Sri Lanka SOEs an economic risk, IMF warns; interim energy price hikes ahead

ECONOMYNEXT – Sri Lanka’s loss making state owned enterprises (SOEs) particularly in energy, are an economic risk requiring reform and market based pricing, an International Monetary Fund official said.

"An important priority is to accelerate implementation of structural reforms in public financial management and SOEs," IMF mission chief Jaewoo Lee said.

"Large financial obligations of SOEs pose fiscal risks and need to be managed by enhancing oversight …and following through on fuel and electricity pricing reform."

Lee said discussions with Sri Lankan authorities showed they were keen on implementing a pricing formula.

But in the interim price increases could be made.

Sri Lanka has already hiked liquefied petroleum gas prices.

An energy ministry official was quoted in the media saying that Ceylon Petroleum Corporation was owed 35 billion rupees in arrears by Ceylon Electricity Board.

Under an existing agreement with the IMF, Sri Lanka has said it wanted to put in place a pricing formula for fuel by March 2018 and electricity and electricity by September 2018.

For electricity, a so-called ‘bulk supply account’ which will make costs transparent has to be set up by the CEB, so that the regulator, the Public Utilities Commission of Sri Lanka, can approve prices.

The PUCSL has failed to raise prices in 2011 triggering the 2011/2012 balance of payments crisis, as the CEB and CPC borrowed around 200 billion rupees from banks to cover SOE deficits and the central bank printed money to keep rates down.





The 2015/2016 balance of payments crisis came as oil prices were cut and the central bank printed money to finance central government deficit after the deficit went off the rails following a so-called 100 day budget in early 2015.

The rupee collapsed from 131 to 152 to the US dollar in the crisis and inflation spiked over 7 percent as the price structure in the country changed.

In 2016 low oil prices allowed SOEs to repay debt, but in 2017 they had been net borrowers.

By matching selling prices to import costs a key risk SOE borrowings or printing money can be avoided, allowing the credit system and the central bank to be out of the equation.

Sri Lanka’s central bank has a long history of trying to resist interest rate increases by printing money and defending the currency and printing more money to offset currency purchases (sterilized foreign exchange sales), triggering BOP crises.

At the moment the central bank is sterilizing foreign exchange purchases amid falling private credit and an improved budget deficit, after tax hikes to cover salary and subsidy hikes made in 2015.

The IMF also urged the central bank to stay ready to tighten policy if either inflation or credit picked up. (Colombo/Sept30/2017)

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