Never let a good crisis go to waste,” Winston Churchill’s famous motto, could not be more applicable to Sri Lanka in its current context: An economy crippled by one of its biggest crises since independence gives a once-in-a-lifetime opportunity for the country to implement much-needed reforms. Following major economic crises, many countries, including India and Thailand, adopted broad economic reforms and emerged considerably stronger. The Sri Lankan government should use the current economic crisis to try things it has never tried before, such as eliminating regressive subsidies and restructuring state-owned firms.
The G20 countries include Sri Lanka’s largest bilateral creditors, such as China, India, Japan, and South Korea, as well as influential members of multilateral creditor organizations such as the US and European states. If this group worked together efficiently, it might provide debt relief to Sri Lanka while also strengthening protections for people’s economic and social rights during a crisis. Because, while the news cycle has moved on, Sri Lanka’s economic crisis is still raging and wreaking havoc on the country’s people. High inflation and little social protection, combined with challenges accessing necessities such as food and healthcare, are wreaking havoc on their lives and rights.
According to the World Food Programme, one in every three households will be food insecure by December 2022. Prospects for 2023 are as bleak: a quarter of the population is expected to remain impoverished, and the World Bank predicts a major economic contraction. The government’s ability to ensure human rights is hampered by Sri Lanka’s debt burden. The governmental debt-to-GDP ratio climbed from 93.6 percent in December 2019 to 114 percent in December 2021.
Even before the global economic crisis made headlines, Sri Lanka was a global outlier in terms of debt servicing expenditure. Prior to the recent crisis, an astounding 71.4 percent of government revenue was spent only on paying interest in 2020, compared to a global average of 6 percent and a regional average of 21.1 percent. Servicing this debt has restricted the government’s ability to spend on areas such as health, education, and social protection, all of which have a direct impact on people’s well-being. According to a recent survey, half of Sri Lankan households are obliged to restrict the amount of food they serve their children.
It is critical to interrupt the cycle of debt that is degrading the human rights of far too many of the island’s 22 million residents. The Sri Lankan government is currently involved in difficult debt discussions in order to obtain financial assistance from the International Monetary Fund. Last year, the IMF reached a staff-level deal with the government, promising to lend $2.9 billion. However, before the loan could be finalized and money disbursed, the IMF accord required sufficient assurances of debt restructuring and relief from Sri Lanka’s creditors.
While IMF assistance may be the reason Sri Lanka’s debt is in the spotlight today, creditors should focus on debt resolution in order to better protect economic and social rights. Previous IMF programs featured requirements that had a negative impact on human rights, such as reduction in public spending and other austerity measures. Workers in Sri Lanka recently went on strike in protest of measures implemented by the government to allegedly win IMF money, such as increasing taxes.
The debt discussions in Sri Lanka are problematic for a number of reasons, including the large number of parties involved. Almost half of Sri Lanka’s total external debt is in open market bonds, which are partly owned by private companies such as hedge funds. One of these private creditors has already filed a debt repayment lawsuit against the Sri Lankan government in an American court. There are also bilateral creditors, as well as multilateral institutions such as the Asian Development Bank and the World Bank Group.
India, the United States, Japan, Australia, and China have all contributed significant help to Sri Lanka. This is due to a number of factors, including their close relationship with Sri Lanka, Sri Lanka’s critical position in the Indo-Pacific, and humanitarian concerns. Because they are Sri Lanka’s major creditors, India, Japan, and China have also consented to debt restructuring.
Other Western and Asian countries, including Canada, France, Germany, Italy, Indonesia, Turkey, the Republic of Korea, the United Kingdom, and the European Union, have also contributed help. This help is primarily limited to humanitarian aid, food security, and the provision of medical equipment and pharmaceuticals. Russia has offered Sri Lanka cheaper oil prices, and Saudi Arabia has continued to provide financial support for ongoing projects. The specifics of Russia’s and Saudi Arabia’s support, as well as their financial value, are unknown at this time. Finally, despite political conversations, Argentina, Brazil, Mexico, and South Africa have not yet contributed any financial or humanitarian assistance.
The G20 includes some of the world’s largest economies. Nonetheless, the countries continue to disagree on matters such as debt and debt increase. As a result, their bilateral and multilateral methods to assisting indebted nations diverge. When dealing with the debt situations of middle-income countries, the grouping will need to implement a structure that forces countries to coordinate and cooperate.
In summation, Debt sustainability and management in middle-income countries is becoming a significant global concern. The Sri Lankan crisis confirms a trend in which middle-income countries are pursuing new partnerships and hazardous commitments to fuel economic growth. However, the G20 grouping lacks a comprehensive plan for dealing with middle-income nations suffering debt crises, despite the fact that the China-initiated alternative financial system has demonstrated significant shortcomings. The G20 grouping and countries must acknowledge this challenge and pursue global and institutional reforms. They should collaborate to encourage better transparency and more rapid aid to indebted middle-income countries.