Domestic Debt Restructuring

Serious questions about how the IMF’s programme in Sri Lanka would affect the country’s common people, particularly the most marginalized and vulnerable communities, have been raised. The initiative was taken in collaboration with President Ranil Wickremesinghe’s administration, which had legitimacy issues. The people of Sri Lanka have experienced severe suffering due to the economic and social measures implemented as part of this programme and were motivated by IMF mandates.

The demise of social security policies is one of this programme’s most alarming features. Concern has been raised over the plan to submit Sri Lanka’s Employees Provident Fund (EPF) and Employees Trust Fund (ETF), which comprise most of working people’s savings, to domestic debt restructuring. These funds are a critical lifeline for many, and subjecting them to such restructuring could jeopardize the financial security of countless individuals.

Although Sri Lanka’s external debt requires immediate attention, the government has been concentrating on internal debt restructuring. This strategy aims to persuade overseas private creditors that they are receiving the same treatment as domestic creditors. However, this tactic might negatively impact Sri Lankan employees’ social security, who are currently dealing with the wide-ranging effects of the COVID-19 pandemic.

The recent bailout agreement between the International Monetary Fund (IMF) and President Ranil Wickremesinghe’s government has sparked renewed public discontent in Sri Lanka. The deal, aimed at addressing the country’s ongoing balance-of-payments crisis, provides less than $3 billion over four years, which is significantly less than what Sri Lanka needs to meet its debt obligations and amounts to just one-sixth of its foreign-exchange earnings in 2022, approximately $18 billion.

In exchange for this emergency loan, the IMF imposed conditions that have worsened Sri Lanka’s wage and cost-of-living challenges. The shift to market exchange rates, in particular, caused rapid currency devaluation, leading to soaring prices for imported fuel and food. As a result, electricity tariffs increased by a staggering 165% between June 2022 and February 2023.

These fiscal constraints have taken a toll on the economy, with GDP contracting by 7.8% in 2022 and a further 11.5% decline in the first quarter of 2023. This has had detrimental effects on employment, people’s livelihoods, and the sustainability of small and medium-sized businesses. Consequently, real wages saw a significant drop of 30-50% in 2022 and have remained stagnant. Despite claims of addressing corruption and illicit financial flows, the IMF’s plan falls short of effectively tackling these issues.

While there is a minor increase in corporate income taxes, the plan neglects the possibility of implementing wealth taxes. Moreover, the focus on regressive measures, such as nearly doubling the value-added tax to 15%, means that most of the additional revenues will come from indirect taxes that disproportionately burden ordinary citizens.

Since private creditors own a sizable amount of Sri Lanka’s international debt, the government contends that DDR is necessary for external debt restructuring. They assert that to participate in the debt restructuring, private creditors requested equal treatment and a 30% decrease in their claims. But it’s important to understand that comparing debt in dollars and rupees is difficult. Debt issued in dollars often has higher yields and more considerable dangers, whereas debt denominated in rupees has lower rates and less risk. However, it appears that foreign private bondholders, whom the IMF and the World Bank support, have transferred the risks of their loan to the Sri Lankan people while still collecting the benefits for themselves.

The IMF has overlooked the concerns of the Sri Lankan people and said that there is “people’s buy-in” for the economic reform package in spite of opposition to these measures, particularly worries about the depletion of pension funds. Due to this, there has been an increase in social breakdown, an increase in malnutrition rates, a negative influence on children’s health, a lack of access to essential services like power and water in many families, an increase in school dropouts, an increase in the number of homeless people, and an increase in drug use. As Sri Lanka grows more and more uninhabitable, the mental health problem is also escalating frighteningly, leading to a significant exodus of educated people fleeing the nation.

The working class and poor of Sri Lanka are pretty angry and frustrated with the IMF’s policy there. Due to the severe economic and social effects, many residents are coping with worsening living circumstances and financial challenges. While debt restructuring may be required, such actions must consider the welfare of the most vulnerable groups and make sure they are not unfairly burdened by their effects. To discover just answers to Sri Lanka’s intricate economic problems, governments, foreign organizations, and civil society must engage in open and inclusive discourse.