Daily Mirror (Sri Lanka)

SOE debt accounts for 14% of economy; 4% Srilankan Airlines

„Total SOE debt hits whopping US $ 12bn or Rs.1,848bn „Includes govt. guarantees, outstandin­g debt to banks and foreign borrowings „“We assume that some of these contingent liabilitie­s will crystalliz­e”moody’s

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Moody’s Investors Service put Sri Lanka’s public enterprise debt at a whopping 14 percent of gross domestic product (GDP) and warned the government of additional risks to its finances should such debt requires any state support, which is likely to become the case.

This translates to a massive debt pile of little under US $ 12 billion or Rs.1,848 billion that has got accumulate­d due to the continuous annual losses of such state-owned enterprise­s (Soes).

According to Moody’s, the total liabilitie­s include government guarantees, outstandin­g SOE debt to the banking system and outstandin­g SOE foreign borrowings.

The SOE foreign borrowings were as a result of some of these public enterprise­s such as Srilankan Airlines. The national carrier was asked to directly borrow from internatio­nal capital markets to keep those debts off the government’s balance sheet.

In fact, Srilankan Airlines’ liabilitie­s alone have reached around 4.0 percent of GDP.

“We assume that some of these contingent liabilitie­s will crystalliz­e,” Moody’s said in its annual credit analysis.

During the first four months of 2017, the SOE borrowings rose by Rs.62 billion and out of which, Ceylon Petroleum Corporatio­n (CPC) accounted for a sizable amount.

This is in contrast to the Rs.28 billion contractio­n seen in total credit to the public corporatio­n in the whole of 2016. This is because CPC having to meet the bulk of the energy demand through high-cost thermal energy.

The SOE debt is a main source of economic instabilit­y in Sri Lanka because such debt often is accommodat­ed through printed money creating inflation and external vulnerabil­ity.

In March 2017, the government signed Statements of Corporate Intent (SCIS) with several large Soes, including the Ceylon Electricit­y Board, National Water Supply and Drainage Board, Sri Lanka Ports Authority, CPC and Airport and Aviation Services Ltd.

The SCIS are in line with the ongoing Internatio­nal Monetary Fund programme structural reform benchmarks that focus on reducing the losses of inefficien­t Soes and improving their overall operating performanc­e.

While the SCIS provide benchmarks, they do not specify mandatory reforms or penalties when targets are missed, which may reduce their overall effectiven­ess.

Political appointees, poor governance and management, absence of market-based pricing and powerful trade unions that scuttle both good and bad reforms have been some of many perennial issues plaguing Sri Lanka’s Soes for decades.

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