State enterprises borrow Rs.19bn in 2017; govt. debt up by Rs.197bn

Sri Lanka’s State-owned Enterprises (SoEs) borrowed a net Rs.19 billion during 2017 from the banking system as the total outstanding credit to the public corporations rose to Rs.514 billion by the end of the year. 

Official data released by the Central Bank showed some spike in credit to the SoEs during December as such credit on a net basis grew by Rs.31 billion. This is an increase from just Rs.7.0 billion in November. 

According to some reports, Road Development Authority and the National Water Supply and Drainage Board had driven bulk of this credit 
in December. 

Sri Lanka’s SoE debt is predominantly driven by state utilities such as Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) and the latter’s financial fortunes largely depend on the weather. 

During 2017, bulk of the electricity was generated using expensive thermal sources. The government was even compelled to purchase power from private sector thermal power producers at high prices to meet the peak demand. 

SoE losses have been a drag on Sri Lanka’s fiscal performance for many decades and cost-reflective pricing formulae for both fuel and electricity are a long overdue structural reform. Meanwhile, the government borrowings rose by Rs.197 billion during 2017 and the total outstanding net credit to the government was Rs.2, 169 billion by the year end.  It was only last week, Mirror Business reported that Sri Lanka’s private sector credit growth moderated to 14.7 percent from around 22.0 percent in 2016. 

On absolute basis, Lankan banks disbursed a total of Rs.618 billion in fresh credit to the private individuals and corporates during the 12-month period, a moderation from over Rs.750 billion in private credit disbursed in 2016. 

Meanwhile, Sri Lanka’s money supply measured by M2b also moderated to 16.7 percent by December 2017 from 21.2 percent a year ago. 

The Central Bank is facing a dilemma to cut rates as the authorities are given with a difficult choice in finding a fine balance between accelerating the economic growth and avoiding fragile economy overheating.

It was only yesterday the Finance Minister, Mangala Samaraweera told a group of Finance Secretaries and Central Bank Governors that Sri Lanka and other emerging nations face tighter credit conditions and higher interest rates with policy rates in developed markets are set to rise. 

An easing monetary policy in the domestic market could stoke widespread flight of capital from the government securities by the foreigners plunging the rupee to new lows and sending the prices of goods and services higher.