The turmoil in the Government of Sri Lanka, and the frantic efforts to stave off an implosion of the entire social fabric, should be a cautionary take to all countries, especially those in the developing world. And this is because, while inevitably there are idiosyncratic factors in play, such as the governing party becoming a Rajapaksha family combined, there are several systemic factors that confront many other states, including Guyana.
Three of those, as identified by the IMF, which has been called in by the Sri Lankans, are: the servicing of massive debts that have accumulated in the last decade; the cumulative effects of the COVID-19 pandemic, such as supply chain challenges that have converged on the economy and the society; and, finally, the unexpected war in Ukraine, which has created an inflationary spiral due to rising food, fertiliser and fuel prices.
Much of this is eerily reminiscent of the economic meltdown in the global south during the 1970s and 1980s, when western banks intermediated the windfall funds of the OPEC countries as they seized control of their petroleum resources. The easy money was snapped up by countries like Brazil and Guyana, but, for a number of reasons – strategic and otherwise – the interest payments could not be serviced.
In this iteration, China has led the way in facilitating easy money for all sorts of projects, especially if those projects are aligned with their Belt and Road Initiative (B&RI). In the case of Sri Lanka, they received over US$5billion in loans to build infrastructure like an airport and port that were not economically sustainable. While, earlier this year, the Government announced that they had comfortable foreign reserves of US$1.5 billion, it is now revealed that this was basically due to a Chinese loan swap that cannot be used to finance foods and other needs, such as fertilisers.
With over US$38 billion in foreign debt that has to be serviced, Sri Lanka has now defaulted on some of its loans, and has resorted to the IMF, which is applying its “tough love” conditionalities. Much would depend on what conditions the Chinese would impose as their loans become due. Since they have been just as free with their lending across the globe, including to Guyana, there is much anticipation about the haircut they would impose on Sri Lanka.
In 1989, Hoyte’s PNC Government had been in an identical situation after his predecessor, Burnham, had defaulted on loans. Guyana had become an international pariah when he refused the IMF’s ministrations. When Hoyte reversed course, interest payments had ballooned the US$800 million borrowed to over US$2.1 billion as the IMF’s ERP kicked in. In Sri Lanka, it does appear that their citizens would go way beyond the “empty rice pots” slogans of the then PPP Opposition against the ensuing privations.
The lesson of the Sri Lankan meltdown is stark for us, since we, along with every other country, face two of the Sri Lankan triple-threats: rising prices, and the effect of COVID-19 on the economy. At this point, in reference to the third threat, our debt-to-GDP ratio is well below any danger signal. Back in 2018, the Granger Administration had signed on to China’s B&RI, and, last year, there was some talk of the new Government accessing US$1.5 billion in loans from China to finance some of its infrastructural projects. The Finance Minister at that time had analysed the risks of such borrowing frontally, and had offered assurances that the Government would be very prudent in increasing its loan portfolio, to ensure that it can be safely serviced.
Some may question why there is a need to take loans for our infrastructure when we have established the National Resources Fund (NRF) and can use it for that purpose – as with the US$200 million just withdrawn and deposited into the Consolidated Fund. But with an economy, as with businesses, it is prudent to have access to funds, so that, if opportunities present themselves, they can be seized, once the cash flow would be able to service the loans.