By Shiran Illanperuma

(First part of this article appeared in

The Island yesterday (13 Jan.)

Sri Lanka in the International Sovereign Bond Debt-Trap

Sri Lanka was the original poster child for the myth of the Chinese debt-trap, which has now been thoroughly debunked by both local and foreign experts. The truth is that the cause for Sri Lanka’s indebtedness can be traced back to the colonial structure of its plantation economy, which has only been augmented through additional dependencies on tourism, remittances, and low-value added manufacturing. Despite attempts by nationalist and left-leaning governments, Sri Lanka has failed to achieve food and energy self-sufficiency, or to set in motion a self-expanding process of industrialisation.

The end of Sri Lanka’s Civil war in 2009 coincided with the Global Financial Crisis (GFC) and the Great Recession. Sri Lanka was relatively insulated from economic downturn as the end of the war brought about a honeymoon period as tourism and property speculation boomed. The Obama administration’s bailing out of the banks through Quantitative Easing unleashed a wave of speculative investments to the Global South, including countries like Sri Lanka. Meanwhile, China’s going out in the wake of the GFC allowed the Sri Lankan government to engage in further fiscal expansion through an ambitious program of infrastructure development, focusing on roads, ports, energy, and not just a few white elephants. However, these shortcomings in the mobilisation of Chinese development finance are more attributable to Colombo’s lack of vision and coherent industrial policy, than any malice on the part of China. As Chinese envoys have often emphasised, all projects were undertaken at the request of the Sri Lankan government, and shortcomings have usually been due to the lack of domestic capacity to manage projects efficiently.

As a lower-middle income country, Sri Lanka found itself increasingly locked out of concessionary finance from multilateral organisations, and so began turning towards private lenders. The country launched its first International Sovereign Bond (ISB) in 2007. However, it is the rightward shift in policy following the change of government in 2015 that completely transformed Sri Lanka’s debt profile, as the government binged on over USD 10 billion worth of ISBs. Therefore, on the eve of Sri Lanka’s default in 2022, only 13.67% of external debt was owed to China. By contrast, 42.43% of external debt was to private bondholders, like Blackrock and Ashmore. To make matters worse, this private debt was of much higher interest rates than bilateral debt from China, accounting for over 70% of interest payments in 2021.

When the COVID-19 pandemic hit, the vulnerabilities of Sri Lanka’s economic structure became painfully apparent. The lack of foreign exchange inflows due to the collapse of tourism and remittances, combined with inflation caused by global supply chain crunches and commodity price booms, brought the economy to its knees. Following the ouster of President Gotabaya Rajapaksa in 2022, the governor of the Central Bank of Sri Lanka announced a ‘pre-emptive default’ on external debt. In the months that followed, the interim President Ranil Wickremesinghe used the chaos to enforce a dizzying array of shock therapy style reforms, unthinkable under conditions of normality. These included:

* Austerity. Withdrawals of fuel subsidies and cost reflective pricing of energy. This contributed to plunging thousands into poverty and off the electricity grid.

* Domestic debt restructuring. A restructuring of domestic debt that singled out the pension funds of the working class while allowing domestic capitalists, bankers, and bondholders to walk away scot-free.

* Central Bank independence. Legislating Central Bank independence, which would prevent the Central Bank of Sri Lanka from purchasing government debt. Concretely, this means that the government is significantly restrained from countercyclical spending in the event of an external shock. Additionally, it could weaken the government’s ability to control interest rates. The act severs monetary sovereignty as it forces the country to rely exclusively on private lenders for financing.

* External debt restructuring. An external debt restructuring agreement negotiated with the mediation of the IMF has been described by local critics as a sell-out. The agreement includes swapping existing bonds for newer bonds, some of them being novel financial instruments.

* Macro-linked bonds – These are bonds, whose interest rates will be linked to Sri Lanka’s economic performance. As GDP growth rates increase, so too do the interest payments. In effect, Sri Lanka must pay its creditors more for growing faster.

* Governance-linked bonds – These bonds tie the interest rate to the government’s implementation of anti-corruption legislation. There is a reasonable concern that this amounts to a kind of blackmail on a sovereign government to adjust its administrative structure according to the whims of international finance capital.

The Rise of the NPP

The NPP coalition includes 21 civil society organisations including trade unions. However, the prime mover within the party is undoubtedly the JVP. The JVP was established by Rohana Wijeweera in 1965, largely through the youth wing of the Ceylon Communist Party (Maoist), which in turn was the result of a 1964 split in the undivided Communist Party of Ceylon that mirrored the tragic Sino-Soviet split.

The JVP was targeted, and its ranks were decimated twice. First, following an attempted youth insurrection in 1971, and again during another insurrection from 1987-1989. The latter resulted in the assassination of Wijeweera along with the entirety of the party’s politburo, except for Somawansa Amarasinghe. Building the party from scratch, Amarasinghe went on to lead the party on the path of reform and was instrumental in taking JVP into electoral politics. During Amarasinghe’s leadership, the JVP dabbled in electoral coalitions, first supporting the SLFP’s Chandrika Bandaranaike Kumaratunga in 1994, then SLFP’s Mahinda Rajapaksa in 2005, and finally joining the UNP in supporting former Army Commander Sarath Fonseka’s bid for Presidency in 2010.

It was in 2014 that the next big shift came, as AKD was made the new leader of the JVP. He has attempted to chart a more independent and centrist path for the party, rejecting coalitions with established political parties and personalities. Following the JVP’s 7th National Congress, the party released a document which proposed a national policy framework for a ‘modernised and industrialised Sri Lanka’. In 2019, the National People’s Power was launched, with the JVP at its core. The broader coalition of NPP helped open JVP’s doors to the middle-class that traditionally was wary of the Party’s radical history. This included professionals, academics, artists, public intellectuals, and even traders and business owners.

The NPP’s success lies in this ability to overcome the JVP’s previous sectarianism and incorporate a broader coalitions of class forces, while at the same time remaining independent of established political parties. For the most part, NPP’s recent electoral campaign avoided a frontal assault that identified the enemy as capitalism, imperialism, or even neoliberalism. Rather, the NPP chose to focus on the vaguer category of corruption, which struck a chord among large portions of the middle-class who felt that the immediate cause of their plight was bad governance. The NPP was able to locate elements of the petty bourgeois that did not have direct access to state power through the established patronage networks of the main parties. This combined with a generational shift in politics helped the JVP construct the NPP as its own ‘civil society’ front. The hunger of this young petty bourgeois to reproduce itself as a class constitutes the strength and weakness of the NPP.

On the election campaign trail, the NPP faced much scrutiny from both the rightist and leftist elements which honed on its lack of an articulate economic plan or strategy. While the NPP platform is explicit about its intention to retain and strengthen public ownership of energy, finance, healthcare and education, questions regarding policy specifics were often dodged with the promise that life would improve with the eradication of corruption. That said, the NPP’s main economic promise was to establish a ‘production-based economy’ that prioritises farmers, fishers and Small and Medium Enterprises (SMEs). Furthermore, the NPP pledged to renegotiate the debt restructuring agreement with the IMF and bondholders in order to ease the tax burden on the people, to establish a development bank, and initiate an expansive science and technology policy to modernise the economy. Concretising these disparate promises into a viable developmental program continues to be the main challenged for the NPP.

One of the most remarkable features of the NPP’s political campaign was its mobilisation of women. This was conducted not in any paternalistic manner but by women party cadres themselves. Rural party meetings often featured women speaking to women, about the specific ways in which economic hardships affected women. This, combined with the party’s sympathies towards people’s economic plights and their sharp vitriol against the perceived corruption of establishment politicians, helped drive an emotive bottom-up campaign. Women in these meetings took the message home, influencing their children, who would go on to popularise the party’s platform on social media platforms, including Tik Tok. In Sri Lanka, where labour force participation for women (FLFPR) is extremely low, 29.6%, they are particularly sensitive to price swings in essential commodities. Meanwhile, the women who work do so predominantly in the public sector, or in export-oriented sectors such as plantations and export processing. This makes political conscious women extremely sensitive to economic shocks, and a powerful political resource once organised.

Struggle for the 21st Century

Sri Lanka’s dilemma is a striking example of the close link between neoliberal debt bondage and subordination to the interests of US-led militarism. In other words, the struggle for sovereignty and development requires a political, economic and even military strategy. In the past, various administrations in Sri Lanka have attempted compromise, thinking that concessions in one area would enable advances in others. The reality is that there is little possibility for negotiation with an increasingly irrational imperialism bent on maintaining US preponderance of power.

The fact is that the NPP governs under conditions favourable to the right. This is to say that the NPP inherits a state that is deeply in debt to Western finance capital, with a military that has been gradually encroached by the US through use of carrot and stick. Moreover, the networks of knowledge production and distribution in Sri Lanka remain downstream of monopoly capital. The JVP itself has only been able to climb into power by moderating rather than dialling up its past socialist and anti-imperialist rhetoric, meaning it does not necessarily have a popular mandate to carry out a revolutionary break from the status quo. Yet even the moderate mandate of the NPP, to improve social welfare and establish a production-based economy, cannot but bring them into confrontation with an imperialism which seeks to stymie the development of the productive forces.

To borrow from the US State Department’s own choice of words, Sri Lanka today stands at the ‘epicentre’ of the struggle for the 21st century. It is a struggle between peaceful development and militarised underdevelopment. Between productive investment for the benefit of the working majority, or debt bondage for the benefit of a ruling minority. While the country appears hemmed in on all sides, entangled in US imperialism both militarily and financially, it would be too simplistic and nihilistic to suggest that there are no alternatives. This struggle for sovereignty and development is today being waged across the darker nations, from the Bolivarian countries in Latin America, to the Sahel region in Africa, and by the Palestinians in West Asia. The struggle of the Sri Lankan people too, will play its role in defining the trajectory of this century.

(This essay was produced by Tricontinental: Institute for Social Research as part of its monthly series Tricontinental Interventions: Conjunctural Analysis from Asia.)