Reforms in debt-accumulated SOEs must to avert next financial crisis: WB

• Says efficiency of South Asian State-owned banks and other State-owned enterprises well below int’l benchmark
• COVID-19 pandemic exposed South Asia’s rising levels of public debt
• Liabilities of loss-making Lankan SOEs have been around 4 to 5% of GDP

As South Asia’s debt continues to escalate due to poor performing State-owned-enterprises and banks (SOEs and SOBs), the World Bank (WB) yesterday advised it is essential for nations within the region to embark on serious reforms to steer away from the next financial crisis.   

Given the region is more exposed to the risks of hidden debt from State-Owned Commercial Banks (SOCBs), SOEs and public-private partnerships (PPPs), the heavy reliance on the institutions conceals South Asia’s vulnerability to accumulating unsustainable levels of debt.

“The COVID-19 pandemic has highlighted South Asia’s rising levels of public debt. The region is more exposed to the risk of hidden debt because it relies heavily on the governments’ involvement in markets to aid economic development, but the crisis demonstrates the critical importance of the judicious use of debt-financed public commitments and debt transparency to build back better, more sustainably, and more equitably,” said World Bank Vice President for South Asia Hartwig Schafer yesterday. Schafer presented his views at the release of the agency’s newest report ‘Hidden Debt: Solutions to Avert the Next Financial Crisis in South Asia’.

He pointed out that the efficiency of South Asian State-owned banks and other State-owned enterprises is well below the international benchmark and as governments rebuild from the shock of the COVID-19 pandemic and strive to avert future financial crises, they should clearly separate the social and commercial objectives of these enterprises to reduce inefficiencies, while maintaining socially beneficial investments.”

While State-owned commercial banks receive capital and debt support from the State to continue or increase lending, the short-term stabilising function comes at the cost of crowding out other social spending as public funds get spent on bank recapitalisation and significant credit misallocation, away from successful firms and especially small and medium enterprises, making for an unequal recovery, said WB Lead Economist Martin Melecky.

The report on ‘Hidden Debt’ estimates that a systemic macro-financial crisis can trigger PPP failures that would cost South Asian countries more than 4 percent of revenues, and the potential costs from distressed SOEs have been even more overwhelming. In Sri Lanka, liabilities of loss-making SOEs have been around 4 to 5 percent of GDP.

In every country studied, the top 10 loss-making SOEs account for more than 80 percent of the total losses in the SOE sector.

The WB advised that the downside risks of leveraging public capital can be mitigated and the upside benefits enhanced through four key avenues for reform which are; purpose, incentives, transparency, and accountability.