Reform of international development architecture needed: The Paris Club and Dollar Debt Colonialism

As the visiting International Monetary Fund (IMF), team boarded a return flight to Washington DC after a week in Colombo, the Paris Club (PC), stepped in through a revolving door at the strategic Indian Ocean island’s Bandaranaike International Airport in the first week of September. 

The signing of a ‘Staff Level Agreement’ with the deeply unpopular ‘Ranil Rajapakse’ regime accused of Economic Crimes was announced before the IMF team’s departure. However, the contents of the agreement like the IMF’s Debt Sustainability Analysis Report on Sri Lanka remain shrouded in mystery except for news of a $ 2.9 billion loan to be disbursed over four years.

Stepping into Sri Lanka on the heels of the departing IMF team, the Paris Club (PC), issued a statement that it was ready to engage in the country’s (dollar-denominated) Debt Restructuring. This is in the wake of a hastily Staged Default in April this year- for the first time in Sri Lanka’s history- as the Cold War escalated in the Indian Ocean region. 

The PC also echoed the IMF’s admonition that the strategic island nation would need to get all its creditors’, particularly bi-lateral lenders, China and India, and other new Asian development partners’ consent to a debt reduction ‘haircut’ in order receive the $ 2.9 billion loan. 

But what precisely is the Paris Club (PC), that few Sri Lankans have ever heard of and what is its role? The PC is in town to coordinate among the various categories of creditors who hold Sri Lanka Government (GoSL) debt since the IMF claims that “burden sharing” and transparency among Creditors is necessary for any Debt Restructuring. 

However, many civil society groups have called for cancellation of the country’s ‘illegal’ and ‘odious’ debt. They view much of the debt as the outcome of corrupt deals between shadowy Hedge Funds and/or International Sovereign Bond (ISB), traders and corrupt politicians and in some instances bi-lateral lenders, which are passed onto the citizens. 

What is clear despite the murky blame game as to who is responsible for the debt and Default being played via global and local corporate media that craft the narrative, is that the Dollar debt trap has ensured a significant loss of Sri Lanka’s economic and trade policy autonomy, sovereignty and independence for the already impoverished citizens of the country who are expected to pay the international creditors.  

Sri Lanka, like many other countries caught in COVID-19 Lockdown induced debt-traps in the Global South, such as Argentina, Zambia and Lebanon, would like to de-dollarise and import oil at discount rates from Russia, hit by US and EU sanctions. However, it has been unable to do so despite the economically debilitating oil, gas and energy shortage because of its reliance on Western financial and consumer markets to access ‘exorbitantly privileged’ US Dollars. 

It is hence that we may speak of Dollar Debt trap Diplomacy and the re-booting of Colonialism at this time in Sri Lanka, which is being asset stripped ex-ante the IMF and PC debt negotiations as strategic national energy and transport infrastructure is ‘un-bundled’ and privatised with serious consequences for nation energy security. 

Indeed, dollar debt diplomacy via the Washington Consensus (IMF and World Bank) and the Paris Club has ensured that the West has once again made deep inroads in the strategic Indian Ocean island’s economy and trade policy. Sri Lanka at the centre of the Indian Ocean is perpetually in the cross-hairs of big power rivalry.

Debt: A numbers game amid colonial power/knowledge hierarchies

The precise amount of Sri Lanka’s external debt is still in question. While various numbers regarding Sri Lanka’s external, dollar denominated debt have been put forward – ranging from $ 51 billion at the time of the Default in April this year, to the much lower figure of $ 26 billion, debt increasingly appears to be a numbers game depending also on who does the calculation. In any case there has been divergence between the Central Bank of Sri Lanka (CBSL) and the IMF, with the Chief of the CBSL insisting quite rightly that internal rupee denominated debt was not on the table.

The debt numbers game is much like the COVID-19 Case Fatality Rate (CFR) and Infection Fatality Rate (IFR), numbers game that promoted, fear, economically devastating Lockdowns prescribed by the World Health Organisation and expensive mass militarised injection campaigns that benefited Big Pharmaceutical corporations in the past two years.

Debt Stock (by major lenders, $ million) – External Resources Department

Principle among Sri Lanka’s debt wielders are US and EU- based shadowy International Sovereign Bond (ISB) holders who together hold nearly 50% of the strategic island’s debt. Additionally, there are bi-lateral or State parties (India, Japan, China and other governments); and multilateral or inter-governmental organisations like the Asian Development Bank (ADB), IMF and WB that hold GOSL Debt. 

At this time with the Paris Club and Lazard, Clifford and Chance, which was hired by the Ranil Rajapakse regime in Colombo to represent the Government, Sri Lanka’s debt calculation and restructuring appears to be a herculean task, a calculation worthy of rocket scientists, which hence must exclude native and national Sri Lankan accounting firms and legal firms that presumably lack the expertise and perhaps mental capacities to represent themselves and the citizens of the country?! 

Debt numbers have been rendered opaque and unnecessarily complex given the number of Bond holders, Mutual and Vulture funds, bi-lateral and multilateral agencies and interests, internal and external rent-seekers, actors and shadowy off-shore financial networks at play in Sri Lanka. These appear to be fishing in the island’s troubled waters at the centre of the Indian Ocean at this time of Cold War and Colonialism 2.0, as the US dollar is increasingly weaponised against Russia and other local currencies, including the Sri Lankan rupee are rapidly depreciating.

What is clear is that the Paris Club represents the US-and EU based Sovereign Bond (ISB) traders and hedge funds of the rich countries of the Organisation for Economic Cooperation and Development (OECD), that hold the lion’s share – almost 50% --of Sri Lanka’s external debt, as they do with many other post-colonial countries of Asia, Africa and South America.

While BlackRock, which got huge US Government COVID-19 bailout funds in 2020 to asset strip around the world holds the largest chunk of Sri Lanka’s ISB debt, Hamilton Reserve Bank of St. Kitts and Nevis in the Caribbean, an off-shore, tax haven has sued the GoSL for default on payments!

The Colonial Club de Paris vs. new Asian development partners

The PC has been described as ‘a powerful creditors’ cartel of the member states of the Organisation for Economic Corporation and Development (OECD), based in France. Made up of 19 of the world’s richest nations, the Paris Club was formed in 1956 as an informal group of creditor governments to manage their collective debt portfolio. 

Although it is non-official the PC’s recommendations have been till recently systematically followed because it forms a creditor countries’ united front to recover payment of debts. 

On the other hand, each debtor country, whether Argentina or Sri Lanka or Zambia is alone and isolated while the IMF and Paris Club and (selected firms such as Lazard, Clifford and Chance in the case of Sri Lanka), calculate debt restructuring, although a ‘Global Debt Tsunami’, as Professor Jayati Ghosh termed it, due to COVID-19 Lockdowns recommended by the World Health Organisation is on the horizon. 

According to the Committee for the Abolition of Illegitimate Debt (CADTM), the PC has evolved into one of many foreign policy tools that one-time colonial powers, like Britain and France, and neo-colonial powers like the US use to maintain their influence over the resources of developing countries. 

Japan was inducted into the PC operation of what may be termed dollar-denominated debt colonialism and hence has been invited by the Ranil Rajapakse regime that clearly follows instructions from the Washington Consensus to organise a creditors meeting for Sri Lanka.

Debt and colonialism: Voices of the people of the Global South

Colonial power/ knowledge hierarchies are all too evident in the IMF-PC- Lazard debt restructuring operation in Sri Lanka, which is bereft of transparency. Thus, civil society groups seeking the out-right cancellation of Sri Lanka’s illegal and odious ISB Debt, have called for full disclosure of the IMF Debt Sustainability Analysis Report on Sri Lanka, the Lazard Report, and the IMF Staff Level Agreement. They have also called for a moratorium and ban on future borrowing from private markets and Vulture funds like BlackRock.

Simultaneously, these primarily Western OECD countries hegemony and control of international finance and development corporation are being increasingly challenged by former colonies – China, India, Indonesia, Iran, Malaysia, Saudi Arabia, Vietnam not to mention the BRICS, the New Development Bank (NDB), and the Asia Infrastructure Bank (AIIB), working thorough South-South development Corporation frameworks at this time of increased Cold War between the rich West and the rest.  

The new Cold war and Colonialism 2.0 increasingly appears to be also targeting China and Russia and the Global South to stymie processes of de-dollarisation in the context of the Ukraine war and sanctions on Russia, amid geopolitical Block formation as Debt Colonialism is being re-booted in Africa, Asia and South America. India and Russia have already re- commenced Rupee-Rouble trade.

There are growing and renewed calls for reform of the international financial and development corporation architecture long dominated by the West and for debt trapped countries to come together and call for cancellation of illegal and odious debt accumulated by corrupt national politicians and international bond traders and Vulture funds. 

The Euro-American western dominance of the IMF and WB is clear in the fact that while the head of the WB is always a US citizen the head of the IMF is always European, while the rest of the world is excluded from the top leadership of these supposedly global financial institutions.

It is hence that there are increasing calls for debtor countries to soon form their own Club de Sud (Southern Club), to deal with the Paris Club and to negotiate with the creditors in the interest of Debt Justice and Climate Justice for the formally colonised countries of the Africa, Asia and South America – the Global South.

In the context, rather than acquiescence to the demands of the Washington Consensus and Colonial Club de Paris that all creditors sit together, the GoSL and civil society organisations would ideally seek to ensure maximum economic policy autonomy, sovereignty and independence from creditors seeking their pound of flesh from the people of Lanka. 

As such, the interests of the Sri Lanka’s debt trapped citizens may be best served by debt restructuring with bilateral and multilateral creditors, while calling for out-right cancellation of ISB debt, given its odious nature and the lack of transparency regarding the identities of the ISB holders.

Colonialism, corruption and odious debt: IMF and economic crimes

While the IMF team’s announcement prior to its departure from Sri Lanka mentioned ‘corruption’, the IMF did not seem to have any qualms about signing agreements with the Ranil Rajapakse regime in Colombo, headed by a President, famous for Bond scams at the Central Bank (CBSL) in 2015, and elephantine cabinets of corrupt Ministers.

Bond scams contributed significantly to Sri Lanka’s debt trap and staged Default on debt repayments in April this year that resulted in a massive cycle of the Rupee currency depreciation and impoverishment of the people against an increasingly Weaponised US dollar.

The dramatic depreciation that several economists have questioned, also given that Sri Lanka is one of the wealthiest countries of South Asia with high human and social development indicators, ensured deeper dollar debt entrapment of the strategic island as food and fuel supply chains were hacked. Meanwhile, inflation numbers, like debt too, have become a numbers game with manipulation of data, indices and matrices.

What is increasingly clear, however, is that Sri Lanka’s dollar debt trap has already resulted in a loss of economic policy autonomy and sovereignty which has prevented the country de-dollarising and buying oil from US-EU sanction- hit Russia as discount rates in rupees/ rubles conversion, although Sri Lanka’s economic meltdown ex-ante and ex-post the Staged Default in April was due to oil, gas and fuel shortages. 

Of course, the colonial and dependent structure of the island’s economy given excessive dependence for export earnings on Western markets and failure of the business community, political elites and related experts and ‘Economic Hitmen’ to diversify markets and products (like fisheries and minerals), given a colonial mentality also limits national economic and trade policy autonomy and sovereignty which would best serve the interest of the dollar debt trapped citizens of Sri Lanka. 

Colonial dependence in GSP Plus and minus trade concessions amid not so veiled threats about removal by the EU have not enabled a singularly corrupt and incompetent regime in Colombo to serve the interests of citizens through safe-guarding policy autonomy and sovereignty and economic and trade policy independence that benefits the people of Sri Lanka…

Debt-Proofing Lanka

During the IMF visit there were calls from Civil Society groups for Debt Cancellation and Debt Justice, and Debt–proofing, particularly, Moratorium and Ban on government borrowing from private capital markets and ISB traders, which charge predatory interest rates and are primarily responsible for the Debt trap and Default.

But the PC like the IMF was in Colombo to bailout the International Sovereign Bond (ISB) traders ISBs, which hold almost 50 % of the external, dollar denominated debt of Sri Lanka and ensure that the Government may keep borrowing from these Vulture fund bond holders. 

Principle among them is BlackRock which got huge US government COVID-19 bailouts), that had debt trapped on the strategic island in partnership with politicians, some who are US citizens like the former Finance Minister, Basil Rajapaksa, who are accused of ‘Economic Crimes’. 

Finally, this same Western development industry which about twenty years ago was under scrutiny with calls for Reform maybe increasingly under threat as new development donors such as India and China have emerged from the post/colony in the Global South to challenge the financial hegemony and neoliberal Development model of the OECD countries, principally the BRICS countries, the New Development Bank and increasingly represent an alternative international aid infrastructure in the making.

As the new Asian development partners challenge the Euro-American, dollar dominated global financial architecture, the question is will Sri Lankans be hostage to geopolitical power plays? China and India, which are bilateral lenders (government to government), and State parties have signalled that they would restructure Sri Lanka’s debt bi-laterally and not with the PC and IMF process. This of course, puts Sri Lanka in an awkward position with Sri Lankan citizens again rendered guinea pigs of geopolitical power plays, trapped in shadowy local-global networks of financial corruption.

Civil society groups meanwhile are calling are also calling for full disclosure and the right to information-- including the IMF Debt Sustainability Analysis Report on Sri Lanka, the Lazard, Clifford and Chance Reports and the IMF Staff Level Agreement- especially as the bill for these expert Reports are also piled onto the debt-trapped citizens of Lanka.

To be continued.

https://www.cadtm.org/At-50-is-the-Paris-Club-a-colonial