May 16, 2022 3:55 p.m
Sri Lanka is grappling with an unprecedented economic crisis. Due to a shortage of foreign exchange and a failure to repay its foreign debt, the country is unable to pay for food, fuel, medicines and other basic needs. Despite the sacrifices involved, the rescue operation by the International Monetary Fund (IMF) was accepted as the only way out of the predicament.
Opposition parties and citizens accuse the Rajapaksa government of widespread corruption and mismanagement of the crisis and are calling for the resignation of the president and parliament. Prime Minister Mahinda Rajapaksa left his post on May 9 (President Gotabaya Rajapaksa appointed former Prime Minister Ranil Wickramasinghe in his place). Protesters have failed to propose a viable alternative or roadmap for the future, and the country remains mired in confusion, chaos and a potentially explosive political impasse.
To understand the complexities of the current crisis and not fall back into the same crippling debt cycle, it is necessary to go beyond domestic politics and examine some commonly overlooked but fundamental global economic and geopolitical issues.
Debt Crisis and Global Inequality
The transfer of money and resources from the poor countries of the South to the rich countries of the North is not a new phenomenon. It has been a constant feature through the centuries of classical colonialism and neo-colonialism. As of early 1989, developing countries owed foreign creditors $1.3 trillion, equivalent to “just over half of their total gross domestic product and two-thirds of their total export earnings.”
More recently, the impact of the war in Ukraine and the Covid-19 crisis have exacerbated the high debt burden of developing countries. These countries were already struggling to service their accumulated debt due to the increase in capital flows from high-income to low-income countries after the 2008 global financial crisis.
Financial liberalization was backed by powerful global interests, including those of the IMF, as interest rates fell in richer countries. This has made it easier for developing countries to borrow from international private capital markets through international government bonds with high interest rates and short maturities. Financial liberalization favored by the IMF and rich countries working with elites in poor countries has created a hierarchical and asymmetrical international financial architecture.
The downgrading of Sri Lanka by credit rating agencies has increased the difficulty of further borrowing to repay the debt
As a December 2021 report published by the Bretton Woods Project points out, this unfair picture creates “macroeconomic imbalances, financial fragility and exchange rate instability that can trigger debt and/or currency crises and limit the autonomy of affected countries over economic policy issues and internal goals”. The NGO Debt Jubilee Campaign (soon to be called Debt Justice) pointed out that 54 countries are going through a debt crisis.
According to the World Bank, Sri Lanka has US$15 billion in bonded debt, mostly dollar-indexed, out of US$45 billion to US$50 billion in long-term debt. The country needs between $7 billion and $8.6 billion to cover its debt burden in 2022, but it had just $1.6 billion in reserves at the end of March.
The downgrade of Sri Lanka by rating agencies such as Moody’s has increased the difficulty of obtaining additional credit to repay the debt. The devaluation of the Sri Lankan rupee, which has lost 32 percent of its value since the beginning of the year, has made it the world’s worst-performing currency, according to economists, exacerbating the situation for the people of Sri Lanka.
The Asian Development Bank and the World Bank hold 13 and 9 percent of Sri Lanka’s external debt respectively. China is currently the country’s largest bilateral lender, holding around 10 percent of its total external debt, followed by Japan with a similar share. About half of Sri Lanka’s total external debt consists of market borrowings, which are raised through government bonds denominated in dollars or euros, mainly issued by investment firms BlackRock and Ashmore Group, along with Fidelity, T Rowe Price and Tiaa, which are among the main creditors of the country. However, information on the holders of the bonds – including one worth $1 billion that expires on July 25 – will not be released publicly.
Sri Lanka is in talks with the IMF to restructure and repay its huge debt. The deal will involve standard privatizations, cuts in social security nets, and alignment of local economic policies with the interests of the United States and other Western countries, which will come at the expense of local workers’ living standards and will inevitably lead to greater prosperity, inequality, and repeated debt crises.
geopolitical rivalry
Economic crises create opportunities for foreign powers to increase economic exploitation and geopolitical control. In the Sri Lankan context, these powers are India, the United States and China.
Sri Lanka’s big neighbor India has extended a $1 billion credit line to Colombo to provide essential food and medicines. The Sri Lankan government has stated that Indian loans are unconditional. However, deals have been struck giving Indian companies exclusive access to invest in the island, according to local analysts.
Sri Lanka is strategically located on the Indian Ocean sea routes. It is estimated that more than 80 percent of the world’s seaborne oil trade passes through the bottlenecks of this part of the sea. Although strangely overlooked by the world media, a cold war is already underway between China and the Quad (the strategic alliance between the United States, Japan, Australia and India) for control of Sri Lanka and the Indian Ocean.
If land and ocean, graphite, ilmenite and other mineral resources were used sustainably, Sri Lanka could be economically self-sufficient and prosperous.
Sri Lanka is part of China’s $1 trillion Belt and Road Initiative (or New Silk Road), which includes the Port of Hambantota. The United States, on the other hand, signed an Open Acquisition and Cross-Service Agreement (ACSA) with Sri Lanka in 2017, facilitating military logistical support. Washington is also attempting to sign a military statute agreement (Sofa) that would effectively turn the Southeast Asian country into a US military base. Although the US proposal for a Millennium Challenge Corporation Compact (an agreement Washington has so far made with 49 developing countries to alleviate poverty) was rejected due to local protests, the goal of the agreement – US control over land, Transport and communications infrastructure – rejected in Sri Lanka – act boldly.
In this context, where Sri Lanka is the scene of geopolitical tensions and rivalries, the debt crisis cannot be understood simply as an economic crisis.
Alternative and sustainable solutions
The young protesters of the “Gotta go home!” movement, who are calling for the resignation of President Gotabaya Rajapaksa, seem unaware of the global dynamics at the heart of their country’s crisis. However, some in Sri Lanka are concerned about the impact of an IMF bailout and have proposed alternative short- and long-term solutions based on the island’s abundance of natural resources and human capital.
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If land and ocean, graphite, ilmenite and other mineral resources were used sustainably, Sri Lanka could become economically self-sufficient and prosperous. In this regard, there is much to be learned from Sri Lanka’s pre-colonial history, not least its hydraulic civilization. The Public Accounts Commission has announced that there are enough oil and natural gas fields in the Mannar Basin to meet the needs of the entire country for sixty years. By harnessing the abundant solar and wind energy, Sri Lanka could become not only energy self-sufficient but also an energy exporter.
Territorial ethics, economic democracy and food and energy sovereignty are the only path to a sustainable future for Sri Lanka, for other countries choked by debt and, to be honest, for the world in general. Overcoming the forces that seek to monopolize control of the natural environment and humanity requires that young people in particular wake up and work together to combat the destructive greed that binds us and threatens to destroy us .
(Translation by Federico Ferrone)
This article was published by Asia Times. Internazionale has a weekly newsletter chronicling what’s going on in Asia. Login here.