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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Friday, May 06, 2005

Twin dragons CPC, CEB burn public funds

Net Govt. borrowing in 2004 soars to Rs. 117 b from original target of Rs. 65 b;
Operational losses of CEB, CPC key contributor; public sector debt now well over GDP

Daily Mirror: Financial Times: "05/05/2005 By Nisthar Cassim

The twin dragons - Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC) in 2004 literally sucked public funds putting the Government’s borrowing program off target.

Last year the public sector deficit increased to 8.4% of GDP as a result of operational losses of CEB and CEB. "The increased public sector deficits were financed largely through borrowings from domestic sources," Central Bank said in its 2004 Annual Report.

The total net domestic borrowing of the Government increased to Rs. 117 billion (5.8% of GDP) compared to the original target of Rs. 65 billion (3.2% of GDP)," the Central Bank revealed. Similarly, the outstanding banking debt of public corporations rose by Rs. 5 billion to Rs. 41.2 billion in 2004. Consequently the central government’s debt and the public sector debt accounted to 105.5% and 107.5% of GDP respectively. These however were marginally lower compared with 2003 data.

It has been reported that CEB posted a hefty loss of Rs. 15 billion in 2004 while CPC saw its debt burden mount to Rs. 23 billion in 2004 from Rs. 15 billion in 2003.

The reasons for financial difficulties and operational losses of CEB and CPC include the failure in the automatic revision of prices of their products and services in tandem with costs. The Sharp rise in oil prices have placed an unprecedented burden on the two state institutions, which were among the five dragons, which the Finance Minister Dr. Sarath Amunugama identified last year.

Capital transfers to public corporations in 2004 had swelled to a record Rs. 19.3 billion as opposed to approved estimate of Rs. 9.3 billion. Transfers for current expenditure were Rs. 20.4 billion as against the approved estimate of Rs. 15.5 billion.

The Central Bank warned that the financial performance of CEB, CPC as well as Sri Lanka Railway has seriously worsened. "It could even threaten the macroeconomic stability given the strategic importance of the services they provide to the national economy," it added.

Noting that organized labour in the energy sector appears to be bent on a protest campaign against any type of reforms, the Central Bank also warned that the "weakening financial conditions of both CEB and CPC could drive them to virtual insolvency with an accumulation of debt obligations to the banking sector."

While price revisions would enable them to cut current losses, recapitalisation is needed to ensure long term solvency. The Central Bank also opined that the protest campaigns would have been motivated by a fear of losing employment, but delaying the needed reforms would hasten that feared eventuality, in addition to passing a burden to the taxpayers to rescue the two enterprises. The Bank said a frank dialogue among all stakeholders involved is a must to reach a consensus for reforms and mapping out a way forward program.

The CEB suffered from twin shocks of drought and high oil prices while CPC was a direct victim of the latter. "The unchanged prices led to the deterioration in the financial position of CEB requiring greater budgetary support. The delay in implementing new power projects, and the proposed reforms and the continuation of high system losses (over 17%) compounded the issues in the electricity sector," the Bank said.

Delayed and inadequate adjustment of fuel prices despite global spikes led to losses in the oil sector and together with the continuing subsidy had impacted the Balance of Payments (BOP). The country spent nearly US$ 372 million additional on oil imports in 2004. The full bill was US$ 1.2 billion.

The Central Bank said that the overall fiscal management and the maintenance of fiscal targets, became challenging in 2004, due to adverse external and domestic shocks that led to a slippage in revenue collection and an over run in expenditure.

In addition, the delays and lower than the expected foreign financing and privatisation proceeds aggravated the difficulty in managing public finances.

It welcomed the reversal in the declining trend in tax/GDP ratio in 2004 and attributed it to the impact of widening the tax base and improving the tax collection.

However, the annual tax collection recorded a shortfall of 0.9 per cent of GDP compared to the budgetary target of 14.8% in 2004. Similarly, the expenditure overrun was about 0.3% of GDP increasing the central government overall fiscal deficit from the target of 6.8% of GDP (which was subsequently changed to 7.3% with the Pre Election Budgetary Position Report in February 2004) to 8.2%.

Central Bank enlightens

Financial performance of CEB, CPC has seriously worsened with possible virtual insolvency in the offing
Threatening the macroeconomic stability
Price revisions would cut current losses
Recapitalisation is needed to ensure long term solvency
Protest campaigns motivated by a fear of losing employment, but delaying the needed reforms would hasten that feared eventuality
Additional burden looming on the taxpayers to rescue the two enterprises
Frank dialogue among all stakeholders involved is a must to reach a consensus for reforms and mapping out a way forward program.

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