Accelerate SOE reforms IMF

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By 2018-01-14

By Ishara Gamage

The Cabinet will approve automatic pricing mechanisms for fuel by March 2018 and for electricity by September 2018, IMF Mission Chief for Sri Lanka Jaewoo Lee said on Friday.

Joining the Video conference session in Colombo, releasing the Third Review of Sri Lanka's existing three-year Extended Fund Facility (EFF) staff level Report, he said there were three State Owned Enterprises (SOEs) closely monitored under the existing IMF programme and the weak financial performance of Sri Lanka's major SOEs in 2017 highlights the need for timely reform.
Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and SriLankan Airlines recorded a combined loss of Rs 52 billion in 2017 1H (0.4 per cent of GDP) as opposed to a combined profit of 0.2 per cent of GDP in 2016.

According to the IMF, rising oil prices and weather shocks raised the cost of non-commercial obligations (NCOs) to supply electricity and fuel at prices below cost-recovery levels.
Furthermore, the outstanding financial obligations of SOEs totalled Rs 1.4 trillion at end-2016, including Rs 1.2 trillion for CPC, CEB, SriLankan Airlines and the Sri Lanka Ports Authority.

According to him, the first step focuses on increasing transparency: a Report outlining the cost of Non-Commercial Obligations (NCOs) for fuel and electricity (Structural Benchmarks – SB) was completed......with delay and the establishment of a Bulk Supply Transactions Account is expected by March 2018 (SB) to enhance transparency of electricity NCOs.
The second step sets at zero a new IT (ceiling) on uncompensated cost of fuel and electricity NCOs (i.e., cost of NCOs minus government transfers, Annex III) for 2018, which will encourage the authorities to recognize the quasi-fiscal subsidies as above-the-line government spending and incentivize cost-reflective pricing
Lee said Sri Lanka's performance has been broadly on track regarding fiscal consolidation, revenue mobilization, monetary policy management and reserves accumulation.

The Government legislated in 2016 the VAT amendments which increased VAT rates and narrowed exemptions.
The programme's landmark reform, the new Inland Revenue Act, was legislated in October 2017 and will be implemented in April 2018.
Consistent with the objectives of the EFF-supported programme, the IMF authorities announced a new far-reaching economic plan titled Vision 2025 in September 2017.
Addressing the Media in Colombo World Bank office he said that to address the delay in adopting automatic pricing mechanisms; the IMF second review recalibrated the reforms into a sequence of steps.
The effort to restructure the Airline has hit an impasse, as the search for a strategic partner restarted under the new task force overseen by the Prime Minister's office has been unsuccessful.
Future programme reviews will discuss the action plan for the Airline and set key milestones as a Structural Benchmark.
Leveraging upon the publication of Statements of Corporate Intent (SCIs) by five major SOEs in April 2017, the authorities are developing a framework to evaluate performance against key performance indicators and plan to expand SCIs to other SOEs.
He also said that revenue-based fiscal consolidation remains the key to improve the country's public finances.
"Our authorities' steadfast efforts towards fiscal consolidation have resulted in significant improvement in fiscal performance", he said.

Sri Lanka's real GDP growth is projected to increase from 4.2 per cent in 2017 to 4.6 per cent in 2018, as agriculture recovers with the return of normal weather conditions while construction and services remain resilient.
Inflation is projected to revert to around 5 per cent in end-2017 and throughout 2018. The current account deficit is projected to shrink from 3 per cent of GDP in 2017 to 2.5 per cent in 2018.

Over the medium term, growth is projected to reach about 5 per cent, consistent with IMF staff estimate of potential growth.

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