ECONOMYNEXT – Sri Lanka’s 40 main non-financial public corporations (NFPEs) have lost 129 billion rupees in on a net basis in 2018 or about 0.9 percent of gross domestic product amid monetary instability, on top of the central government budget deficit before depreciation.
Sri Lanka’s budget deficit fell to 5.3 percent of GDP in 2018, down from 5.3 percent a year earlier, with people being taxed at higher rates, but currency depreciation sent the national debt soaring to 82.9 percent of GDP from 76.9 percent of GDP despite a 7.7 percent expansion of nominal GDP, which was faster than the deficit.
Due to a quirk in public sector accounting, depreciation is not accounted for as part of the budget deficit, though there are actual cash outflows on debt repayments on account of currency depreciation.
The public sector deficit is about 6.2 percent of GDP in 2018 when the net losses of the main non-financial state owne enteprises are counted.
The NFPE losses also reduce Sri Lanka’s national savings including private savings, though they are not private enterprises, analysts have said.
It is not clear why currency depreciation is hidden from budget deficits, despite their cashflow effects, but it did help hide the real harm done by Bretton-Woods style soft pegs in the post-World War II era from the general public, analysts say.
The negative effects from monetary instability on state enterprises however is brought into the profit and loss account as soon as it is incurred not just for current year cashflows, but for future years as well.
In Sri Lanka the rupee fell from 153 to 182 to the US dollar as the centarl bank tried to target and exchagne rate and also targetted a policy rate by printing 246 billion rupees.
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A large portion of the 129 billion rupees of net losses of NFPI’s came from a 104 billion rupee loss in Ceylon Petroleum Corporation.
Most of the CPC’s losses came from currency depreciation, despite finance minister Mangala Samaraweera making politically difficult market pricing under an International Monetary Fund program.
The IMF program however did not place ceilings on domestic assets of the central bank despite it having several convertibility undertakings including a forex reserve target, leaving room for the agency to print money and bust the rupee, critics have said.
There have been calls to reform the agency so that it cannot target two anchors at the same time and de-stabilize the credit system, budgets and state enterprises by helping worsen an illiberal economic framework based on a foundation of unsound money.
Sri Lanka market priced fuel without bringing controls on the domestic operations of the central bank. As a result Sri Lanka is not able to bring down fuel prices when oil prices fall, because the currency has been permanently depreciated under a convertibility undertaking called Real Effective Exchange Rate targeting.
The currency collapse has led to tax cuts on fuel due to the soft-peg collapse has also, harming the so-called ‘revenue based fiscal consolidation’ aim of the IMF deal.
Public Sector Deficit
Sri Lanka also does not publish a broader public sector deficit.
With the NFPI losses, the non-financial public sector deficit before currency depreciation is about 6.2 percent of GDP in 2018.
In 2017, when the rupee was only depreciation by 3 rupees, the same enterprises made losses of 44 billion rupees, or 0.33 percent of GDP.
Financial state enterprises however made profits of 79.9 billion rupees, down from 86.4 billion rupees a year earlier. Sri Lanka’s state banks are now profitable, after reforms made by then head of Public Enterprise Reform Commission, Mano Tittawella, in the 1990s.
Bank profits however had fallen amid monetary instability in 2018.
Sri Lanka’s current administration did not privatize any state enterprises, avoiding any structural changes that may have boosted growth or efficiency or brought in foreign private capital.
But it signed statements of corporate intent (SCI) with SOEs under the IMF program.
When financial state owned enterprises are included, the main state-owned enterprises made a collective loss 29 billion rupees.
It also includes the profits of Employees Trust Fund, which is a pension fund, whose beneficiaries are private sector workers, which made profits of 26.7 billion rupees.
"The government does not have the ability to carry these losses," Finance Minister Mangala Samaraweera said.
"When SOEs keep losing public money, there’s a question on why we keep them running,"
"I personally question why the funds which could be used for development or welfare is being wasted on a few corporations, even though it is true that they give essential services like electricity, fuel, air travel and media."
SriLankan Airlines lost 17 billion rupees in 2018.
In 2018, 37 SOEs reported 131 billion rupees in profits, while 16 SOEs reported 157 billion rupees in losses, Treasury Secretary R. H. S. Samaratunga said.
"Can the government afford to maintain Srilankan Airlines? It is a debate we should have," he said.
"Sri Lankan SOEs have created a greater burden on the people without generating adequate value or services," he said. "Reducing losses from SOEs will be crucial to managing the fiscal balance in 2019 and beyond, and maintaining investor confidence," he said.
The List of 10 SOEs which signed the new statements of corporate intent are listed below:
Sri Lanka State Plantation Corporation, Urban Development Authority, Lanka Sathosa (Pvt) Ltd, Central Engineering Consultancy Bureau, State Timber Corporation, Kurunegala Plantation (Pvt) Ltd, State Pharmaceuticals Corporation, Milco (Pvt) Ltd, National Livestock Development Board Geological Survey and Mines Bureau.
The public enterprise division of the ministry of finance also monitors the Employees Trust Fund a contributory retirement fund of private sector workers. The unit says there are 422 state-owned enterprises and statutory authorities which includes 123 subsidiaries. About 287 are watched by the PED, and the rest by the national budget department.
(Colombo/June12/2019 – update III)