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IMF
report says govt. still abusing captive funds “There has been little progress made in eliminating the quasi-fiscal activities of public corporations,” the report said. It noted that following the sharp rise in world oil prices, the authorities suspended the petroleum pricing formula that ensured domestic prices reflected market prices in 2004. Prices are now administered with periodic ad hoc adjustments. The government pays subsidies to the petroleum companies for the difference between the underlying formula price and the administered price. Likewise, Ceylon Electricity Board (CEB) prices continue to be administered at below-cost levels and with cross-subsidization between industrial and domestic sectors. “Despite the below market pricing of their petroleum inputs, CEB continues to make substantial losses that are financed through borrowing from public financial corporations and arrears to government and other public corporations,” the report said. It said many of the most important issues highlighted by the original ROSC, published in October 2002, in particular in the area of reforming relations between the government and public enterprises, remain to be addressed. “Particular priority should be given to developing and publishing a systematic accounting of implicit and contingent liabilities, moving away from using public corporations for quasi-fiscal activities and reducing the reliance of the government on captive sources of cheap budget and public enterprise financing.” Producing consolidated accounts of central and provincial governments should also be pursued, in particular if the government is planning further reforms to the system of intergovernmental fiscal relations, the report said. The report was prepared after the IMF staff reviewed developments in the areas pertaining to Sri Lanka’s observance of fiscal transparency practices with a view to updating changes in current practices, or describing the implementation of the ROSC’s recommendations. The original ROSC emphasized the importance of subjecting public corporations to market discipline, developing an overarching privatization strategy, and reforming domestic financing policies to reduce reliance on and increase the transparency of borrowing from captive sources of financing such as the Employees’ Provident Fund (EPF). The new report said that the implementation of ROSC recommendations has been affected by external and political developments such as the general elections in April 2004 which it said “caused a hiatus” in policy implementation while a new coalition was formed. The new government had a different approach, which has led to changes in some of the policies described in the original ROSC. Furthermore, the December 26, 2004 tsunami has diminished the short-term priority attached to fiscal management reforms, the report said. It said the 2003 Fiscal Management (Responsibility) Act (FMRA) has improved the transparency of government fiscal policy but that the focus of public enterprise reform has changed from privatization to restructuring. The 14 largest public corporations have been placed under the control of the Strategic Enterprise Management Agency (SEMA) that has the objective of improving performance of these agencies through restructuring while retaining public ownership. “The government has recently announced a policy that privatization of any of these agencies will require a two-thirds majority in parliament,” the report said. However, it said that some progress has been made in preparing key public enterprises for the introduction of market discipline. Non-price competition in the petroleum sector has been introduced through the introduction of a foreign-owned second company and negotiations are underway to introduce a third player through further divestiture of the assets of the state-owned petroleum ompany. A plan is being developed to improve the efficiency of CEB through the separation of its generation, transmission and distribution functions into individual companies. The report said the government continues to use public financial corporations to subsidize the cost of budgetary financing. “Rupee securities and foreign-currency denominated bonds continue to be placed with state-owned banks and financial corporations, often at below market rates. State-owned banks have often been used to provide financing to loss-making public corporations.” The report said that while there was some improvement in the availability of information the budget documentation does not contain systematic quantification or analysis of tax expenditures. In 2004, the Budget Estimates document included detailed information on actual and projected revenue, grants, and expenditures of provincial councils. These however were not consolidated with information on central government activities. Information was also provided on transfers to public enterprises, but not on their overall financial position. “However, the 2005 budget documentation did not include any of this detail,” the IMF said. “The budget documentation only contains information concerning central government debt and does not address overall public sector debt.”Central government borrowing that is on-lent to development banks for private sector lending is included in budget estimates, but excluded from the economic classification of the budget outturn even though it adds directly to the stock of central government debt. “There
has been considerable progress in a number of areas since the original
ROSC,” the report said. “However, the gains remain fragile,
as demonstrated by the reduction in information provided alongside
the budget in 2005.” |
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