in our ability to come up with viable and sustainable solutions to jump-start the growth of the economy is the way forward. This conditionality is paramount even to restructuring the existing debt instruments so that they can be traded in secondary markets to mobilise cash flows for stimulating the economic activities for growth.

In times of crisis, stakeholders are forced to sit and negotiate to find viable solutions, balancing the common and conflicting interests between the two sides. Hence, parties who sit down for negotiations are forced to deal with adversaries and not with friends or sympathisers ready to bargain to meet different expectations.

Time for shock doctrines  

In an excessively financialised world cyclic financial crises are a common feature. Someone’s pain will always turn into another’s gain swiftly. The international financial system consisting of private and public institutions, is well set to manage the crisis with the sole objective of privatisation of gains and socialisations of pain. 

Many of their strategies anaesthetise weak policymakers looking for innovative and creative economic growth led solutions to overcome the debt-burdened situations in the developing world. Capitalising on this phenomenon they force painful shock doctrines and austerities on the victims of the financial crisis reversing all the socio-economic gains achieved thus far. The classic example could be quoted from our own experience, currently, a quarter of Sri Lanka’s population is pushed below the poverty line. Moreover, the second IMF EFF assistance is a blessing in disguise for policymakers to hoodwink the public, especially on the eve of elections. Partners with whom Sri Lankan Treasury and Ministry of Finance officials negotiate are aware of the time-critical importance of this factor. Media statements following the various IMF official’s meetings are loaded with praises but without any substance in handling the crisis for a viable resolution. Instead, many are saddled in their comfort zone depending on further debt as the only recourse.

Pruning expenditure on social security and welfare, imposing unbearable income tax on the middle class – working poor – curtailing their purchasing power, reversing all progressive labour laws and regulations that mainstream inclusive growth and fairer distribution of wealth created in the economy, especially hampering the investment growth in the EPF, workers savings with arbitrary interest rate cuts are some of the policy options concealed within the shock doctrine recommendations. 

Aside from the above privatisation of profitable State-Owned Enterprises was mismanaged by appointing cronies by the various Governments, including appointing yes men to serve the political interest including in the banks allowing the henchmen to rob the banks from inside. Commercially viable enterprises are loaded with debt restraining them from coming out with any turnaround strategies. Much national wealth is now offered on a platter for privatisation as a remedial measure to the current crisis. These are part and parcel of the shock doctrine proposed to serve the interest of those foreign investors to grab the national wealth. A classic case, outsourcing the on-arrival visa issuance to tourists at the BIA to a private company hiking the visa fees at a disproportionate increase impacting the resilient tourism industry. On top of that the private company charges $ 18.50 as their fees on each tourist applying for a visa.

Pruning expenditure on social security and welfare, imposing unbearable income tax on the middle class – working poor – curtailing their purchasing power, reversing all progressive labour laws and regulations that mainstream inclusive growth and fairer distribution of wealth created in the economy, especially hampering the investment growth in the EPF, workers savings with arbitrary interest rate cuts are some of the policy options concealed within the shock doctrine recommendations

However, many economists, and advisors are keen to measure productivity gains even at times of crisis on factor inputs such as labour, land and entrepreneurship except capital. At times of financial crises, private-public partnerships strongly advocate Quantitative Easing options as a remedy to maintain market stability by subsidising the Capital Markets with zero and negative interest rates. 

Those civic-conscious officials consisting of the Sri Lankan delegation who sit for negotiations with the OCC should bear in mind, for the sake of sustainability of the debt and stimulation of future growth in the economy, that they should not pass on the advantage of time factor to the opponents across the table. They need to put the country’s interest first, not to serve the interest of the bankrupt political propaganda, merely to deceive the electorate on the eve of elections. Sadly, there isn’t any form of social dialogue between the policymakers, officials, private sector chambers, and academia to propose policy recommendations, at least, to identify and cut the avoidable expenditure in the parallel administration structures in the island state. A culture of meaningful stakeholder consultations before policy formulation is a must in the desired new system that Sri Lanka is aspiring for. 

Information asymmetry and the role of the Institute of International Finance 

The second critical element that is vital in negotiations is information. In any negotiation process to achieve desirable goals all parties need to act in good faith and be fully informed of the facts and circumstances.

The Institute of International Finance (IIF) is a powerful organisation that represents the interests of private creditors and financial institutions. IIF members include a wide range of financial firms operating globally in the sovereign debt markets, with common and divergent interests. The mission and basic lobbying position of the IIF are enshrined in its by-laws, namely, to be the most influential financial lobby organisation at the international level that promotes voluntary market-based approaches to financial or debt crisis prevention and management.

According to Netherlands Amsterdam-based Stichting Onderzoek Multinationale Ondernemingen (SOMO), Centre for Research on Multinational Corporations) October 2021, report highlights serious imbalances in relationships between the IIF and private creditors, on the one hand, and the other hand public international and national financial decision-makers, parliamentarians, citizens, and other affected stakeholders. Furthermore, reports contend that the IIF’s strategy leads to even higher indebtedness to private creditors and promotes a profitable sustainability-linked financial industry, which the IIF actively supports in the interest of its members. https://www.somo.nl/the-iif-debt-relief/

The Sri Lankan delegation needs to be aware of the advantages enjoyed by the counterparties with whom they negotiate. As per findings of the SOMO research IIF membership covers the largest international financial conglomerates with common and diverse interests regarding sovereign debt of middle-to-lower income countries: from private and public Chinese banks and Wall Street investment banks to credit rating agencies, asset managers and hedge funds. Official authorities like the IMF and World Bank, and even the central banks of some middle- and low-income countries, are IIF members. 

On the one hand, this diversity of members involved in the international debt market can enable members more easily to exchange views and coordinate. On the other hand, members’ very diverse interests may block positions and solutions that are proposed in the IIF’s lobbying activities.

Lazard the French Asset Management company Sri Lanka consults for the debt restructuring and the law firm Clifford Chance both could be members of IIF, if so the conflict of interest between the parties will become a stumbling block in reaching a favourable solution to the benefit of Sri Lanka as highlighted in SOMO report. This fact must receive the best attention of the Sri Lankan delegation to the negotiation bearing in mind that no one subordinate could work for two masters’ honestly – the adage often quoted as a warning to be cautiously optimistic in similar circumstances. 

Information is power – markets are good when you are on the right side

The third element that is crucial in handling negotiation effectively rallies around the power that the parties to the negotiation garner. Readers would understand better by the foregoing how the balance of power tilts between the parties to negotiations. 

IIF is committed to protecting the interests of its members by lobbying for voluntary market-based approaches to financial or debt crisis prevention and management. Towards achieving these goals IIF functions with a few committees such as IIF Committee on Sovereign Risk Management (CSRM), G20 Debt Service Suspension Initiative (DSSI), IIF Debt Transparency Working Group (DTWG), IIF Emerging Markets Advisory Council (EMAC). They are very well equipped with data on capital market flows and debt situations in countries and markets across the region. IIF is committed to serving the interests of its members to spot investment opportunities and secure the assets with returns.

Following the recent rounds of negotiations with the Sri Lanka delegation with OCC, media reports revealed that in principle understanding was reached with a set of frameworks for further negotiations. Furthermore, there appear to be some discussions to extend the maturities with varying haircuts and interest rates reclassifying the Sovereign Bonds linked to either Macro or Governance parameters. We are forced to agree weighing the pros and cons to make the bonds marketable in the secondary markets to overcome the short-term constraints knowing how the Creditors team up to serve their interest.

Breaking the vicious debt cycles – focus on growth instead of distribution

 Sri Lanka is battling with the current crisis because of irresponsible borrowing and investment in wasteful projects. The Supreme Court has given a ruling pointing out the responsible policymakers and concerned Government officials who contributed to the mismanagement of the economy. But it is good to remember stupidity is not a crime in the eyes of law, hence marginalised and vulnerable populations sacrifice future prosperity for sins of the corrupt and greedy. 

To offer a viable counter-proposal to the OCC at the next round of negotiations, the Sri Lankan delegation must be prepared with viable policy options that stimulate economic growth in the long-term enabling us to repay the debts and move away from the debt traps. To make that happen Sri Lankan policymakers will have to move away from popular distribution-led policy directives offered to deceive the electorate to growth-led directives for bottom up transformation. 

A May Day promise by the President to increase the daily wage of Workers in Plantations to Rs. 1700 is one such gimmick. This writer fully supports the upliftment of the quality of life of the plantation workers. But that must come as a non-wage benefit as a form of social security measure, without destabilising the plantation industry. There is enough money saved by the plantation workers in their EPF/ETF to be invested in such projects getting a reasonable return to sustain the viability of the fund. Such projects will serve the growth and distribution needs of the country. 

Sri Lanka has been depending too much on the advice from the neo-liberal pundits aiming at realising fake prosperities widening inequality in wealth, income, health, and education. We need to count on organic growth-focused economic policies and directives instead of synthetic short-term policies grappling with deplorable debt.

Facts, issues highlighted in the essay; assumptions made and actions proposed are to stimulate discussion and debate amongst the like-minded. Critics’ comments are welcome to encourage meaningful social dialogues among various stakeholders and policymakers to think of creative and innovative growth led options to overcome the eternal debt crisis.

 

(The writer could be reached via email at [email protected].)