Unmanageable Debt

Sri Lanka is unlikely to get relief any time soon. A new government is likely to restart negotiations for a new loan from the International Monetary Fund (IMF), which will demand that it come to agreement with its creditors to reduce its debts to a sustainable level—otherwise the IMF loan will go straight into corporate pockets in debt repayments. 

The negotiations could take years. Zambia has been trying for twenty months to persuade its private lenders to restructure its debts, without visible progress. When Sri Lanka finally defaulted, Hamilton Reserve, a bondholder based in the tax haven of St Kitts and Nevis, immediately sued Sri Lanka in the US courts to demand repayment in full, regardless of the country’s inability to pay.

The extremity of Sri Lanka’s situation is partly a result of the Rajapaksa dynasty’s debt-funded infrastructure projects, brutal civil war, and tax cuts. But many countries are facing similar problems—the global food and fuel crisis is also a debt crisis. Last week, Ghana followed Sri Lanka in requesting an IMF loan, and is likely to be told that it too must negotiate with its creditors. Large countries like Pakistan and even Turkey could follow. As prices of food and fuel have rocketed in the wake of the Russian invasion of Ukraine, lower income countries across the world face being pushed over the edge into economic meltdown. 

Even before the Russian invasion, lower income countries were facing a growing debt crisis. Fifty-four countries were in debt crisis globally, up from thirty-one in 2018. Debt levels have grown dramatically over the last ten years, as private lenders looked for returns in a period of cheap money and low interest rates in the West, where riskier bonds issued by lower income governments still promised hefty levels of interest. Lenders were gambling that countries wouldn’t face external shocks that would interrupt the economic growth necessary to pay off the debts and interest.

Of course, those shocks materialised, in the form of the pandemic and now the Ukraine war. Lower income country governments borrowed to support communities and for the healthcare response to the pandemic, as income from tourism and many exports crashed. They borrowed far less than rich countries, but at much higher interest rates. They were unable to afford the massive economic stimulus given to rich economies, and emerged with weakened economies burdened by dramatically increased debts. They were in no position to confront a further shock, when Western sanctions on Russia and the Russian blockade of Ukrainian ports reduced food and fuel supplies.

Many lower income countries are heavily dependent on Russian and Ukrainian wheat production—Sri Lanka receives forty-five percent of its supplies from those two countries. The globalised food system means that wheat price rises lead to rising prices across the board. Since the US deregulated commodities markets in the 1990s, rampant speculation on food prices has led to price volatility that can become extreme in the event of a major shock, forcing prices up beyond the means of many people and countries, even as overall food production levels hold up. 

Fuel price increases have made fertilisers increasingly unaffordable, leading Sri Lanka to temporarily and disastrously ban imports in April 2021 and demand its farmers make an overnight and chaotic transition to organic farming, with a devastating impact on subsequent harvests. Lower income countries often lack food security because their economies were orientated away from self-sufficiency by colonial powers followed by the structural adjustment programmes of the IMF, which prioritised the production and export of food crops for the international market.

Countries have managed the escalating crisis by subsidising food and energy, to keep them at affordable levels for their populations. But the IMF is demanding the removal of these subsidies, and the imposition of new taxes on food and fuel, as part of its austerity conditions for new loans.

The impact is disproportionately felt by poorer people within lower income countries because they spend more of their income on food and fuel, just as poorer households in the UK are being hardest hit by the cost of living crisis here.

A Growing Crisis

All the indicators are that the crisis is just beginning. Rising price inflation has provoked the US Federal Reserve to raise interest rates, which will make it more expensive for lower income countries to repay dollar-denominated debts, including by taking out fresh loans, as interest rates risk on international financial markets and the dollar increases in value. Simultaneously, higher interest rates in rich countries are leading to capital flight, as investors seek safely profitable investments.

Meanwhile, the climate emergency is causing catastrophic droughts and famines in some of the world’s most indebted countries, including Chad, Ethiopia, and Somalia, all of which are heavily dependent on Russian and Ukrainian wheat and other food imports.

For the Western powers, it’s always someone else’s fault. The food and energy crisis is explained as an automatic consequence of the Russian invasion, without mention of the record profits of energy companies or food speculators. The failure to make progress on restructuring debts is all the fault of China, despite the fact that a far greater proportion of debt is owed to Western bondholders, who failed to participate even in the G20’s limited debt suspension initiative. Sri Lanka has been widely presented as a victim of a mythic Chinese ‘debt-trap diplomacy’, despite an almost complete absence of evidence.

Western leaders continue to point to the G20 Common Framework as the solution to the debt crisis. A response to the pandemic, the Common Framework was supposed to allow countries in debt crisis to restructure their debts in a coordinated way with all of their creditors—yet twenty months on, no debts have been restructured, largely due to the recalcitrance of private lenders. 

Western banks, hedge funds, and oil traders, who lent at high interest because of the risk, are refusing to accept that the pandemic and food and fuel crisis mean they have lost their gamble. In most cases they are continuing to be paid the repayments and interest they demand, even as people in lower income countries go down to one meal a day to make ends meet. Indeed, many of the creditors bought the debt at knock-down prices because of the likelihood of defaults—if paid in full, BlackRock could make 110 percent profit on its Zambian debt.

Cancel the Debt

But this situation cannot last. It is unimaginable that lower income countries will continue indefinitely supporting BlackRock’s profiteering while their people lose livelihoods and can’t feed themselves. Waves of protest are shaking many countries, and the Sri Lankan government is unlikely to be the last to fall. Debt cancellation is a demand of protesters and a coalition of civil society leaders. In Tunisia, the powerful union movement is preventing an authoritarian government from capitulating to IMF austerity demands, strengthening its hand in ongoing negotiations. In Argentina, a deal with the IMF has split the government and mobilised the streets against compliance. 

Western leaders may care little for the welfare of communities in lower income countries—but they will care about this growing wave of instability, particularly if large countries default and destabilise the international financial system. It will be complex and difficult to herd private creditors into fair and sufficient debt restructurings and cancellation, to bring debt down to sustainable levels and address Chinese concerns about bailing out Western banks—but on the scale of global challenges, not that difficult. It simply requires political will in the G7 to reform a discredited system that currently only benefits corporate freeloading.

The Sri Lanka crisis, likely to be followed by a looming Ukrainian debt restructuring, should be the wake-up call. In the short-term, Sri Lanka needs resources now: the IMF should provide an immediate loan, on the condition that it not be used to pay off creditors. 

But systemic change is overdue. Replacing or strengthening the discredited Common Framework is one of the simplest single things that world leaders can do to address the multiple crises facing lower income countries. A system that allows countries to suspend debt repayments in the event of external shocks, and cancel debts when they go bankrupt, will be essential for addressing the climate emergency as well as the food and fuel crisis. The world cannot continue to stagger on with the delusion that all debts can and must be paid, no matter the scale of the emergency.