SL prone to debt shock until energy pricing mechanism in place: IMF

By Chandeepa Wettasinghe

Sri Lanka’s likelihood of experiencing a debt shock via state-owned enterprise (SOE) contingent debt may remain high until at least September 2018 due to delays in implementing energy sector cost-reflective pricing formulae, an International Monetary Fund (IMF) country report said last week.
“If contingent SOE debt is included, total public debt would rise to 94 percent of GDP (considered as a shock scenario in debt sustainability analysis) and decline below 90 percent of GDP by 2020. The likelihood of such a scenario has increased due to delays in energy pricing reform,” the IMF said.
The IMF is expecting Sri Lanka’s debt to GDP to be 85 percent this year, and if a SOE debt shock occurs, it would fall back to such a level (84 percent of GDP) by 2022.

A letter from the Sri Lankan government, attached to the report, outlined that the pricing formulae, which were supposed to be in effect by December 2016 as a structural benchmark of the IMF programme, have been readjusted to next year and that further research will be conducted 
until implementation.

“Building on access to greater information and after further consultation with stakeholders, the cabinet will approve automatic pricing mechanisms for fuel and electricity by March 2018 and September 2018, respectively,” the government said.

According to the IMF, the Sri Lankan budget’s primary balance—expected to reach a 1 percent of GDP surplus in 2018 under the current scenario—could reach an 8.9 percent deficit instead if a SOE debt shock is delivered.

The timing of the debt shock would be of concern due to increased borrowing needs to settle the SOE debt and given the stress on the balance of payments that would materialize in 2019 when bunched up central government debt will begin maturing.

 The contingent liabilities of the loss-making Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), SriLankan Airlines and the Sri Lanka Port Authority add up to Rs.1.2 trillion. The government had discovered this in late-2015 with technical assistance from the IMF.

Mismanagement, corruption and nepotism had racked up Rs.123.27 billion in losses for the national carrier between 2009 and 2015, while the next two years saw approximately Rs. 40 billion in losses adding up to this. The airline had borrowed to purchase unnecessary aircraft until 2015.

CPC and CEB had accumulated debt during the past administration in order to provide fuel and electricity at subsidized prices, at a loss. The current government is continuing subsidies.

CEB, which made a Rs. 28.85 billion profit in 2015, posted a Rs. 14.5 billion loss in 2016 due to the government not approving a price increase to avoid losses. CEB’s projected loss for 2017 is Rs. 28 billion.

Meanwhile, CPC, which had accumulated approximately Rs. 245 billion in losses by end-2014, saw Rs. 19.47 billion in losses added in 2015, before making a Rs. 69.62 billion profit in 2016. CPC losses for the first four months of this year stood at Rs. 3.85 billion.

Sri Lankans are happy to accept subsidized fuel and energy prices, forgetting that the losses and debt incurred by the SOEs will have to be recouped by the government through taxes in the future.
Starting this year, the financial performances of CPC, CEB and SriLankan will be subjected to quarterly monitoring.

The United National Party, the leading force in the unity government, is currently in a precarious political position, and may have to fight tooth and nail for votes in the run up to long-overdue local government elections, which could in turn influence the momentum of the 2020 general elections.
The implementation of higher taxation in late 2016 may have been one reason for delaying the implementation of automated cost-reflective energy formulae until 2018, when the base effect of higher taxation will have subsided.

The government said that the 2018 timelines were chosen in order to reduce an ‘ad-hoc increase’ in prices, and to educate and consult with the public. It added that time is needed to evaluate subsidies, and in the case of electricity, to set up a bulk supply transmission account.

The IMF noted that there was difficulty in forging political consensus within the coalition government to implement the pricing mechanisms.