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Extreme poverty rises as Sri Lanka’s economy falls

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Crops are unharvested, blackouts are common and transport has halted—Yuri Prasad looks at who’s to blame for the ‘debt crisis’ that’s punishing ordinary people
Issue 2813
Sri Lankan woman rows a small boat

Economic crisis in Sri Lanka is worsening poverty (Picture: Max Wilson)

A mixture of rage and despair fills the air in Sri Lanka. The nets of fishers are empty because they cannot find fuel to take their boats out to sea.

Farmers stare blankly at their crops as they over-ripen because there’s no diesel for tractors to bring in the harvest.

In the cities, transport has ground to a halt and petrol queues extend for miles. The government cuts off electricity for several hours every day, meaning often there is no light in the evening.

Meanwhile the price of cooking gas has risen so high that many can’t afford it. Everyone fears that food will also soon become scarce and that ­starvation will come to Sri Lanka—a largely agricultural country that was until recently hailed as an economic growth over-achiever.

“I have never been more scared about the economy and the food ­situation, and what it means for our working people,” Ahilan Kadirgamar, a union activist and lecturer in Jaffna, wrote in the Sri Lankan Daily Mirror newspaper. “The state has no plan and has not given any leadership or direction, and its local officials are hiding,” they added.

The United Nations says that 70 percent of the population is already skipping at least one meal a day. The crisis started when Sri Lanka defaulted on its international debts in April, and lenders gave the government 30 days to find £63 million pounds of unpaid interest. That’s money it was simply unable to find.

Without foreign currency reserves, Sri Lanka is now barely able to import any goods—even basic medicines. The economy now stands on the brink of collapse, and so does the establishment.

“The reality is that there is no government now, and there is no ­leadership in the country,” says Ahilan. “The president and prime minister have no legitimacy to lead, and the empty shell of the ruling regime is cracking.”

A delegation from the International Monetary Fund (IMF) left the island late last month, having so far failed to secure a refinancing deal with the government. They know protests could sweep the fragile regime away within weeks, or even days.

Any eventual IMF deal will involve tearing into public spending and passing the buck for the crisis to the working class and the poor. The Fund says it first wants to “stabilise” Sri Lanka’s debts. That’s ­bankers’ code for agreeing a new payment plan that will be funded by a fire sale of state assets.

Ministers have already agreed to give the Ceylon Petroleum Corporation’s oil facilities to a range of multinationals and to cut some 800,000 public sector jobs. The attacks will only add to rage on the streets.

Ahilan says workers now need to “start taking responsibility for not just our political crisis, but also our overwhelming economic woes. We have to ground our economic future in our people’s power rather than place our faith on the market.”  

Read an interview with Ahilan Kadirgamar in the latest International Socialism journal

Central banks trapped Global South in debt—then raised interest rates

When the West’s central bankers decided to try to tackle inflation by raising interest rates, they knew there would be casualties.

In economically advanced countries, it will mean slowing down the economy and raising unemployment. In indebted nations, rate rises carry the possibility of a Sri Lankan-style debt default and the danger of economic collapse.

More than half of low-income countries are now at high risk of “debt distress” or are already in it, according to the World Bank. In the wake of the 2008 financial crash, the big central banks lowered their interest rates. They encouraged countries in the Global South to borrow from them using hard currencies, mainly the US dollar.

By 2019 this pile of “external debt” had risen to $5.6 trillion, or £4.7 trillion. That figure has risen during the pandemic and the war in Ukraine.

With interest rates rising, and currencies in the Global South devaluing fast, many countries are struggling to pay interest on their loans.

The Ghanaian currency CEDI has dropped 22 percent against the US dollar this year. Now the West African country is forced to spend 45 percent of its revenue on interest payments.

In response, the government slashed fertiliser subsidies—meaning future crop yields will almost certainly fall. Fewer crops means more hunger and death for millions of already desperately poor workers and farmers.

Investors gouge African states

Today’s international debt crisis in the Global South is different from the one that ravaged Latin America in the 1980s.

Back then the US brokered deals between oil rich countries with budget surpluses and poor countries in Central and South America. This time private investors are at the centre of the turmoil.

Some 57 percent of Ghana’s external debt payments go to private lenders rather than global institutions, such as the World Bank and the IMF, according to campaigning group Debt Justice.

The lenders are international investment banks, hedge funds and asset managers looking to maximise their profit. They are particularly attracted to Africa because they can get away with higher interest rates there.

Look at the difference in borrowing rates between Argentina, in Latin America, and Angola, in Africa. Argentina has defaulted on debts on nine occasions, but the government there can borrow at rates of around 7 percent.

Angola has not defaulted since the end of the civil war in 2002, yet is charged at least 9 percent interest rates, despite its loans being for shorter terms.

No wonder that many African economists accuse the financial system of racism. And no wonder many African states have instead turned to the Chinese state to borrow money.

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