A Staged Default & Sovereign Bond Debt Trap? IMF’s Spring Meetings Amid Hybrid Cold War

By Darini Rajasingham-Senanayake –APRIL 27, 2022

Dr. Darini Rajasingham-Senanayake

In Cherry Blossom lined Washington DC last week Sri Lanka became the poster child of the International Monetary Fund’s (IMF), Spring Meetings in the glare of global media last week. The strategic Indian Ocean island’s pathetic plight featured on major media and television channels that craft the global narrative, with images of people in queues amid food, fuel, and medicine shortages due to its crashing currency, soaring cost of living and ‘Arab Spring’ style protests.

One of the wealthier nations in the South Asia region and listed as by the World Bank in 2019 as an Upper Middle Income County (MIC), Sri Lanka with a population of 22 billion people had just defaulted on her debt payments– for the first time in the country’s history. Global media imaging of the scenic island nation’s financial crisis served to affirm the relevance of the Washington Consensus and the Fund albeit as the “lender of last resorts.

The timing of the Sri Lanka rupee’s crash against the “exorbitantly privileged” US dollar was as miraculous as the Easter Sunday hybrid war attacks in the tourism-dependent island that targeted Chinese-owned Shangri La and other luxury hotels, which were mysteriously claimed by Islamic State (ISIS) in 2019.

Meanwhile, Oxfam released the “Inequality Kills” Report and called on the IMF to “abandon demands for austerity as a cost-of-living crisis drives up hunger and poverty worldwide”. Its spokesperson noted that “87 percent of the International Monetary Fund’s (IMF) COVID-19 loans require developing countries facing some of the world’s worst humanitarian crises to adopt tough, new austerity measures that will further exacerbate poverty and inequality.

The organization noted that “the wealth of the world’s 10 richest men doubled since the pandemic began while the incomes of 99% of humanity are worse off because of COVID-19”. 263 million people could be pushed into extreme poverty in 2022, due to the combined impact of COVID-19, inequality and food and energy price inflation – accelerated by the war in Ukraine.”

Sri Lanka’s total debt is USD 51 billion and the country must pay USD 7 billion this year to International Sovereign Bond (ISB) traders based in New York as noted by Senior Economist and Head of the Institute for Policy Studies (IPS), Dr. Dushni Weerakoon.

For a comparative perspective, Elon Musk offered to buy Twitter for USD 43 billion, in the same week! The greatest transfer of wealth in human history transpired over the past two years while much of the world was in Covid-19 lockdowns and global trade disrupted, also resulting in speculation in commodities futures, which were partly responsible for the spike in global food and fuel prices as noted by Economist Jayati Ghosh. Is the exorbitantly privileged Greenback weaponized against sanctions hit Russia being used on other strategic ‘emerging economies’ as a hybrid Cold War envelops the world? Should the US dollar and its supporting financial architecture be dumped?

Staged Dollar Shortage, down-grades and Arab Spring Protests

Back on Colombo’s Galle Face seafront, Arab Spring Playbook-style protests by youth enjoying their freedom after 2 years of Covid lockdowns unfolded as part of the push to propel the Colombo regime’s pivot to Washington DC.

Usually anti-government protests happen at the iconic Independence Square, but the current protests were staged close to South Asia’s busiest sea port – the Colombo Harbour and notably near the Chinese built Colombo Port city.

While the protestors, anonymously organized via Social Media, called on the Sri Lankan President Gotabaya Rajapakse to go home they did Not say “Gota Go Home to AMERICA”. The President after all was a US citizen until 2019. Nor was Debt Cancellation or a debt jubilee on the agenda of the Protestors, some of whom held posters calling on the government to go to the IMF in the hope of better financial management. The IMF had been painted as a savior by various economists and local think tanks as the drum beat to default intensified!

But the Protestors had other creative solutions to the island’s crisis of corruption and economic miss-management: “A Buy Local Products Campaign’ to encourage citizens to support local manufacture and industry and stop consuming expensive imported luxury goods, for instance.

Some suggested a permanent halt of the practice of providing Duty Free car permits to politicians, doctors, university lecturers and the privileged ‘professional’ class, as well as abolishing various special health Insurance schemes.

Other protestors wanted to reverse the privatization of the national Health care and Education system and the sale of Yugadhanavi power plant to a dubious American company called New Fortress. The latter had compromised Sri Lanka’s Energy Security.

Several protestors suggested marching to the US embassy and call on the US Government to return all the assets of the dual US citizen and Minister for Economic Disaster, Basil Rajapakese in Los Angeles to pay down the National Debt. Others called for accountability for those responsible for the Central Bank Bond Scams. Long term suggestions to grow the economy and develop the country were setting up Research and Development working groups on Energy Security, Ocean and Mineral resources.

Some academics supporting the protests suggested Debt Cancellation and cited the Debt Jubilee project that had earlier called on the IMF and World Bank to offer an immediate cancellation of all principal, interest and charges due to the deadly economic toll of the World Health Organization ‘s (WHO) Covid-19 lockdowns in poor countries.

The Jubilee project had also recommended that the G20 support moves by any country to stop making payments on debt to private external lenders and that new IMF and World Bank finance should be in the form of grants not loans, and require other lenders to reprofile the debt where sustainability is uncertain, or restructure their debt where it is unsustainable,[1] to help ensure money is used to support public policy priorities in response to the COVID-19 crisis, rather than to repay other lenders.

Sovereign Bond Debt Trap

Like Lebanon, once known as the Paris of the Middle east, Sri Lanka is a relatively wealthy country in South Asia and listed as a lower Middle Income Country (MIC). The strategic island is ahead of India, Pakistan, Bangladesh, Nepal and Afghanistan on the SAARC regional poverty count.

The country has always paid down its debt and had no previous history of default. Likewise, its debt to GDP ratio, another metric to determine the solvency of a county, at 110 percent was not off the map although this is cited as one of the reasons for rating agency downgrades, leading to difficulty borrowing to sustain debt servicing and default. But this too may be kept in perspective. The top ten countries with the highest debt to GDP ratio according to the World population review are: [i]

1. Venezuela — 350%
2. Japan — 266%
3. Sudan — 259%
4. Greece — 206%
5. Lebanon — 172%
6. Cabo Verde — 157%
7. Italy — 156%
8. Libya — 155%
9. Portugal — 134%
10. Singapore — 131%
11. Bahrain — 128%
12. United States — 128

While China has often been identified as the source of Sri Lanka’s Debt trap it is Euro-American based International Sovereign Bond (ISB) traders, whose names are kept secret that are mainly responsible for the default at this time.

The above map’s colour coding may be miss-leading since it is the green coded International Sovereign Bonds (ISB)s and Other Financial Markets that are the cause of Sri Lanka’s debt default at this time and NOT the bi-lateral lenders (although coded in red in the above graph. In fact, Sri Lanka’s bi-lateral and multilateral donors which include the ADB, Japan, China and India have all indicated a desire to help and willingness to delay debt payment. They have also donated food, fuel and medicine to the cash strapped island.

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