WB calls SL to urgently implement liability management law

„Says to act critically to deal with Eurobonds refinancing risks „Also calls for establishment of unified debt management office

As Sri Lanka remains vulnerable due to high fiscal risks stemming from public and State-owned enterprises (Soes), the World Bank (WB) last week stressed the enactment of legislation on liability management is imperative to deal with the continuing issue.

The recently launched country development update by the WB stated that although the government’s debt to GDP ratio had contracted to 77.6 percent, it remains high compared to other middle-income countries and is vulnerable to risks.

Thus the development lender stressed implementing the new Active Liability Management Act is critical to deal with the risks of refinancing the eurobonds maturing between 2019 and 2022.

The Liability Management Act essentially allows the raising of new debt of an amount up to 10 percent of the total outstanding debt beyond maturing debt within the year, which can be used to buy back debt maturing in future years.

It is stressed that while the enactment is a key measure towards managing an immediate risk, many other important reforms are essential for

improving the debt management function given the significant risks in the debt portfolio.

According to the international agency, needed is an integrated risk management approach to manage debt and contingent liabilities linked to Soes and the impact of natural disasters.

WB noted that Sri Lanka’s sizeable State-owned Enterprise (SOE) sector is struggling, with SOE debt growing mainly due to the absence of cost-reflective pricing of energy and weak operational performance.

“Recent introduction of costreflective pricing for fuel is an important measure to reduce fiscal risks. Implementing without further delay the pricing formulas, and establishing a unified debt management office are critical,” the WB pointed out in its Sri Lanka Development Update (SLDU) report.

Meanwhile, in the context of high domestic interest rates, the WB professed that the gradual tightening of global financial conditions and an expected gradual depreciation of the exchange rate, along with the increased fiscal discipline will prove critical.

It was highlighted that if the said measures are seen through, continued fiscal consolidation would assist Sri Lanka in reducing of debt burden in the medium term.