IMF, World Bank & Sri Lanka's bloodbath: "Collateral damage on private people"

By Robert Loblaw

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The Sri Lankan military’s victory over the LTTE, in 2009, involved a high number of documented civilian casualties.  Around the globe, 2009 was also a year of financial turmoil. A dispute between Deutsche Bank and the government of Sri Lanka, which started that same year, may provide insights into a possible link between the financial crisis’ effect on Sri Lanka, and the way the conflict ended.

The Deutsche Bank v Sri Lanka investment case was brought to the International Centre for the Settlement of Investment Disputes (ICSID, a branch of the World Bank) on March 24, 2009. Paragraph 6 of the case document summarizes: “The dispute has its origins in an oil Hedging Agreement dated 8 July 2008...between Deutsche Bank and Ceylon Petroleum Corporation.”

A Buzzfeed article, from August, 2016, reported that the hedge agreement was essentially a bet, by the Ceylon Petroleum Corporation, that oil prices would rise. “Then, instead of rising, the price of oil crashed. The Sri Lankan state company found itself forced to pay the banks millions. Sri Lanka’s Supreme Court ordered a temporary freeze of payments while authorities scrutinized the deals.” This freeze prompted the German bank to take legal action.

The tribunal in Deutsche Bank v Sri Lanka decided against Sri Lanka in 2012, with a total loss to the country of $60 million US. Paragraph 561 of the decision announced its majority view that Sri Lanka had violated Article 4(2) of the treaty governing the case, signed between Germany and Sri Lanka. Article 7 of the treaty names the International Monetary Fund (IMF) as the authority that would regulate any exchange of currency resulting from a violation of Article 4(2).

What does all this have to do with the armed conflict?

IMF & World Bank

A widely publicized email, from advisor Burns Strider to former US Secretary of State Clinton (“Some intel for you” dated May 4, 2009), reads in part that “the people on the ground both with World Bank and IMF believe the Tigers need to be completely defeated and any collateral damage inflicted on private people by SL govt in process is ok.”

On December 11, 2009, a US Senate Foreign Relations Committee report entitled “Sri Lanka: Recharting US Strategy after the War” gave a more reserved assessment of the World Bank’s role toward the end of the armed conflict that previous spring. The document reads: “World Bank staff in Sri Lanka...should be commended on their development of a ‘conflict filter to enhance effectiveness and reduce reputational risks’” for the organization’s work in Sri Lanka. “However,” the report stated,  “the IMF does not officially consider conflict sensitivity at all....On July 24, 2009, the IMF approved a $2.6 billion loan to support the Government of Sri Lanka’s ‘ambitious program...to restore fiscal and external viability and address the significant reconstruction needs of the conflict-affected areas, thereby laying the basis for future higher economic growth.’ The IMF did not examine the possible impact of its program on the conflict in Sri Lanka.”

Civilian casualties

On one hand, then, Strider’s email implies that both of the institutions involved in the Deutsche Bank v Sri Lanka case were also interested in seeing the war end quickly—knowing the high risk of civilian casualties. On the other hand, the Committee report is more conservative, but it implies that the IMF did not examine the risk of civilian casualties in its recommendations to Sri Lanka.

Explaining its need to assist Sri Lanka as it recovered from the global financial crisis, the IMF stated in 2011:

“Three decades of war distorted Sri Lanka’s economy, hindered development, and reduced the country’s potential growth. But since the end of the conflict in 2009 and with the help of an IMF loan program, the country’s economic fundamentals have improved markedly....Over the past few decades, Sri Lanka’s public debt grew to unsustainable levels as military spending and debt service costs increased, and budget revenues fell” (emphasis added).

Yet critics have pointed out that even today, international loans conditional on privatization have affected the Sri Lankan population negatively, and also led it into a debt trap. The end of the war does not seem to have produced its intended result.

The obvious message that can be derived from the above developments seems to be that in 2009, between the financial crisis affecting the banking system worldwide, and the drop in oil prices that affected Sri Lanka’s ability to repay a major European bank, international financial institutions believed that Sri Lankan military spending had to be curbed drastically if it would ever meet its financial obligations. The war had to end quickly.

Strider’s email even describes a method that arguably helped to achieve that awful conclusion: “collateral damage inflicted on private people” by the Sri Lankan government.☐

© JDS