182 economists and development experts have called for debt cancellation for Sri Lanka to help it out of its current economic crisis. In a statement released today, the signatories – including Jayati Ghosh, Thomas Piketty, Dani Rodrik, Ravi Kanbur, Yannis Varoufakis and Ha-Joon Chang – call for debt cancellation by all external creditors and measures to stem the illicit outflow of capital from the country.
The experts say that private companies who lent at high interest rates to corrupt politicians must face consequences from their risky lending by cancelling debt.[1]
Debt restructuring negotiations for Sri Lanka are now at a crucial stage. Much of the focus has been on the role of China in the debt talks, but 50% of Sri Lanka’s external debt payments are to private lenders, whereas only 14% are to China.[2]
In the statement the experts say:
“Private creditors own almost 40% of Sri Lanka’s external debt stock, mostly in the form of International Sovereign Bonds, but higher interest rates mean that they receive over 50% of external debt payments. Such lenders charged a premium to lend to Sri Lanka to cover their risks, which accrued them massive profits and contributed to Sri Lanka’s first ever default in April 2022. Lenders who benefited from higher returns because of the “risk premium” must be willing to take the consequences of that risk.”
The statement continues:
“Debt negotiations in Sri Lanka are now at a crucial stage. All lenders—bilateral, multilateral, and private — must share the burden of restructuring … However, Sri Lanka on its own cannot ensure this; it requires much greater international support.”
“The Sri Lankan case will provide an important indicator of whether the world—and the international financial system in particular—is equipped to deal with the increasingly urgent questions of sovereign debt relief and sustainability; and to ensure a modicum of justice in international debt negotiations. It is therefore crucial not only for the people of Sri Lanka, but to restore any faith in a multilateral system that is already under fire for its lack of legitimacy and basic viability.”
Sri Lanka is one of several countries which have defaulted on external debt, or are seeking a debt restructuring, since the Covid pandemic began. Ghana suspended many of its external debt payments in December 2022, following Lebanon, Suriname, Ukraine and Zambia. With global interest rates increasing and widespread recessions expected in 2023, many more countries could follow.[3] Debt Justice research has found that, for two-thirds of lower income countries with International Sovereign Bonds, interest rates are so high that they are probably unable to take out new loans from external private lenders, increasing the chance they will need to default on their existing debts.[4]
Notes
[1] The full statement is available at https://debtjustice.org.uk/wp-content/uploads/2023/01/Sri-Lanka-debt-statement.pdf
[2] Calculated by Debt Justice from the World Bank International Debt Statistics database. According to the World Bank, between 2023 and 2029 Sri Lanka is due to pay $16.5 billion to external private lenders (52% of external debt payments), $4.5 billion to China (14%), $3.5 billion to other governments (11%) and $7 billion to multilateral lenders (22%).
[3] IMF Head Kristalina Georgieva has said the IMF expects one-third of countries to be in recession in 2023 https://www.theguardian.com/business/2023/jan/02/third-of-world-economy-to-hit-recession-in-2023-imf-head-warns