ECONOMYNEXT - Sri Lanka's state debt could move into a 'shock scenario' rising to 10 percent to 94 percent of gross domestic product if the central government has to pay state owned enterprise (SOE) loans, an International Monetary Fund report has found.
The lack of price formulae for petroleum, market pricing electricity would increase the risk.
"…[I]n a contingent liability shock scenario (the central government becomes liable for additional debt of 10 percent of GDP in 2017), the debt to GDP ratio would initially jump to 94 percent of GDP and gradually decline to 84 percent of GDP in 2022," the International Monetary Fund said in an economic report.
Si Lanka's central government itself had debt of 79.3 percent of gross domestic product by the end of 2016 and the Central Bank had loans from the IMF for about 0.7 percent of GDP.
The Treasury had had guaranteed debt (contingent liability) up to 4.2 percent of gross domestic product of several state enterprises which have their own revenue but run losses due to price controls, and agencies like the Road Development Authority which have no revenues to pay the debt at all, data show.
During the Rajapaksa administration some state agencies were encouraged to borrow for investment through Treasury guarantees, amid warnings from domestic analysts, and energy utilities borrowed from banks with or without guarantees to give subsidies outside the budget to falsely understate the deficit.
However these fiscal data manipulations have now become large enough to pose a threat to economic stability.
IMF estimated the Ceylon Electricity Board had debt of 2.2 percent of GDP by end 2015, Ceylon Petroleum Corporation 3.9 percent, Sri Lanka Ports Authority 2.2 percent and SriLankan Airlines inclusive of leases 2.8 percent of GDP and other 0.6 percent.
In 2016 some short term loans of energy utilities were paid down, according to later data with oil prices falling. However by the latter part of 2016 oil prices started to move up and a drought expanded thermal energy generation reversing the positive trend.
Sri Lanka's energy SOEs, were expected to market-price output by end 2016, under an ongoing agreement but it did not happen.
IMF said the likelihood of a shock "scenario has increased due to delays in energy pricing reform."
Long term economic watchers see market pricing energy as a key solution to reducing the risk of balance of payments crises, because Sri Lanka has a so-called soft-pegged central bank which prints money first and generates crises, before allowing rates to go up.
The central bank prints money to stop rates rising when state energy utilities borrow for subsidies, Sri Lanka's rupee comes under pressure, exporters hold dollars back and in recent years, foreign investors in bonds flee the country.
In 1999/200, 2008/9 and 2011/2012 BOP crisis were caused by money printing to accommodate energy subsidies while the 2015/2016 crises was largely caused by money printing to cover a runway budget deficit from a state salary hike. (Colombo/Aug12/2017)