Home » Debt restructuring, austerity and the IMF: a panacea or an exacerbation? Part 5

Debt restructuring, austerity and the IMF: a panacea or an exacerbation? Part 5


Link to part 4

Dr. Lionel Bopage

The IMF program in Lanka and its implications

The IMF agreement with Sri Lanka emphasises fiscal consolidation, which requires the government to achieve a budget surplus within two years. It also conditions its funding on increases in energy tariffs and flexible exchange rates that will likely lead to currency devaluation and higher interest rates. In addition, the program projects unrealistically high revenues without imposing wealth taxes or restricting illicit financial flows.

Loan conditionality and austerity measures are regressive in nature and have a disproportionate impact on the most vulnerable members of society, and Sri Lanka is no exception. For example, the elimination of fuel subsidies will make transport for people in remote areas more costly, thereby reducing access to the services they receive. Similarly, increases in electricity tariffs will lead to higher healthcare costs, forcing those less well off to the Hobbesian choice between food, electricity, medicine and education for their children.

A better public sector

The rationale for a government to provide some services to the public is that profit-making or profit-maximising will not deliver those services to all who need them at an affordable price. A fundamental difference between a government and a business is that a government’s goods and services will be available to everyone who should get them. The wellbeing of an economy depends on certain resources being available to everyone who requires those resources in the population, irrespective of one’s ability to pay.

The efficiency of a government enterprise should not be assessed by whether it makes profits or not. For example, a public utility provider such as one delivering electricity, water or public transport can increase profits by raising the price of the good or service it delivers. But the result is that some people, usually the low-income consumers, will be deprived of their necessities.

Slashing the public service and making government smaller have been a repetitive mantra sold as a political panacea for addressing many economic challenges. In practice the results have been disastrous in numerous cases around the world. For example, in Australia, after several rounds of slashing the Federal Public Service and an increasing dependence on unaccountable, expensive private consultancies, the government has recently been forced (much to its ideological chagrin) to take tentative steps to reversing that trend. The reason is that instead of providing better services at lower cost, privatisation of public services often delivers massive profits for rich corporates while increasing overall costs to the government, providing lower quality-higher cost services to the public, and fostering political corruption.

It is true that the public sector often fails to meet basic service standards. What is needed then is to improve the quality of the services and the efficiency with which those services are delivered by undertaking investments in the sector that are needed to increase the  skills, understanding, and capacity for providing such services to the population.

Austerity and inequality

Austerity as demanded by the likes of the IMF will disadvantage the poor consumers, who already pay a large and unsustainable amount of their household income towards essential items, even further. The Governor of the Central Bank has rejected the assertion that almost the entire burden of debt restructuring will be borne by the working class. He states that it is a misrepresentation of reality[i]. However, the government is pushing ahead with the offensive by taking measures such as privatising public assets and targeting superannuation funds of working people. A hand-in-glove approach is used to provide more and more relief to the corporate sector, such as debt reprieves, tax holidays, and flexible labour laws. Finally, the government and IMF supported by their media outlets and think tanks have launched a ruthless assault on any alternative financial and fiscal routes.

There are alternatives which the next section explores, and which are being sidelined by supporters of the IMF package.

A non-austere path to addressing the crisis

As the Italian theoretician Antonio Gramsci remarked in the early part of the 20th century, when Italy was enduring one of its periodic economic and industrial crises:

The crisis creates situations which are dangerous in the short run, since the various strata of the population are not all capable of orienting themselves equally swiftly, or of reorganizing with the same rhythm. The traditional ruling class, which has numerous trained cadres, changes men and programmes and, with greater speed than is achieved by subordinate classes, reabsorbs the control that was slipping from its grasp. Perhaps it may make sacrifices and expose itself to an uncertain future by demagogic promises; but it retains power, reinforces it for the time being, and uses it to crush its adversary and disperse his leading cadres, who cannot be very numerous or highly trained.[ii]

IMF reforms focus on deregulating the economy and privatising resources available in the economy. For example, Sri Lanka has never been asked to industrialise by utilising its own natural resources. So, the country became dependent on exporting commodities of which prices vary, depending on global supply and demand based on the vagaries of the corporate world.

Securing vital sectors of economy

The sectors of the economy vital to Sri Lanka and its people are not secure. Like many developing countries have done, Sri Lanka has also bypassed strengthening of its manufacturing base. Instead, all those countries including Sri Lanka are relying on service sectors, built on a foundation of an unstable, vulnerable and manipulated economy based on speculation.

For example, almost all neo-liberal countries have secured food and energy sufficiency, while Sri Lanka is still overly dependent on food and energy imports[iii]. Ignoring the fact that Lanka can easily become self-reliant and secure in terms of food, energy and water has led to an ever-increasing foreign exchange deficit problem, forcing the country to borrow foreign exchange with no end in sight.

Developing countries like Sri Lanka are in structural dependency due to their external debt. Of course, almost all countries in the world carry some form of debt. However, the cost of borrowing depends on how economically advanced the country is. Developed countries can borrow at a much lower interest rate, as such loans are classified as “low” risk.

International experience with austerity

There is no historical evidence that austerity measures have worked in getting countries out of a debt crisis. Examples over many decades and spanning from Greece to Indonesia to Egypt and Tunisia show that austerity does not work. Reducing the fiscal deficit and servicing debt by squeezing the public sector have made the economic recession and crisis more severe by exacerbating inequalities. The need to have austerity measures in place has nothing to do with fixing a country’s long-term structural issues but ensures that its debt repayments will be prioritised to pay back international lenders and institutions.

Instead of repeatedly relying on measures that do not work and penalise the majority of the country’s citizenry, other financial steps ought to be put in place in indebted countries like Sri Lanka. Sri Lanka needs to assure the fiscal responsibility of the government by enforcing the laws against corruption, mismanagement, and wastage. In a country like Lanka, the ruling elite and its dependents eschew such fiscal responsibility by violating all transparency and accountability provisions. The country needs to find a fair economic pathway to live within its means. One way forward for this could be the electorate to hold politicians to account during election campaigns, by demanding them to provide concrete funding plans for their campaign promises in their election manifestos.

Fiscal transparency and accountability

The country needs to develop an Integrated Financial Management System (IFMS), so as to ensure each and every public transaction is fully captured allowing auditing agencies to trace back if and when necessary. At the moment, nobody knows what happens with the finances the government receives from lending institutions. This opaqueness has paved the way for many opportunities for collusion, corruption and money laundering. Limits should be placed on the government’s overall borrowing from domestic and international capital markets. Another significant measure the government can take is to reduce public expenditure. This will include cutting down the size of the government, in particular the large and untenable security apparatus.

The government needs to be transparent in its dealings with the IMF. All information between the IMF and the government needs to be fully disclosed to the populace, particularly the indebtedness of all state and semi-state agencies. Any measure that is implemented needs to be subjected to broader consultation within a wide national stakeholder forum on the economy. This should include all key representative groups including business and political entities, civil society, and trade unions, among others. Such consultative forums will generate valuable and innovative ideas for economic reforms. In turn, any reforms proposed would thereby enjoy better societal support.

To be continued

22 August 2023

[i] Discourse on Development (Devdiscourse) 7 July 2023, https://www.devdiscourse.com/article/headlines/2515211-sri-lanka-central-bank-governor-dismisses-concerns-over-projected-losses-for-epf-due-to-domestic-debt-restructuring

[ii] Antonio Gramsci, ‘State and Civil Society’, in Quintin Hoare and Geoffrey Nowell Smith, eds., Selections from the Prison Notebooks of Antonio Gramsci, Lawrence & Wishart, London, 1971, pp. 210-11.

[iii] For example, the Australia is demanding the European Union to offer significantly more generous concessions to Australian agricultural producers in order to ink a free trade agreement between like-minded partners at a time of mounting geopolitical uncertainty. Refer Australian Financial Review, 9 June 2023, https://www.afr.com/policy/economy/trade-deal-unlikely-unless-eu-lets-in-australian-farmers-20230709-p5dmv7

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