IMF must become more than just a debt collector for private creditors

 Private creditors, such as the world’s largest asset manager Blackrock, must face the consequences of the risks they took

• People must protect themselves from poor local governance and the imperfect global economic order

The Annual Meeting of the Boards of Governors of the International Monetary Fund (IMF) and the World Bank Group (WBG) in Washington DC this October, will discuss issues of global concern. Debt justice should be at the top of their agenda.

Sri Lanka and many other nations classified as lower-middle-income countries by the WBG are not developing, and the financial tools that are being provided to help them develop and reform prove to be unsuitable. These countries are falling behind on a range of socio economic indicators and cannot repay debt. In Sri Lanka’s case the causes are both internal and external.

There is world-wide consensus on internal causes, that poor governance, high corruption and economic mismanagement contributes to Sri Lanka’s external debt crisis. The lack of comprehensive and wide-scale political reforms perpetuates these problems.

External causes of Sri Lanka’s sovereign debt crisis

IMF and the WBG, global multilateral institutions, are cornerstones of the financial system designed at the end of the Second World War. They facilitate global economic corporation and protect the interests of wealthy nations. The cataclysmic inequality that defines our planet is intrinsic to systemic factors. Exploitation and debt crises are its inevitable by-product. Debt is a tool of control within the system. The system isn’t broken. It is designed to function like that. 

These imperfections of the global economic order exacerbate Sri Lanka’s debt crisis. 

The existing system is geared to ensure as many poor countries borrow money from commercial money markets, an idea that has been ‘legitimised’ through financialisation of the global economy. Half of Sri Lanka’s sovereign debts are to private creditors.

Multilateral institutions are in principle important organisations, but only if they are mandated to secure global economic stability whilst improving the wellbeing of all people and the planet. Without agreement for this vision by all donor nations, particularly the USA that creates the global reserve currency, the necessary funding and policies have never materialised.

The continued underfunding of multilateral institutions is a political choice by developed countries and not borne of economic necessity. Since the global financial crisis of 2008, there was a huge infusion of liquidity into the international commercial money markets at near zero interest rates. None of these funds found its way into multilateral institutions in the required scale. This has contributed to the global sovereign debt crisis faced by nearly 53 poor countries today. These nations borrowed and tied themselves into a debt trap, because borrowing from private creditors had become ‘legitimised’.

Both the IMF and WBG have recognised the economic, fiscal and environmental crises the global economy now faces. But missing from their analysis is that the current conditionalities they impose contribute to the crisis of growing poverty and hunger of developing nations.

Worryingly, there seems to be an unquestioning agreement among people with political and economic influence in Sri Lanka that the IMF, in its current guise, can provide a sustainable solution to the nation’s debt crisis despite the 16 previously failed attempts. It cannot, without reform.

Were multilateral institutions asleep on their watch?

Private investors seeking high yields switched their funds on mass to emerging markets during a decade of low interest rates in the western world. To many seasoned observers, the imminent sovereign debt crisis was clear to see. The emergence of the pandemic and trade sanctions against Russia accelerated the crisis to the critical levels they are today.

Sovereign debt restructuring negotiations are complex, and requires the participation of all multilateral institutions, bilateral lenders and private creditors to agree on a solution.

Sovereign debt is the only category of debt without a bankruptcy mechanism and the international community has relied on the contractual approach to prevent and resolve sovereign debt problems. Despite known difficulties in voluntarily engaging private creditors in debt restructuring negotiations, multilateral organisations failed to facilitate effective solutions and legislative changes that would force private creditors to participate.

Public policy has been designed by special financial interests and the political will to make the necessary legal reforms is absent in the USA and UK, countries under whose laws most sovereign bonds are governed. The courts in these locations are often less favourable to sovereign governments.

Yet, the IMF encouraged countries of the developing world to issue International Sovereign Bonds without the necessary safeguards or adequate transparency in the global financial system.

Sri Lanka was able to reach a preliminary agreement with the IMF for a 48-month Extended Fund Facility of $ 2.9 billion. The loan is intended to restore macroeconomic stability and debt sustainability, to unlock the growth potential in the economy. Given the scale of the nation’s overall economic crisis, this is an insignificant sum to set the country on a sustainable recovery path. Unfortunately, the IMF appears to be acting only as a debt collector or de-risking agent to encourage private creditors to join the restructuring negotiations.

With such high levels of borrowing from private creditors, Sri Lanka should look after its national interests by calling out unfair rules that are stacked against them.

Private creditors must bear the consequences of their risky lending practices

Private creditors are unfairly benefiting from both high yields and high protection at the expense of the Sri Lankan people.

There is insufficient transparency for private creditor loans. They fail to show which specific projects are funded or whether these projects would generate a recurring income to pay back their interest and capital. Their intentions of aggressive profiteering were clearly demonstrated by repeatedly failing to engage in the debt restructuring programs of other debtor nations.

Private creditors, such as the world’s largest asset manager Blackrock, must face the consequences of the risks they took. The risks were clear for all to see.

Following Sri Lanka’s historic bond scam of 2015, shockwaves were sent through the government treasuries market and $ 3.4 billion of government securities held by foreigners were divested away from Sri Lanka. Government ISBs were issued to rebuild foreign reserves. Private creditors seeking high returns purchased them despite the surrounding risky landscape.

The lack of robust fiscal management by the Sri Lankan Government was also well-known. Tax intake was dangerously low and the scale of political corruption was unacceptably high.

Responsible borrowing is equally important as responsible lending. Conducing inadequate due diligence on the credit-worthiness of the borrower is both irresponsible and risky. Now that these risks have materialised private creditors should bear the losses.

The people of Sri Lanka cannot be held responsible for the repayment of any odious debts. The debts owed to private creditors should therefore be cancelled.

Mitigating risks posed by the imperfect global economic system

Like all developing countries operating within an imperfect global financial system, Sri Lanka needs access to foreign credit facilities to purchase essential goods and services that cannot be produced locally. But the country can face harmful long-term economic, social and environmental consequences by blindly engaging in this system without taking any mitigating steps to reduce risk. For example, these could be considered:

Critically reviewing IMF Debt Sustainability Analysis framework: As a sovereign country Sri Lanka should have a Debt Sustainability plan of its own, open to public scrutiny, that focusses on the wellbeing of its people and environment. Because the IMF does not share their methodology used for its own DSA, this is a means by which Sri Lanka can then ensure the IMF-DSA considers the country’s priorities.

Collaborating with G77 for the redistribution of $ 650 billion new special drawing rights (SDR): Sri Lanka should collaborate with the G77, a loose alliance of developing nations, to promote a common development agenda, including accessing allocations lying in the accounts of developed countries that could be used as a short-term facility for Sri Lanka.

Reclassifying as a lower income country: Sri Lanka with an annual per capita income of just $ 3,800, is now rated as a lower-middle income country, a rating that excludes it from accessing multilateral loans. Due to the scale of economic hardships endured by its people, Sri Lanka should be calling to be re-classified as a low-income country, and away from commercial money markets.

Gaining larger concessional financing: Sri Lanka should be given emergency funding similar to the one granted to Ukraine. Borrowing from appropriately funded multilateral institutions are most favourable due to low interest rates and longer payment periods. Bilateral loans are less favourable because lender governments may have geopolitical ambitions that can harm sovereignty. It is vitally important for Sri Lanka to have a genuinely non-aligned position in the geopolitical battles between larger nations to obtain support from as many countries as possible.

Restructuring multilateral and bilateral debt: Call on the IMF to lead the debt restructuring negotiations by prioritising the needs of local people and the environment.

Cancelling private creditor debt: Call for a large haircut to private creditor debts or declare these odious debts null and void. Borrowing from commercial money markets (holding International Sovereign Bonds), should always be avoided. By their nature, these opaque loans are open to corruption both on lender and borrower sides. With inadequate visibility of final beneficiaries of ISB’s it is not possible to assess whether politically connected persons in Sri Lanka benefit from these loans.

Requesting bankruptcy mechanism for sovereign governments and a debt relief initiate: Encourage India, the next chair of the G20, a strategic multilateral platform connecting the world’s major developed and emerging economies, to call for a formal bankruptcy mechanism for sovereign governments.

Campaigning for legislative reforms for sovereign debt agreements with private creditors: Make it compulsory for uncooperative private creditors to participate in debt restructuring negotiations.

Sri Lanka has enough human capital and natural resources that can be fully harnessed to embark on a sustainable recovery path that’s underpinned by entrepreneurship, social justice and ecological conservation. The IMF should support a sustainable solution to Sri Lanka’s external debt crisis proposed by a legitimate government which has the mandate of the people. Fundamental to all this are the comprehensive and wide-scale local political reforms needed to establish honest politics, good governance, and economic competence. The door to a better, sustainable future can be opened. The key to it is firmly in the hands of ordinary voters of Sri Lanka.

(The writer is a former Local Councillor for London Borough of Enfield in the United Kingdom representing the Green Party and a member of the Sri Lankan diaspora.)