Friday, July 1, 2022

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 Independent think-tank Advocata backs SriLankan Airlines privatisation

Independent think-tank Advocata Institute is backing the privatisation of SriLankan Airlines stating that its daily loss of Rs. 99 million is a burden that the country can no longer afford.

It said SriLankan Airlines is one of the four largest loss-making State-owned enterprises (SOEs) in the country. 

The financial performance of State-Owned Enterprises (SOEs) has placed a heavy burden on public finances for decades. Therefore, reforming SOEs such as SriLankan Airlines has been long overdue.

At a time when Sri Lanka has announced a sovereign debt default, and when the Government has insufficient revenues to cover the salaries of State-sector workers, divesting such an unproductive enterprise like SriLankan Airlines should receive urgent attention.

The national carrier has racked up approximately Rs. 372 billion in losses (as of July 2021) since control was taken from Emirates in 2008. For the year ending in March 2021 alone, SriLankan Airlines reported losses of Rs. 45.2 billion. 

The airline has, on numerous occasions, required treasury guaranteed loans to stay afloat, and has amassed over Rs. 53.6 billion in guarantees as of August 2021. 

Many of its loans are dollars – an even more unsustainable burden to the existing sovereign debt crisis, even as the country is facing a dire shortage of all foreign currency reserves for essential imports. 

Sri Lankans of all walks of life ultimately have had to bear this burden and these massive losses have crowded out other more beneficial spending such as on social welfare.

The Advocata Institute also said it welcomes Prime Minister Ranil Wickremasinghes ’s recent statement that SriLankan Airlines should be privatised. Given the poor financial position of SriLankan Airlines and the debt accumulated, it is likely that the airline will have to be sold for a nominal sum.

The benefit of privatising would mainly be from the avoidance of future losses. This is a better alternative than continuing to burden the country’s banking sector which is already under severe stress. SriLankan received over Rs. 194 billion in public guaranteed debt from 2017-21, of which over Rs. 60 billion was received in 2021 alone; it is the recipient of the sixth largest amount of public-guaranteed debt.  

“We need to eliminate this massive hole in our budget, and we need to do it now,” said Dr. Malathy Knight, an economist who has done extensive work on state enterprise reform. “SriLankan Airlines must come off the books, and the structuring and sequencing of the sale along with the bidding process must be aligned towards this goal,” she went on to say.

The move will also act as a confidence boosting measure to investors, multilateral lenders and bond holders that Sri Lanka is serious about economic reforms. Such hard reforms are the only means of making a recovery from the dire economic crisis that is a daily reality in Sri Lanka.

Sri Lanka would not be alone in taking such a pragmatic step to improve Government finances. Air India, the Indian national carrier, followed a workable privatisation strategy. Air India was sold for $ 400 million plus the assumption of a portion of the existing debts ($ 2 billion out of a total of $ 8 billion).  

A similar agreement carried out by an independent and open tender process will bring in maximum return to Sri Lanka. Going forward, the Government needs to adopt a comprehensive reform program that will set the stage for structural reforms that can drive the country towards an economic recovery. Privatising SriLankan Airlines can be the starting point.

To prevent any further deterioration to the economy, the Advocata Institute calls upon the Government to immediately start on a credible program of reform in order to prevent further hardship on the people of Sri Lanka. 

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