Deflationary Policies for Debt Repayment Ahilan Kadirgamar

The World Bank and the IMF Spring meetings begin this week in Washington. And with the worst sovereign debt crisis in decades, the pronouncements at these meetings will be monitored closely by many for the relief that debt-distressed countries in the Global South can expect. However, regardless of what is discussed and announced, the policies of the World Bank and the IMF will continue to safeguard the interests of global finance capital to the detriment of the social and economic lives of the people affected by the debt crisis.

It was exactly two years ago and just days ahead of the annual meetings in Washington that Sri Lanka defaulted on its external debt. At the time, the Ministry of Finance announced its intention to pursue debt restructuring “consistent with an economic adjustment programme supported by the IMF.” The IMF programme itself was not approved until a year later in March 2023. Meanwhile, debt restructuring with Sri Lanka’s bilateral and commercial creditors is yet to be completed. Nevertheless, according to the Director General of the Presidential Secretariat, Sri Lanka has repaid the debt owed to the Asian Development Bank, World Bank, IMF and other multilateral creditors, amounting to a total of USD 1.4 billion since July 2022.

How is it possible for Sri Lanka to repay such debt in the interim, and where is Sri Lanka’s economy headed on this path of debt restructuring? I address below the dangerous deflationary policies imposed by the World Bank and IMF, to ensure that Sri Lanka can repay its creditors and resume commercial borrowing from the global financial markets – the main culprit of the debt crisis in the future.

World Bank Update

Of course, the World Bank and the IMF are not unaware of the economic devastation caused by their policies. But even as the heads of their institutions sound alarm bells for the global economy and call for stimulus as a response in Washington, double standards in policies applied to developing countries result in more austerity. Worse, even as the reports by International Financial Institutions (IFIs) on Sri Lanka elucidate the dynamics of economic contraction, they nevertheless push for policies that compound the same terrible economic trajectory.

The World Bank’s Sri Lanka Development Update launched earlier this month describes the worrying situation for working people in the country:
“Worsening labour market trends continue to pose further risks to household welfare. The closure of businesses, especially micro, small and medium enterprises, contributed to a contraction in Labour Force Participation (LFP) to 49.8 percent in 2022 from 52.3 percent in 2019 … the LFP rate in urban areas continues to worsen (45.2 percent in Q3 2023), and total LFP remains below pre-pandemic levels. … Furthermore, 45.8 percent of employed individuals experienced a pay/allowance cut or income loss, 48 percent experienced a reduction in working hours, and 47.3 percent experienced a work break or temporary absence since March 2022. Approximately 60 percent of all households also reported a reduction in income. … Almost three-fourths of households have limited their expenditure or changed their diets in response to higher living costs.”

Even those who are employed in Government jobs are hit hard. The only Government expenditure in nominal rupees that declined between 2022 and 2023 was its salaries and wages bill by 2.4%. This is while Government expenditure as a whole increased by 38.5% with inflation during that period. The World Bank also notes that cement consumption in Sri Lanka has dropped below half of what it was five years ago as construction projects including those by the Government have been brought to a halt. That means all those people who depend on building wage labour have lost more than half their work.

There is other data that one can mention here. The Petroleum Dealers’ Association claims diesel and petrol consumption in 2024 has dropped by 35% to 45% compared to pre-pandemic levels. Almost one million households in the country, or a fifth of the population, have been disconnected from the electricity grid over the last two years. These indicators reflect the consequences of severe austerity measures such as the major interest rate hikes, market pricing of energy, and cuts to state subsidies. Indeed, such austerity policies constitute the pillars of the World Bank and IMF recovery path set for Sri Lanka.

Accumulation by Dispossession

The hawkish attitude of the World Bank and the IMF towards inflation and deficit spending contains its own logic. The Central Bank’s policy rate of 16.5% last year and targets of primary budget surplus drastically reducing government expenditure have culminated in the Sri Lankan rupee appreciating against the US dollar by 7.8% during the first quarter of 2024. These deflationary policies have resulted in year-on-year inflation in March collapsing to 0.9% and the Colombo Consumer Price Index declining by 1.9% in March from February. Austerity measures have repressed the wages and purchasing capacity of working people leading to prices falling. As a result, there is far less effective demand to incentivize local production. In other words, Sri Lanka’s economy is in free fall.

These deflationary dynamics, however, serve the interests of external creditors and global finance capital more broadly. The Central Bank has been purchasing US dollars to increase foreign reserves, which in and of itself is not bad for the country. But the question is, towards what end?

The USD 1.4 billion in debt repayment of multilateral debt over the last twenty months is a case in point, with dollars spent on debt servicing rather than stimulus for local production thus reducing the import bill. The logic of paying off debt increases the confidence of global financiers while ignoring development objectives. In this context, speculative foreign inflows into the Colombo Stock Exchange are turning around. In February 2024, they reached USD 42 million, reaching levels just before the economic crisis two years earlier. But from experience we know that such finance capital can just as easily fly out.

The World Bank Update states: “A sufficiently deep debt restructuring is needed to restore Sri Lanka’s debt sustainability and regain access to international financial markets.” Indeed, countries like Sri Lanka need a major reduction in their debt stock and even debt cancellation. But the question is whether it is towards reintegration with the international financial markets or the growth and welfare of Sri Lanka’s economy and its people. Despite the lip service of the World Bank and IMF towards debt restructuring, the reality is one of minimal debt reduction. Meanwhile, much of the burden of this adjustment is placed on the working people.

This trajectory is not only reflected in the near-term adjustment of the economy. The World Bank’s longer-term policies for Sri Lanka betray an even more cynical agenda. While labour force participation is declining across the board because of the economic crisis, the recent situation of urban labour relative to rural labour reflects working people’s initiatives towards survival and stability through a focus on the rural economy and food production. However, the World Bank’s well-funded agricultural modernization policies call for uprooting rural folk off their land. The World Bank claims that displaced cultivators can find work in the urban sectors, with such land handed over to more productive agribusinesses. Meanwhile, there are no jobs in the urban sectors and the agribusiness enterprises may not even take up production depending on the whims of global agricultural markets. In this way, such policies in the long run will only compound the effects of Sri Lanka’s economic depression.

The deflationary policies of the World Bank and IMF serve the accumulation of global financial capital through integration with international markets. And for that, they are even turning to raid the rural economy. These deflationary policies only serve to deepen the logic of neoliberalism at the heart of the global debt crisis. Lessons about deflation and the tremendous suffering of the Great Depression of the 1930s are disregarded when they believe the crisis is limited to a few small countries. What is at stake for the working people of Sri Lanka is their livelihoods, food, and indeed the very survival of their next generation.

(This article was originally published in The Daily Mirror on April 16, 2024)