Unlocking economic potential: Debt restructuring alone won’t suffice without SOE reforms

The Advocata Institute on Thursday pointed out that to unlock economic potential, debt restructuring alone won’t suffice but in parallel SOE reforms must be pursued.

It warned that without continued SOE reforms, Sri Lanka risks perpetuating its economic challenges and will likely need to return to the International Monetary Fund (IMF) repeatedly. They urged that the Government should not be involved in business operations and highlighted the potential misuse of SOEs for electoral purposes if reforms are delayed due to upcoming elections. “If SOE reforms are not continued, Sri Lanka will have to go back to the IMF over and over. Government should not be doing business.” 

The Advocata Institute CEO Dhananath Fernando noted that SOEs profits were primarily due to significant price increases and the absorption of losses by the Government of Sri Lanka (GOSL). Some of the specific examples were: 

Ceylon Petroleum Corporation (CPC): Reported a pre-tax profit of Rs. 120.3 billion in 2023, following a loss of Rs. 617.6 billion in 2022. This increase in profit was partly due to a significant decrease in finance costs caused by the transfer of Government-guaranteed foreign currency loans and bills equivalent to Rs. 884 billion to the Government balance sheet at the end of 2022, against which a corresponding equity infusion was made by the Government to CPC. Revenue increases were mainly due to the reintroduction of the pricing formula from May 2022.

Ceylon Electricity Board (CEB): Achieved a net profit of Rs. 61.2 billion in 2023 compared to a net loss of Rs. 298.2 billion in 2022. The average unit cost at the selling point increased to Rs. 42.86 per KWh in 2023, compared to Rs. 21.24 per KWh in 2022. The implementation of cost-recovery tariff s resulted in three consecutive tariff revisions in 2023,” Fernando noted, explaining that these adjustments were essential to achieving the profit. It has been reported that the average unit selling price of electricity in Sri Lanka is the highest in the South Asian region. 

According to the 2023 data, Sri Lankans pay 2.5 to 3 times more for electricity than their South Asian neighbours. 

National Water Supply and Drainage Board (NWSDB): Noted a net profit of Rs. 5.2 billion in 2023, contrasting a loss of Rs. 2.7 billion in 2022.The General Treasury contributed Rs. 28 billion as equity for loan repayment in 2023.

SriLankan Airlines: Reported a net profit of Rs. 7.3 billion in 2023, a significant turnaround from a loss of Rs. 73.6 billion in 2022/23. However, in March 2024, the Government took over substantial loans from the airline and offered additional financial assistance to support its cash flow problems. Fernando emphasised that these profits were not generated through genuine productive means but were instead the result of restrictive market conditions and monopolistic power granted to these SOEs. “Even though these SOEs made a profit on the surface, this was not earned in a proper productive manner. The market conditions are also very restrictive with monopoly power given for these SOEs.” He called for transparent and accountable SOE reforms, stressing that meaningful debt restructuring and stable macroeconomic growth depend on these reforms. “SOE reforms have to be done in a transparent and accountable manner. Looking at the debt figures of the SOEs, restructuring of these entities is absolutely necessary for a meaningful debt restructuring and for stable macroeconomic growth.” 

Advocata Research Consultant Rehana Thowfeek highlighted the lack of transparency surrounding the SOE bill, initially slated for enactment in May 2024. 

“The bill was supposed to be enacted in May 2024, but nothing has come of it. It has been presented to the parliament, but we do not know why no action has been taken, and the public does not know much about it.” She emphasised the public’s right to be informed about the progress and implications of the bill, which aims to set restrictions on the type of Government debt allocated to SOEs. Thowfeek pointed out the masking of financials appears to make these entities profitable, citing instances of debt being passed onto tax payers. She stressed that true economic relief for consumers, especially in essential services like electricity and fuel, can only be achieved through better management and efficiency within SOEs. 

Senior Financial Journalist Shihar Aneez underscored the vicious cycle of the Government’s absorption of loans to showcase superficial profits within SOEs. “We are in a vicious cycle where the government has absorbed loans in order to witness profits in SOEs without addressing the need to reconstruct the current SOE-based model itself.” 

During the Q&A session, the urgency of continuing the SOE reform process before the elections was reiterated. It was noted that delaying reforms would diminish the marketability of these enterprises and reduce investor interest. The speakers also called for all political parties to include SOE reform commitments in their election manifestos to prevent the misuse of public funds. “The public bearing the cost of SOE losses are most often unaware of the actual costs and the huge misuse of public funds.” The event concluded with a call to action for the Government and the public to recognise the necessity of SOE reforms for Sri Lanka’s economic future. The speakers stressed that without these reforms, the burden of debt restructuring would ultimately fall on the general population, hindering improvements in essential.