Sri Lanka’s continued debt crisis highlights urgent need for wider reform

9 April 2024

Crowd protests outside Presidential Secretariat Office in Colombo in April 2022. Credit Ruwan Walpola/ Shutterstock

As the international community struggles to respond to multiple pressing crises, including what Development Finance International’s research has found to be the  “worst ever global debt crisis”, the case of Sri Lanka presents a cautionary tale about the costs of the inability of the IMF, the G20 Common Framework (see Observer Winter 2020) and the wider international system to prevent and respond to the devastating human rights, social and political consequences of unsustainable debt.

After becoming the first country in the Asia Pacific region to default on its debt in 2022, in March 2023 Sri Lanka entered its 17th IMF programme with $2.9 billion in finance. In March, over 60 trade unions, civil society organisations and social movements sent a letter to the IMF team visiting the country for the Second Review of the ongoing Extended Fund Facility (EFF) agreement highlighting numerous concerns and making several demands, including the abolition of surcharges, and a “transparent and democratic decision-making process regarding reforms, by providing relevant information…used to prepare the Debt Sustainability Assessment.”

As a December 2023 Political Economy Research Institute working paper made clear, the dominant explanations provided by international financial institutions, and some scholars, have failed to adequately acknowledge the long-term and structural consequences of the liberalising policy conditions contained in the previous 16 IMF programmes, which created a growing dependence on expensive and fickle capital market finance, for example. In addition to drawing attention to the enduring negative impacts of IMF-imposed neoliberal policies, the paper focuses on another pressing contemporary issue: The inadequacy of the IMF’s Debt Sustainability Analysis (DSA). The Sri Lankan DSA reflects a well-documented trend toward overly optimistic growth projections, which burdens the population with significant human rights consequences to ensure creditors are paid (see Observer Winter 2022, Winter 2020).

Debt obligations over human rights concerns and climate justice perpetuate cycles of poverty, violence and inequalityDr Thiruni Kelegama and Melanie Gunathilaka

The Sri Lankan case provides yet more evidence, if any were needed, of the urgent need for the IMF to heed calls from the former UN Independent Expert on foreign debt and human rights, and global civil society to integrate states’ human rights obligations into DSAs.

Escaping technocratic discussions to address immediate human needs

Worryingly, as noted by University of Jaffna’s Dr Ahilan Kadirgamar in a March article in the online newspaper Daily Mirror, “The hegemonic narrative today is going through change; the insolvency crisis (inability to repay debt) is now being constructed as a liquidity crisis (lack of short-term funds to make debt payments). It is claimed that if there is sufficient sloshing of funds including new loans to such debt-ridden countries, then debt restructuring will not be necessary.” This can be seen, for example, in the Financing for Development Lab’s January proposal titled, “A bridge to climate action: A tripartite deal for times of illiquidity” (see Observer Spring 2024).

The question of Sri Lanka’s path to debt sustainability takes place within the wider context of the IMF’s continued unwillingness to accept that the current global debt situation must be categorised as a systemic crisis, requiring real efforts toward comprehensive resolutions, including debt cancellation and the establishment of an independent UN-based debt restructure mechanism (see Observer Winter 2022). As research collaborators of the Institute for Political Economy, Dr Thiruni Kelegama of Oxford University and Melanie Gunathilaka of Climate Action Now Sri Lanka stress, the current system ensures that “repayment is always viewed through the lens of economic necessity and this exacerbates human rights violations…. Debt obligations over human rights concerns and climate justice perpetuate cycles of poverty, violence and inequality.”