Hashim bin Rashid

Sri Lanka and Pakistan today face the largest economic crisis in their histories. Domestic currencies appear on the verge of collapse, import bans have been announced, and inflation is at an all-time high as indicated by spikes in fuel and food prices.

In Sri Lanka, the Rajapaksa government was ousted by a people’s movement in scenes that were witnessed across the world. This catapulted the interim prime minister, Ranil Wickremesinghe, into the president’s office, who has prioritized cracking down on protestors over serious economic reform. With a democratic protest movement being crushed by authoritarian militarism, not new in Sri Lanka, it is no surprise that the International Monetary Fund (IMF) is now willing to talk. The IMF works better with authoritarian governments than democratic ones.

In Pakistan, history is repeating itself unironically. One prime minister, Imran Khan, was recently ousted, reemerging as an opposition figure taking on the coalition government led by Shahbaz Sharif, with little acknowledgement that this government is merely continuing the same policies as his own. Like Khan’s first year in power in 2018, the Pakistan Muslim League-Nawaz (PML-N)/Pakistan People’s Party (PPP) has spent its first few months being spun around in circles by the IMF, which demanded doubling fuel and energy prices and devaluing the currency as preconditions for bailout talks.  

The crisis goes much deeper for working people in both countries, who have been queuing up for fuel and skipping meals to deal with price hikes and shortages of essential commodities. With wages stagnant, there has been a downgrade in the quality of life of not just the poorest, but also the middle classes.  

With public anger at a boiling point, public discourse has been taken over by middle class professionals and policy hawks, who continue to peddle the only solution they know: go back to the IMF.

IMF Legacies in Sri Lanka and Pakistan

The irony is that it is the IMF that caused these crises in the first place. Structural reforms, led by the IMF-World Bank nexus, began in 1977 in Sri Lanka under the Jayawardene government, with Pakistan following suit in 1978 under the military dictatorship of General Zia ul Haq.

In both countries, the so-called “open economy” model began to replace socialist-led attempts to build a strong state sector. When the IMF was invited, their diagnosis was simple: the economic problems of the countries were the result of a bloated state sector, with “public enemy number one” being subsidies, which in fact served both developmental and social welfare objectives. The IMF promoted the replacement of the state-supported economy with a “market economy”, in which the strongest private enterprises would spark “real” economic growth.

This diagnosis was the outcome of elaborate myth-making. Sri Lanka had suffered a balance of payment crisis in the 1970s, which was the result of contradictions in the colonial economy, such as its export-driven plantation agriculture being decimated by a collapse in commodity prices. It is no surprise that the benefits of this were reaped in the Global North, and countries dependent on global export markets were suddenly told that their economies were built on the wrong fundamentals.

The premise itself was correct. The Global South had been integrated into the global economy during the colonial period on terms of trade that only benefited the colonizing countries. In the 1960s and 70s, Pakistan and Sri Lanka were amongst many countries attempting to wrestle free from trade dependency with the Global North. During their early post-independence, both countries had been supported by so-called soft loans to help them along their developmental journey. However, the commodity price crash was quickly followed by the US deciding to spike interest rates in the early 80s.

Key international financial institutions, like the IMF and World Bank, refused to allow access to more loans unless a set of policy prescriptions were followed, which was the beginning of the notorious structural adjustment plans. This set up the crisis that was to come, with governments launching an attack on the organized labour movement, undertaking mass privatization of the state sector, cutting subsidies, devaluating currencies, and undermining institutions of social welfare.

Coming with a promise of increased investment from the West, much of these so-called investments were lopsided deals, designed to transfer surplus from Pakistan and Sri Lanka to the Global North. One of the most crippling developments in Pakistan was the IMF-led launch of the Private Power Policy in 1994, which allowed Western corporations to set up electricity generation plants in the country at little cost, and be guaranteed dollar-pegged returns, which could be repatriated freely out of the country. This was the beginning of the circular debt spiral which the power sector in Pakistan has not been able to get out of.

Stories like these show that, rather than breaking the debt trap, IMF loans and structural adjustment have only made the financial crisis deeper.

Debt and Speculative Finance

The larger consequence of market reforms has been changes in state borrowing. Since the early 2000s, governments have turned from multilateral organizations and “friendly” countries to private lenders in the speculative global finance system.

Where loans from the former could be renegotiated, and often had larger political imperatives backing them, private lenders merely care about a return on their investment, and the IMF has increasingly become their international backer.

The result of these developments has been the rapid change in the debt profiles of Pakistan and Sri Lanka. The real debt now comes from private lenders. In 2007, Sri Lanka began to rapidly switch to lending from private sector lenders in global financial markets through bonds. Pakistan began to move its debt profile to include international bonds, which both countries have issued at over seven percent interest – which is one of the major reasons for the repayment crisis.

Out of the more than $15.5 billion Pakistan borrowed in the first 10 months of 2022, $1.5 billion was from overseas Pakistanis, $4 billion from multilateral lenders, $3 billion from Saudi Arabia, $2.6 billion from commercial banks and almost $2 billion from international bonds.

“IMF deals…continue the same set of market reform policies that are painful for the working populations and have brought the two economies to their knees”

The IMF itself is not a major source of debt, but no private or multilateral entity is willing to lend to a country without the IMF backing its so-called “fiscal” management plan. In 2020, the IMF was only owed around $9 billion out of Pakistan’s $112 billion external debt. In comparison, Sri Lanka only owes around $2 billion to the IMF out of its $56 billion external debt, coming in at about 4 percent of its external debt.

Ongoing negotiations for a bailout between the two countries and the IMF, valued at anywhere between $2 and $3 billion over three years, would only come to around $1 billion per year. In contrast to the actual current account deficit in Pakistan of around $17 billion, the IMF loans are a very small proportion of the country’s net borrowing.

Sri Lanka’s current account deficit has, in fact, consistently dwarfed Pakistan’s, with it usually ranging around $1 billion, but jumping up significantly due to the loss of tourism during the COVID pandemic.

If not a bailout, what purpose do the IMF deals serve? One, they serve to back up multilateral and private financial capital. Second, these deals constitute agreements to continue the same set of market reform policies that are painful for the working populations and have brought the two economies to their knees in the first place.

In addition to private debt, the second major issue facing Pakistan and Sri Lanka has been a mounting trade deficit, which is very much a product of the open trade policies that have been pushed by the IMF-World Bank nexus.

Till the mid-1970s, industrialization policies in South Asia were geared towards manufacturing growth, which would both reduce the import bill by covering domestic demand and export the surplus to earn foreign exchange. The withering away of trade restrictions in the late 1970s has rapidly propelled domestic elites into global consumption cultures to the detriment of domestic industrial growth.

The consequence has been accruing massive trade deficits. In 2022 alone, Pakistan accrued a negative trade deficit of around $33 billion. This has only been made semi-manageable by around $20 billion in remittances, which effectively confirms that the country’s biggest export is labour, not commodities.

Pushed into competition with other developing countries, the export sector in Pakistan and Sri Lanka has been effectively dragged into a race to the bottom. Government policies to push exports, and even develop Special Economic Zones, have merely contributed to squeezing the rights of working populations, rather than solving the issue of debt dependency.

Is Debt Always a Problem? Differences Between the Centre and the Periphery

It is also important to note that the pressure to take IMF deals is as much a function of the structure of global financial markets as it is of domestic mismanagement.

The global economy in the era of free trade is underwritten by debt and current account deficits. The two countries at the heart of global imperialism, the US and the UK, are two of the worlds most indebted countries and accrue the biggest current account deficits.

If external borrowing itself was the problem, it would be these two economies that would be under the hammer, with US external debt estimated at around $20,000 billion and the UKs at $8,700 billion. The external debt of Pakistan and Sri Lanka, in comparison, is miniscule, with the countries ranked 54th and 64th respectively in terms of net external debt.

While external indebtedness itself builds an inherent instability within the global economy, the debt numbers in the two South Asian countries themselves are not high enough to merit the despair that political and economic elites express. Moreover, let’s not forget, the narrative of economic crisis that can only be solved through seeking external debt through the IMF goes back to the late 1970s.

So, if the external debt is itself not that high, why is there an economic crisis in Pakistan and Sri Lanka? Largely, the answer comes down to the fact that, once any country signs an agreement with the IMF, global perceptions of its economic health begin to be shaped by the nexus of the IMF and international credit rating agencies.

The IMF and the Disruption of the Developmental State

The IMF begins to enforce a set of conditionalities designed to make development impossible. It is no surprise that, globally, there are no IMF success stories. Instead, the IMF continues to enforce dictums that are designed to further the relationship of dependency between countries in the Global South and North.

The countries who did make their way out of these traps, such as South Korea, did so under conditions akin to the Marshall Plans for Europe, with privileged access to the US and European markets, as well as massive subsidies for their emerging industrial sectors.

While South Asia’s ruling elites have pandered to the US repeatedly, there has never been developmental plans that came even close to the preferential terms offered to the Southeast Asian countries, who were forced to align with the US during the Cold War through war, coups, and mass terror.

Since the late 70s, South Asian states looking for support in their development processes are directed to go to the IMF. Rather than offering a developmental plan, the IMF’s approach boils down to “fiscal reform” with a single agenda: dismantling the developmental state.

“Once stuck in the IMF trap, there is no way to break out of the cycle while continuing to play the rules of the game.”

Having told Pakistan and Sri Lanka to cut developmental and social welfare expenditures to balance their budgets, it is no surprise that the outcome is stalling economic development. With currencies deliberately weakened, domestic prices in these import dependent economies begin to increase. The value generated from exports begins to crash, and no new industries are viable to set up as the cost of operating business begins to spiral up.

Once stuck in the IMF trap, there is no way to break out of the cycle while continuing to play the rules of the game.

A Chinese Path to Development?

The relationship of financial imperialism cultivated by the Global North, through institutions like the IMF, has been one of the critical reasons why both Pakistan and Sri Lanka have turned to China in recent decades.

In theory, the Chinese investments in infrastructure development were designed to reignite the developmental trajectory in the two countries. The $62 billion China-Pakistan Economic Corridor (CPEC) project promises investments in transport infrastructures, energy projects, and new special economic zones. In the context of Sri Lanka, much attention has focused on the transfer of the Hambantota Port, which was built with Chinese money, to a Chinese company, while other Chinese investments in the country have focused on infrastructural development.

Even though the Chinese investments are made up of debt, these are significantly different from money received from IMF programmes or private lenders, which are merely designed to cover the shortfall in the current account deficits. Chinese money, on the other hand, has gone into developing an economic infrastructure to support economic growth.

However, it has become increasingly clear that there is no concurrent vision of how economic development will take place in the domestic economy of either Pakistan or Sri Lanka. This has led to a dynamic in which Chinese companies are syphoning off undeclared amounts of capital from both countries, and Chinese debt repayment is likely to pose another challenge in the medium term.

Crisis Narratives and Lazy Economists

Economic policy makers in Pakistan and Sri Lanka are trained to take a narrow view that barely goes beyond any analysis outside national borders. This has led to the same mantra being repeated for decades: the economic crisis is a function of overspending on development and relief for the poor.

Ironically, the same fervour of criticism is never directed at the massive elite subsidies that exist in both countries, with a UNDP report last year estimating that elite subsidies in Pakistan amounted to a staggering $17.4 billion.

Effectively, this is a borrowed narrative, which has been well-drilled into local elites by funding agencies. No mainstream economic commentator is willing to even talk about development anymore. Instead, neoclassical economists continue to talk about fiscal balancing and averting an economic crisis, which requires, they claim, temporary suffering on the part of the public.

The suffering of the public is permanent, and there is no future crisis to be averted. The crisis already exists for the region’s working people, who face high prices, shortages of essential goods, falling incomes and high levels of youth unemployment.

The crisis of the elite is a crisis of spreadsheets – a crisis of accounting. This is a crisis that the IMF can solve. The crisis of the people, on the other hand, is a crisis of the falling dignity of life. Neither the IMF nor the governing regimes have a solution to this crisis. Thus, every new IMF programme inked by the elites can only make this crisis of life deeper.

Breaking the Cycle, Planning for Development

A crisis caused by market reforms cannot be solved by market reforms. The same solutions that have not worked in the last half a century will not suddenly start working.

Even Bangladesh, South Asia’s so-called “miracle economy”, which has pushed export-led development at the cost of public welfare, is negotiating a $4.5 billion package from the IMF.

The people’s movement in Sri Lanka that has brought the Rajapaksas down cannot stop with securing cosmetic regime change. It remains a great tragedy that the political oppositions in both countries, in fact, attempt to build their legitimacy by promising to be more loyal to the IMF programmes than the sitting government.

The memories of the economic experimentation in the Global South that emerged after independence have faded from the political imagination. Import substitution industrialization, welfare states, development banks of the South, debt-free development, and, of course, socialism are no longer the dreams that guide us.

It is impossible that the same elites that brought the crisis will be able to find a way to solve it. Public anger has been escalating in both Pakistan and Sri Lanka, but it is being channeled and dissipated through a mix of authoritarianism and populism. The proposal of debt default is a serious one for any popular movement, but doing this requires a vision for what development must look like, and the path to get there. The IMF path has not worked.

Breaking out of financial imperialism in South Asia requires us to begin to re-imagine what development would look like. In a world where we no longer dream, and protest cycles run from crisis to crisis, the power to shape our future still remains, tragically, in the hands of those who have brought us here in the first place.

Hashim bin Rashid is a doctoral candidate at SOAS University of London. He has worked as a journalist, teacher and progressive activist in Pakistan.

The article benefited from conversations with Ahilan Kadirgamar at the University of Jaffna.

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