Over the past few years Sri Lanka has experienced its worst ever economic crisis - fuel shortages, daily power cuts, no medicines, schools having to close, inflation running at 50 per cent, mass protests. In May 2022 for the first time in its history Sri Lanka failed to make an interest payment on its external debt. It’s now under an IMF austerity programme. Ahilan Kadirgamar, a sociology lecturer from Sri Lanka, provides the wider historical context and consequences. And Prathibha Fernando, a woman who lives just outside of the capital Colombo, shares her moving story about the personal costs of such economic hardships - including on her child’s education. 

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Hi there, welcome to Economics from the South where we rethink economics, give a voice to

marginalized communities, and come up with lasting solutions to ensure a fairer, more sustainable future for all of us.

I'm your host, Julians Amboko.

A Kenyan business journalist.

It's great to have you on board this series from Ideas, the International Development Economics Associates, a

network of progressive economists who challenge the way the world is run and put forward viable alternatives that

center the perspectives and needs of the global south.

I'll be speaking to economists and academics about breaking the endless cycle of debt distress and

rethinking the global financial architecture.

And we'll also hear the experiences of people on the economic front lines in the global south.

Episode 3.

Our focus this time is on Sri Lanka, which over the past few years has experienced its worst ever.

Economic crisis, fuel shortages, daily power cuts, no medicines, schools having to close, inflation running at 50%, mass protests.

And then in 2022, for the first time in its history, Sri Lanka failed to make an interest payment on its external debt.

So let's get to grips with the wider context and the consequences of all this with a member of the Ideas Executive Committee.

I'm Ahilan Kadirgamar.

I teach sociology at the University of Jaffna.

A lot of my research is on both rural indebtedness and sovereign debt.

Dr.

Ahilan, let's look at a historical view.

How did Sri Lanka get to this point?

I think Sri Lanka, like much of the world that was colonized at independence,

there was the hope for development, for progress.

And actually, Sri Lanka, compared to other countries, went ahead with a robust social welfare program, free education,

free healthcare, a food subsidy that by the 1970s, Sri Lanka, along with Cuba and the Indian state of Kerala, were considered

development models, because even though our per capita income was very low, we had very high human development indicators.

But that started to change, like with many of the countries in Africa, with the structural adjustment programs that came about.

So Sri Lanka was the first country in South Asia to go through liberalization.

And then, um, they got rid of the food subsidy and our allocations for education and healthcare started to decline.

But the reason why Sri Lankan society has been vibrant to some extent, even though we went through a long

civil war, was because of such social welfare programs.

And that is what is worrying now, you know, what would be the future of all of that now that Sri Lanka has not only defaulted

on its debt, they are going through a very harsh IMF program with severe austerity measures and a debt restructuring process.

Give us a little more context into the present situation from an indebtedness,

the restructuring, the default perspective.

So, Sri Lanka, you know, started to ramp up its debt, particularly borrowing in

the commercial markets over the last 15 years.

I mean, that's, I think, true of Ghana, of Zambia, so many countries going to the capital markets.

And even many of us started to write about a decade ago that this is not sustainable.

We are headed towards a crisis, and what we were really worried about was the social cost of it.

So as the COVID pandemic hit and, uh, economic situation began to decline and we defaulted on our external debt

in April 2022, suddenly they have a large fuel queues, electricity supply was disrupted, even some basic essentials

like milk powder, which we import was in very bad shape.

short supply.

So that led to massive protests.

You might have seen on the television, you know, people in their hundreds of thousands and then capturing the presidential

palace and even swimming in the presidential swimming pool.

But there was one demand that that president had to go and the people won.

In a sense, then the president's, uh, family and supporters were still the majority in

parliament and there was a counter revolution.

They put forward another president and tremendous repression along with the support of the military.

And this is what has led for severe austerity measures on the part of the IMF program to be implemented.

When you talk about severe austerity measures, what is austerity and why

would you classify it as severe austerity?

Austerity basically means a huge reduction in government spending because two years ago,

there was a policy shift in terms of our government where they decided to go for an IMF program and as part of

it, they started implementing the IMF's recommendations.

Right, which is cutting all subsidies.

So for example, if you take fuel, for a country like Sri Lanka, fuel costs have to be

maintained at a level that people can afford it.

It might be fuel for transport.

So suddenly, bus fares tripled.

Small scale farmers.

Fisher folk, they use kerosene oil for irrigation or for their small boats.

Suddenly the price of kerosene went fourfold.

So then they could not fish, for example.

Or the cost of electricity tripled or even quadrupled.

So Sri Lanka is a unique country in South Asia where 99 percent of our people have access to the electricity grid.

And they were paying, you know, on the order of maybe two US dollars a month for the electricity bill, but suddenly

when that increases, what we've seen is that out of a population of, say, around five, six million households

in Sri Lanka, one million households have lost their electricity connection over the last year and a half.

The price of bread during the economic crisis went down.

threefold increase.

So people couldn't afford bread, then they tried to substitute for something else.

And all of this because the government had resigned from its responsibility to protect

the people in terms of their very basic needs.

Wow.

So in a sense, what you're telling us is that there's been a rollback, significant rollback in

the social protection infrastructure in the country.

That's right.

So there is the broader social welfare in terms of education, health, and food.

And when it comes to healthcare, for example, again, Sri Lanka had a very long history of a strong healthcare

system, including a preventive healthcare system, which is what helped us during the COVID crisis.

But now, when people go to the hospital, they are asked to go and buy their medicines outside, they may

not be able to afford it, to go and do their tests in private So the public health system is now in jeopardy.

Education, again, now children are not having enough meals.

Sometimes they're going to school and even fainting.

School dropouts are on the rise.

Parents can't afford the bus fare to send their children to school.

So all of this is on the one hand collapsing.

And then there's what we call the Um, social protection and the, and the IMF and the World Bank define it a bit

more narrowly in terms of those who are in most need.

Like I mentioned, in the 1970s, there was a universal food subsidy.

Every individual was entitled to two kilograms of rice.

per week.

So that ensured that there was no starvation.

With the structural adjustment programs, they changed it into a cash transfer and then a targeted cash transfer.

And with inflation, it had become very minimal.

Now, with the economic crisis and the new IMF program that Sri Lanka is in over the last year, the whole promise was

that, okay, austerity measures are going to be harsh, but there will be a new social protection system that would at

least make sure it safeguards those who are most affected.

But in reality, what happened with this IMF program is that only 0.

6 percent of GDP is allocated for this new social protection scheme.

And then they justified it by saying, they're going to target better.

They're going to find the people who are most affected.

But how do you target during an economic crisis?

One season, the farmers are out.

The next season, the fisher folk are out.

Then the urban workers, a country like Sri Lanka, like much of Africa, the majority of our people, somewhere between

60 to 70 percent of the people work in the informal sector.

They don't have a regular income.

So then you have to target the entire 70%.

So it just does not it.

Makes sense.

So this new social protection program, which is part of the IMF program, which was designed

by the World Bank, has been an utter failure.

And what we are seeing is the rise in poverty.

Poverty, according to the World Bank, has doubled.

I think it's much higher.

The data will only come, come out later.

According to the UNDP, around 55 percent of our population are vulnerable in terms of access

to education, health, and so on and so forth.

It's been a disaster.

Right.

And there's been many protests, particularly by women who this is the only way in which they engage with the state.

Right.

It's through the social protection mechanism that they can go to their local in Sri Lanka, we call the Samudhi

officer in their village to say, these are my needs.

And if there's any additional help, I can get that.

But all that is being changed overnight.

What happens to the social and economic fabric of a country in debt distress?

Thanks.

What I'm really concerned about the next generations, even in Southern Europe, we saw what happened in Greece, the lost decade.

And if you just look at even the growth figures for Sri Lanka, it's going to be 2028 before we

are GDP returns to the level that it was in 2018.

So we've Definitely lost a decade, but it's more like two decades that we're looking at because

there was no growth during that whole decade.

Now the social impact of that is that there is increasing unemployment, livelihoods have been disrupted,

youth have no future other than to maybe migrate.

abroad.

And what we learned from the civil war, and I think, you know, so many countries around the world have gone through such

conflicts, is that when one generation is affected, when women are displaced during a war or their education is disrupted during an

economic crisis, it also affects the next generation's education.

So how can we protect our society.

One idea that many scholars and activists have been proposing in Sri Lanka, which might be relevant for other

countries, is that we need universal social protection.

It's always criticized that freeloaders will gain.

It's not about freeloaders because at that basic level, it's only people who really need those

services would come forward and, uh, get them.

And I work with cooperatives in Northern Sri Lanka, and we actually.

Piloted for six months, a universal food subsidy scheme, and we found that only about 40 percent of the people

came for it, even though we offered it to everyone.

We provided, uh, one kilogram of rice per person at 50 rupees less.

So, this kind of universal social protection schemes.

are important.

And how would we fund it?

So we need to really have redistribution.

In Sri Lanka, we are talking about wealth taxes.

The IMF is quick to move on everything.

But when it comes to wealth taxes, it's pushed out to 2025.

And they're saying we need the data, we need the proper mechanisms to be able to do it.

So redistribution

But what's happened, if you're thinking about the future in Sri Lanka, and I think Zambia and maybe Ghana again, were confronted

with this question of what is called domestic debt restructuring.

Even though Sri Lanka defaulted on its external debt, these powerful bondholders put a lot of pressure on Sri Lanka, and even

the IMF's parameters pushed us into domestic debt restructuring.

What did the Sri Lankan government do?

They did not go after the banks.

They did not go after the finance companies.

They did not even go after wealthy individual investors.

They targeted the retirement funds of our working people.

They were the tea pluckers, the garment sector workers, mainly women, and many of them even earned below poverty.

level wages.

They would not even fall into any tax bracket.

That retirement fund we call the Employee Provident Fund is controlled by the central bank.

The central bank proposed domestic debt restructuring and then they implemented it with

the support of an illegitimate parliament, in my view, where over the next 16 years, every year, 0.

5 percent of our GDP is going to be saved by cutting the interest to be paid to this retirement funds.

You know, I mentioned earlier only 0.

6 percent of GDP for social protection.

Now they're going to, with the other hand, take away 0.

5 percent of GDP from our Working people.

Yeah.

The consequence over 16 years is that that retirement fund is going to be 47 percent less more or less our working people over

the next 16 years are going to lose half their retirement fund.

So this is how during a crisis inequality works.

The rich get richer and the poor get poor and the entire burden of debt restructuring is passed on to our working people.

If you could give us a little more detail around some of the proposals which

are being put on the table around wealth taxation.

And given that you've spoken about Sri Lanka having a predominantly informal economy, how do we go about the headache?

Like any other frontier market of domestic resource mobilization, because the informal economy might

not be within the radar of the authorities.

Yeah, when it comes to wealth taxes, definitely property taxes, vehicle taxes, because what happened

over the last 15 years when Sri Lanka, like so many other countries in the global south, were floating these sovereign

bonds, huge amount of capital coming in to a country as debt.

What did we do with that?

Suddenly you saw Colombo, the capital city of Sri Lanka, change overnight.

They have a high rise buildings, condominiums, the number of BMWs and Mercedes Benzes on the streets increased.

So who gained from all that debt and who's.

paying for it.

So a wealth tax in a sense is this idea that there should be payback by the wealthy who actually made

a killing during this binge with the debt crisis.

So when you're thinking of alternatives, how do we strengthen our society and particularly a society of very small producers?

Sri Lanka is unique in that we don't have, like in other parts of South Asia, these large zamindars or large landholders.

It's mainly a smallholding agriculture and even fisheries, it's fishermen go on these fiberglass boats

that are 17 foot long, just a couple of them, and they are hardly able to earn their living for that day.

This debt restructuring process and the IMF program is all about repaying.

The powerful creditors and safeguarding our elite who have already gained from this.

So we need a very different process.

In my view, we have to take agrarian change and the rural economy front on in terms of addressing the economic crisis.

Whatever investment possible should be going in that, because we're also suffering from a food crisis.

It's about survival, and if we can produce more food, if we can support our small producers, that

would at least ensure that people don't starve.

And then there's been the experiment in the 1960s and 70s around self sufficiency.

And I really draw inspiration from, you know, some of the powerful leaders and thinkers in Africa.

The Arusha Declaration, which talked about self reliance and self sufficiency, the Lagos Plan in the early 1980s, where again, they

talked about the importance of the food system and agriculture.

Even if you take at the United Nations, the new international economic order, which was, uh, published as a very powerful

document developed by UNCTAD, Raúl Prebisch, and then the secretary general who actually delivered it happened to be a

Sri Lankan, Gamani Corea, they understood this very unequal order, but they also want to safeguard the third world countries

at that time with better terms of trade, proper investment.

So we need global solutions at that level, but we also need solutions nationally and locally.

And I think our leaders and our countries also have to take responsibility to address these problems.

And I think it has to start with redistribution, and it has to focus on the most vulnerable in our societies.

If we can stabilize them, in my view, other things will fall in place.

Countries like Sri Lanka and countries in Africa should be very conscious of the long term costs of trying to

resolve this crisis by just repaying the creditors.

And we will only be able to resist that if we become a coalition, perhaps, of debtor nations to be able to oppose this.

Because as a small country, as an individual country, it's very hard to confront these powerful actors.

Because they're also backed by very powerful Western interests.

So there needs to be a lot more thinking and there needs to be a lot more solidarity between Asia and Africa and,

and Latin America in terms of dealing with this crisis.

And then we have to hold our governments accountable and say, enough is enough.

We cannot go in this direction where we go from debt crisis to debt crisis.

There needs to be constraints on lending.

There needs to be new avenues of development financing that is concessional.

The external debt and trade liberalization which comes together is the main problem.

Because that is what pushes us into a balance of payment problem where we won't even be able to import the essentials.

that we need.

So when I talk about rebuilding our rural economies, there's so much that we can do with our own resources.

And sometimes the government might have to borrow locally to be able to do that.

It's even better if it can redistribute it through a wealth tax.

But when it comes to our external sector, we really have to rethink this idea that

imports can come in without any restrictions.

And because we've been pushed with structural adjustment programs towards trade liberalization and capital account

convertibility, which has what has led since the last four decades of neoliberal policies for repeated and deepening crisis.

So there needs to be a complete rethinking of how we deal with the external sector.

We need to come up with new ideas of how we are going to mobilize our domestic resources and our policies.

and including debt.

It's not that we can completely get away from debt, but we have to think about it as credit that is productive.

And there, there needs to be a lot of rethinking.

Dr.

Ahilan, thank you so much for your time and for your insights.

Thank you for having me.

That was Dr.

Ahilan Kadirgamar from the University of Jaffna in Sri Lanka, and also a member of the IDEAs executive committee.

The president who secured that IMF deal lost the September 2024 elections.

Ideas will be keeping a very close eye on the new president, Anura Kumara Disanayaka.

So do sign up for the newsletter.

Details in the show notes.

Now, as Ahilan had pointed out, the people who bear the brunt of the social costs of debt are working people.

So let's hear from a woman who lives about 15 kilometers outside the capital, Colombo.

She was a freelance journalist, supplementing her income by selling indoor plants to big hotels.

But then in 2019, Sri Lanka was rocked by a terrorist attack, the Easter bombings of three churches and three luxury hotels.

Prathibha Fernando tells a story to our reporter Saroj Pathirana.

After bomb blast, all the tourism sector has, like, vanished in Sri Lanka.

So, all the orders I've received, it was stopped.

That's the very first problem I had to face, a serious one.

And, uh, my husband's job was a graphic designer.

And they have cut 50 percent from his salary as well.

So, obviously, we couldn't pay the rent.

Uh, our electricity supply was cut off because we couldn't pay the bill.

Our water supply was cut off.

And then my, uh, daughter's school, we were okay financially before all these things happened.

So she was going to a private school.

Uh, it's nearly two and a half years now.

She's at home.

So, uh, that's the most painful thing up to now that I'm suffering because even now when I'm thinking about that, I,

uh, I always feel like that I'm a very failed mom, mother.

I'm a failed person as a mother, as a parent, because two and a half years I couldn't send my daughter to school.

Several online classes only.

Did you try to get her into a government school?

I tried, but in my case, that's a problem because my kid, she was like, studying in a

Cambridge syllabus from grade one, from nursery actually.

If I had to send her to the government school, it's going to be totally different syllabus and it's going to be in single medium.

And even for English medium, uh.

It's going to be like some amount I have to pay.

I'm still appealing and I'm still, still fighting with the school to get her back.

Me and my husband, we were selling food, you know.

We were preparing Sinhala things, coconut roti, manjok and kochi sambola.

That's, that's very famous among our people.

Bus road and we were like, go there.

We, we used to sell that because we tried everything.

We tried our best to do that, and then we were like doing that.

Then the pandemic came, so there was a shutdown and everything, so we couldn't do that anymore.

Then came the A, yeah, the youth led, uh, uprising.

The whole world was watching how young people, adults, children, everybody got together and protested, peacefully

protested, mainly centered in Colombo, Gold Face.

You were part of it, right?

Yeah, so I was lucky enough to get a job at a private school and then my husband as well,

he was lucky enough to get a job as a photographer and I was like a teacher and a media coordinator.

I don't know, maybe we were foolish, I don't know.

But we were acting according to our conscience, our heart.

So that was a time that people were dying in the queues.

There was people that they couldn't even survive.

They were dying in hunger and there were kids dying in hunger and everything.

So as people experienced that situation, we couldn't just watch and stayed at home.

As a result, you lost the job.

Yeah, we both, me and my husband, they kicked us out.

But Luckily, my husband got a job.

Now we have, we have something to eat.

Even I borrowed money and saved my house.

The government described the president as the savior of Sri Lanka, that he got International Monetary

Fund to support Sri Lanka, and the economy is back on track.

Do you believe that?

To be honest, I, I don't believe it at all because obviously we are the one who's suffering.

We are the ones facing real problems.

IMF is not a solution for a country.

So we have so many examples from Greece and several other countries.

This is not a method of survival.

That's not the way it should be.

That's why we fought like this.

It's not fair for my kid.

It's not fair for any kid.

Like, if they need to, like, suffer like this, if they need to stay at home like this, because of

the financial issues, there should be a system in the country to look after kids, look after people.

I'm considering myself as lucky, because at least I have a roof over my head with lots of debts, I know.

I'm still struggling to survive.

I'm not well.

But at least we can, like, eat something.

There are so many people, there are so many parents who can't provide even one meal per day for their kids.

Many thanks to Prathibha Fernando for sharing her story.

It leaves us with a lot to think about.

Next time on Economics from the South, we are back with Jayati Ghosh and Charleza Bugri to examine

the role of global multilateral organizations and private creditors in the debt crisis.

One big failure of the common framework is that it still relies on this IMF DSA, the Debt

Sustainability Analysis, as if it is this wonderful thing which is written in stone and which is this objective truth.

It's not.

Civil society, especially in Africa, have to stop believing that the IMF is the

instrument for disciplining their own government.

They are part of a global financial infrastructure that serves more powerful interests and basically

ends up creating more dependency on debt.

Thanks for listening to Economics from the South from the International Development Economics Associates.

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To the Ideas Newsletter.

I'm Julians Amboko, the producer Penny Dale the concept is by Charles Abugre, CP C.P.

Chandrasekhar and atieno Ndomo of the International Development Economics Associates.