Sri Lanka needs cash again and is in a downward spiral. Since the beginning of March 2022, the Sri Lankan rupee has fallen by almost 45 percent compared to the U.S. dollar. Its foreign exchange reserves are nearly dry, having dropped below $1 billion. Meanwhile, the island nation has to repay debt of about $4 billion in the rest of this year, including a $1 billion international sovereign bond that matures in July 2022. Sri Lanka faces imminent default.
In Sri Lanka, the weak economic recovery amid the pandemic has been even further slowed down due to mismanaged government finances and ill-timed tax cuts, making it impossible to pay back the country’s debts to the international financial institutions. As a consequence, Sri Lanka will have to take yet another loan with more conditions – meaning that the country’s sovereignty and the people’s welfare will be, once more, gambled away by a power-intoxicated and corrupt elite.
Sri Lanka’s main exports of tea, rubber, and garments suffered amid the sharp decline of global commodity prices. In addition to this, even before the pandemic, the tourism sector of Sri Lanka had faced losses as tourists stayed away from the country in light of the Easter bombings of 2019. The pandemic further added fuel to the fire. Moreover, controversial tax cuts lowered government revenue. Finally, the Rajapaksa clan‘s government suddenly pivoted to organic farming, ushering in a disaster for food production and food sovereignty.
All of these factors contributed to an overall fatal situation for the country’s economic resilience. Sri Lankans are facing food and fuel shortages, power cuts, and inadequate supply of medicines, among other items.
Sri Lanka and the International Financial Organizations
The vulnerabilities of Sri Lanka have long made it the perfect prey for international financial organizations.
The elites of post-colonial Sri Lanka intoxicated the people with money borrowed from international financial organizations and political allies. In fact, Sri Lanka was the first country in South Asia to embrace neoliberalism. Yet the opening of its economy to the International Monetary Fund (IMF) came with the vilification of minorities and a violent onslaught on trade unions.
Meanwhile, in order to grab any lifeline possible in the current circumstances, Sri Lanka further complicated its problematic financial situation by resorting to regional superpowers in a bid to keep economic collapse at bay (and, not least, to keep the ruling elite in power). To this end the regional rivals, India and China, came to Sri Lanka’s rescue and have granted $4.5 billion in emergency aid. But the great powers are certainly not acting out of altruistic motives. Sri Lanka is a battleground for power rivalry in the region, thanks to its strategic location along major sea lanes in the Indian Ocean.
Sri Lanka has also turned to the World Bank for help.
The IMF and World Bank, part of the Bretton Woods heritage, are the West’s main international financial institutions (IFI). Since 1944, the IMF and World Bank have been the crucial twin intergovernmental institutions shaping the world’s development and financial order. Sri Lanka has frequently engaged with these international financial organizations. The country joined the IMF on August 29, 1950 and has a voting share of 0.1417 percent on the IMF’s Board of Governors, sharing a common director on the Executive Board with Bangladesh, Bhutan, and India. Since joining, Sri Lanka has been the recipient of 16 IMF loans.
These loans, however, come at a steep cost: implementing the IMF‘s economic policies. Here is a sample from the IMF Executive Board’s 2021 Article IV Consultation Statement:
Noting Sri Lanka’s low tax-to-GDP ratio, they saw scope for raising income tax and VAT rates and minimizing exemptions, complemented with revenue administration reform. Directors encouraged continued improvements to expenditure rationalization, budget formulation and execution, and the fiscal rule. They also encouraged the authorities to reform state-owned enterprises and adopt cost-recovery energy pricing
In effect, the IFIs are the harbingers of neoliberalization. They are also undemocratic, imposing conditions on foreign governments. The IMF and World Bank are multilateral institutions, and in theory there is the possibility to review the hierarchy of the international economic architecture through institutional reforms. But in practice that is not happening: The Western hegemony of the IFIs continues to represent the U.S. imperial project of global neoliberalism.
As W.D. Lakshman wrote all the way back in 1985:
Sri Lanka after 1977 has become yet one more laboratory for IMF-WB experimentation. These institutions, whose resources and policies are controlled by the developed countries of the West, probably sincerely believe that the free market, private enterprise, capitalist system which proved effective in those countries in the advancement of the forces of production, will also be effective in the Third World.
The reality, however, has often proved that assumption wrong.
A Critical Analysis From the TWAIL Perspective
TWAIL stands for “Third World Approaches to International Law.” The philosophical foundation of TWAIL is that international law, as it exists today, is a product of a colonial heritage. Its current international institutions, such as the Eurocentric Bretton Woods Institutions, namely the International Monetary Fund and World Bank, perpetuate the same colonial-origin hierarchy that places the Global North over the Global South, by manipulating the Global South’s dependency upon on money and the language of human rights.
TWAIL scholarship has been hostile toward IFIs, as these institutions serve to maintain Western hegemony. IFIs are vital instruments for maintaining the imbalance of powers and protecting the interests of the First World at the expense of the Third World. B.S. Chimni has written that IFIs are part and parcel of the growing infrastructure of international institutions aiding the nascent global state, which serves the interests of transnational capital and powerful states at the expense of Third World states and peoples. Furthering this thought, Makau Mutua explains that the manipulation of the international legal principle of sovereign equality ushers in the perpetuation of existing structural inequality, while enhancing the interests of the First World.
The United Nations’ independent expert on foreign debt wrote in a 2019 report:
While it is true that the World Bank and, far less explicitly, IMF are statutorily prevented from making political considerations, it is difficult to argue that violating human rights can be part of the domestic political affairs of countries (Art. 2(7) of the Charter of the United Nations). Referring to the opinion of IMF, Special Rapporteur Giorgio Gaja of the International Law Commission held that one cannot say “that an organization is free from international responsibility if it acts in compliance with its constituent instrument”. Furthermore, a number of international financial institutions provide, in their statutes, the principle of neutrality (“making political considerations”), which has been routinely violated by bypassing it or reinterpreting it artificially in order to institute structural adjustment policies.
In theory both, the IMF and the World Bank are explicitly prohibited from engaging in the political affairs of member states. But in practice they have metamorphosed from apolitical institutions to political actors with wide-ranging powers to impact the economies of the Third World. The anti-democratic nature of neoliberalism is the point of resistance for political struggle. IFIs are outside political and legal control. Internationally there is a lack of even elementary accountability, let alone democratic control over institutions such as the IMF, the World Trade Organization, and the World Bank. The overwhelming power of financial institutions makes a mockery of any serious effort for democratization and addressing the deteriorating socioeconomic living conditions of the people in Sri Lanka and elsewhere in the Global South.
Sri Lanka is a prime example of a Third World country led by a post-colonial elite that is using people as collateral for their power considerations. The island nation has been surrendered to international financial organizations and regional superpowers as a battleground for neoliberal destruction and as a vessel for geopolitical power considerations. The idea of human rights of empowering people (in the Global South at least) is futile when the very international organizations ostensibly promoting human rights are also imposing their own political agenda on the country. In this context, human rights are easily sacrificed for financial power.
An United Nations assessment of World Bank policies provocatively concluded that the organization is “a human rights-free zone… It treats human rights more like an infectious disease than universal values and obligations.” IFIs have chosen, willingly and deliberately, to engage in neocolonialism.
As Balakrishnan Rajagopal writes:
The colonial vestige of Europe and the United States appointing the heads of the Bretton Woods institutions even continues without challenge. Private markets – those which caused the worldwide financial meltdown, including bond traders, hedge funds, and, of course, credit rating agencies – are not governed by international law at all, but only by weak national regulators who lack competence and independence. We are back to business as usual.
The ones who suffer the most are the people of the Global South. Returning to the example of Sri Lanka, its people will have to bear the brunt of skyrocketing prices and shortages of essential products for a long time to come.