COLOMBO (EconomyNext) – Sri Lanka urgently needs to fix its loss-making power and energy sector given the pressure it exerts on the balance of payments and budget deficit, government officials and economists said.
“If we don’t get the policy right in this sector the entire economy is affected,” declared Suren Batagoda, Secretary, Ministry of Power and Energy.
Petroleum imports take up about a quarter of the island’s total import bill and accounts for about half the export earnings, he told a forum on regulating the downstream petroleum sector.
Indrajith Coomaraswamy, deputy chairman of the Pathfinder Foundation, a think-tank, said an efficient power and energy sector is a prerequisite to be globally competitive.
“If the power and energy sector is not competitive, you cannot be competitive in the global economy,” he told the forum organized by the Public Utilities Commission of Sri Lanka.
Sri Lanka has no option but to seek foreign investment to increase exports as local savings are inadequate and the government cannot borrow any more given already high debt levels, he said.
“Our export performance has been very disappointing,” Coomaraswamy said. “Merchandise and services exports account for about 20 percent of gross domestic product compared with 70 percent in countries like Malaysia, Vietnam and Thailand.”
In recent years Sri Lanka’s share of global exports has come down, a “clear sign of loss of competitiveness,” he said.
That’s where the power and energy sector comes in as it is a “critical link in our economic competitiveness,” he said.
“So we need to get things right to make the economy more competitive. If not we can’t attract foreign direct investment and improve our export performance.”
High electricity prices is one of the reasons for Sri Lanka’s lack of export competitiveness.
“So we need to resolve these issues if we are to take advantage of the prospects of the moment,”
The power and energy sector has an impact on the balance of payments with the oil import bill accounting for 25 percent of imports.
“For the forseeable future we are going to be reliant on petroleum products. So the greater the efficiency you have in that sector, the less pressure you have on the balance of payments.”
Coomaraswamy said the sector also impacts the budget deficit which has been the main source of economic instability since 1977 with the current account of the budget in deficit every single year.
“That means we have borrowed even for recurrent expenditure – we have lived beyond our means because we were a ‘donor darling’ for many years,” Coomaraswamy said.
“The traditional donors wanted to demonstrate how a liberalized economy can develop, so we got a lot of foreign aid.”
But now Sri Lanka had become a lower middle income country and no longer had access to concessional money, being forced to borrow internationally at commercial rates.
Losses in state-owned utilities like the Ceylon Petroleum Corporation and Ceylon Electricity Board have had a direct impact on the budget deficit.
“We’ve been a high budget deficit, high inflation and high interest rate economy with an over valued currency,” Coomaraswamy said.
“If we sort the budget deficit out then we can be a low budget deficit, low inflation country wih a stable currency like other successful economies in Asia.”
The CEB and CPC over the years, because of subsidies or non payment of bills by government agencies and authorities, had incurred large losses which undermined the government’s fiscal position, he said.