Sri Lanka Should Cancel Not Renegotiate Corrupt Loans 

It will be years if not decades before the once prospering nation of Sri Lanka recovers from the financial and humanitarian crisis brought on by the fiscal profligacy of the Rajapaksa family. During the 10-year rule presidential rule of Mahindra (2005 -2015), the government began borrowing ever larger sums, principally from China, to build ports, roads, and other infrastructure. Younger brother Gotabaya continued the family tradition when elected president in 2019, borrowing more and more to keep the project pipeline full and the business community happy.

For many projects, the terminus of the pipeline was the Rajapaksa’s home district. A herd of white elephants poured forth: an unused airport (Mattala Rajapaksa International Airport), a deserted cricket stadium (Mahinda Rajapaksa International Cricket Stadium), and a useless international conference center. Whether the loans for these projects were the result of corrupt dealings has been much discussed but never investigated. Same with many other loans taken out during Mahinda and Gotabaya’s reigns.

The Rajapaksa’ reckless borrowing was accompanied by other equally irresponsible fiscal policies: state-owned enterprises that bled resources, a regressive, poorly enforced tax code. Gotabaya’s 2019 cuts in personal and corporate taxation and its almost halving the VAT (from 15% to 8%) put an economy headed over the cliff into overdrive. The inevitable result of borrowing too much and taking too little in: last May the government announced it could not pay its debts, the sovereign equivalent of a corporation or person declaring bankruptcy.

The International Monetary Fund has now come to the rescue, offering to lend the government $2.9 billion while it renegotiates the some $35 billion it owes the Asian Development Bank, China, India, Japan, the World Bank, and private lenders.

But not all Sri Lanka’s debts should be renegotiated. Where a loan was taken out because a government official was bribed, Sri Lanka has a clear right to cancel or rescind it. That right to walk from a loan procured through corruption is recognized under international law (article 8(2) of the Council of Europe’s Civil Law Convention Against Corruption, article 34 of the UN Convention Against Corruption, UNICTRAL Principles of International Contracts 3.3.1) and the domestic laws of most legal systems. Indeed, it is a part of the common law of Sri Lanka (Review Sri Lanka UNCAC Compliance) and article 52 of China’s contract law expressly states “A contract is void [if] 1. either party enters into the contract by means of fraud. . ..”

Sri Lankans will suffer for years for the wrongs done to them by the Rajapaksas and accomplices. They should not have to bear the burden of paying off one single dollar, yuan, rupee, or yen of a loan taken out corruptly. Where there are suspicions that a loan, as those to support the elephant herd in the Rajapaksas’ home district, was tainted with corruption, an investigation should be opened. And during loan renegotiations, Sir Lanka should make it clear that no matter the terms, it reserves the right to cancel or rescind any contract procured through corruption.

2 thoughts on “Sri Lanka Should Cancel Not Renegotiate Corrupt Loans 

  1. Hi Richard – very interesting proposal. I wonder how rescinding the corrupt loans would affect efforts to recover misappropriated funds. For example, in the 1MBD scandal, the US returned over $1bil of misappropriated funds for the corruption that occurred within its jurisdiction. If these corrupt loans were cancelled, might this thwart the return of ill-gotten gains to Sri Lanka? Additionally, do you think that completely rescinding this debt in lieu of renegotiating (with support of the IMF) would hurt Sri Lanka’s ability to access the capital markets in the future?

  2. if contract is null and void, this leads to restitution. That means that Sri Lanka will be ought to return the loan to the borrower. Parties should return to the situation prior to contract

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.