This is the second in a series of three articles. Please click here for Part 1.
Viewpoint by Darini Rajasingham-Senanayake *
Sri Lanka a theatre of US proxy war in the Indian Ocean Region?
COLOMBO (IDN) — Like Lebanon, once known as the Paris of the Middle East, Sri Lanka is a relatively wealthy country in South Asia and listed as a lower Middle-Income Country (MIC). The strategic island is ahead of India, Pakistan, Bangladesh, Nepal and Afghanistan on the SAARC regional poverty count.
The country has always paid down its debt and had no previous history of default. Likewise, its debt to GDP ratio, another metric to determine the solvency of a county, at 110 per cent was not off the map although this is cited as one of the reasons for rating agency downgrades, leading to difficulty borrowing to sustain debt servicing and default. But this too may be kept in perspective. The top ten countries with the highest debt to GDP ratio according to the World population review are:
- Venezuela — 350%
- Japan — 266%
- Sudan — 259%
- Greece — 206%
- Lebanon — 172%
- Cabo Verde — 157%
- Italy — 156%
- Libya — 155%
- Portugal — 134%
- Singapore — 131%
- Bahrain — 128%
- United States — 128%
While China has often been identified as the source of Sri Lanka’s Debt trap it is Euro-American based International Sovereign Bond (ISB) traders, whose names are kept secret that are mainly responsible for the default at this time.
This graphic’s colour coding may be misleading since it is the green coded International Sovereign Bonds (ISB)s and Other Financial Markets that are the cause of Sri Lanka’s debt default at this time and NOT the bilateral lenders (although coded in red in the above graph). In fact, Sri Lanka’s bi-lateral and multilateral donors which include the ADB, Japan, China and India have all indicated a desire to help and willingness to delay debt payment. They have also donated food, fuel and medicine to the cash strapped island.
While the names and proportions of the national debt owned by various bilateral donors and multilateral agencies, such as the ADB, World Bank, Japan, China, each with around 10 per cent and India with around 4 per cent, were known, the names of the US and EU-based ISBs that own over 55 per cent of the island’s debt and which are part of the shadowy international financial system where black money is parked in offshore accounts, which are primarily responsible for the ‘debt trap’ and downgrades, are not disclosed.
ISBs are the root cause of Sri Lanka’s Default at this time, but this is a well-kept secret, hidden by the “Chinese debt trap” propaganda and narrative, and by local economists and think tanks funded by USAID and EU grants and projects. The latter promotes the narrative the IMF is the ‘solution’ even though the IMF has never pretended that it cares about poor people or inequality, or even protestors but rather works for the global 1 per cent. In fact, the IMF is fundamentally part of the problem.
In the final analysis downgrades by rating agencies are based on various Subjective considerations of “CONFIDENCE” in the ability of the county to sustain debt as stated by Dr Nishan De Mel of Verite Research. “When the IMF determines that a country’s debt is not sustainable, the country needs to take steps to restore debt sustainability prior to IMF lending,” the Fund’s country director Masahiro Nozaki said recently in a statement regarding Sri Lanka. The IMF does not differentiate between illiquidity and insolvency!
Pumped and Dumped into the Middle-Income Country (MIC) Debt trap
From a longer and wider perspective, the question arises: was Sri Lanka “pumped and dumped” by the Washington Consensus, when the World Bank upgraded it to a Lower Middle Income Country (MIC) in 1997, and then an Upper MIC in 2019 thus making it ineligible for low-interest development aid which compelled borrowing on Capital markets—like other countries that are placed in the ‘Middle Income Country Trap?
Rating Agencies and Sovereign Bond traders work in concert with the Washington Consensus and the OECD Paris Club of Western aid donors and do not recognize the difference between illiquidity and insolvency. It is increasingly evident that the island’s debt crisis has many external dimensions and is not entirely internally driven.
Arguably, under most metrics, Sri Lanka should not have been downgraded to the point of default by Rating Agencies like Moody’s and Fitch at this time. The downgrades were principally due to the USD 7 billion payments due to US-based Bond traders like Goldman Saks, Black Rock and Vanguard.
Asset managers BlackRock Inc. and Ashmore Group Plc. were among the creditors organizing in a group ahead of the IMF talks and had hired law firm White & Case for advice. Ayres Investment Management LLP, DecisionBoundaries LLC and Perella Weinberg LP are among firms seeking to provide financial advice to Sri Lanka’s creditors, sources said, as the country heads towards a revamp of its $12 billion of external debt. Recent filings show major asset managers such as Fidelity, T Rowe Price and TIAA also hold some of the country’s outstanding dollar bonds.
Disregarding the difference between illiquidity and insolvency, the drumbeat and narrative of and for Sri Lanka’s Default was in the air for some time—at least since the rejections of the Millennium Challenge Corporation (MCC) compact: As Professor Howard Nicholas, of the Institute of Social Studies (ISS), Netherlands, recently suggested in a lecture organized by the Economics Students Association of the University of Colombo, alluding to Geopolitics and the recent visit by US Secretary for South and Southeast Asia, Victoria Nuland to Colombo, the island’s Default seemed to have followed a systematic, deliberate and planned route to deliver Sri Lanka into IMF’s and Washington’s clutches.
Default would effectively enable the IMF’s and foreign ‘legal advisors’ to effectively takeover this strategic island nation’s economic policy process, and Sri Lanka would lose Economic and Social Policy Autonomy and Sovereignty.
Simultaneously, the IMF’s aid conditionalities would enable Washington to stave off a perceived China Threat and likely make it impossible for Sri Lanka to source its oil, gas and other Energy requirements which are at the root of the current crisis at discount rates from sanctions-hit Russia.
Has Sri Lanka become, like Ukraine, a theatre of US proxy war this time in the Indian Ocean Region as the New Cold War escalates?
However, from a different perspective, this island at the centre of the Indian Ocean Sea Lanes of Communication (SLOC), seems to suffer from a “Paradox of Plenty or perhaps a geostrategic Resource Curse”. [IDN-InDepthNews – 25 April 2022]
* Dr Darini Rajasingham-Senanayake is a social and medical anthropologist with expertise in international development and political-economic analysis. She was a member of the International Steering Group of the North-South Institute project: “Southern Perspectives on Reform of the International Aid Architecture”.
Image Credit: China-US Focus
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