Nikkei Asia: 18 May 2022

A Sri Lankan plan to privatize its national airline has brought rare murmurs of optimism, mixed with a large dose of skepticism, as the country hits the end of a debt grace period and runs out of fuel.

Newly appointed Prime Minister Ranil Wickremesinghe announced the decision on the airline Monday evening, offering no details of how the government intends to offload a carrier that lost 45 billion Sri Lankan rupees ($129 million) in the 2020-2021 financial year.

The premier said SriLankan Airlines’ total losses stood at 372 billion rupees as of the end of March 2021 — a burden, he warned, that all citizens would have to carry even if privatization succeeds. “You must be aware that this is a loss that must be borne even by the poor people of this country who have never stepped on an airplane,” he said in his first address to the nation since he was sworn in last week.

Economists welcomed the plan even as they questioned the prospects for achieving it. “This is long overdue and must be implemented as soon as possible,” Malathy Knight, a research associate at Verite Research and consultant at the Advocata Institute think tank, told Nikkei Asia.

The push to privatize SriLankan came just as a grace period on two unpaid foreign bonds was due to expire on Wednesday, likely marking its first such default. Last month, amid a worsening foreign exchange crisis and snowballing public protests against President Gotabaya Rajapaksa’s government, the country announced that it would stop repaying foreign obligations and would instead use the money for food and fuel imports. But by early May, usable foreign reserves stood at less than $50 million.

In his speech, Wickremesinghe warned the nation of 22 million to brace for “an even more difficult time,” as gasoline had dwindled to enough for only one day. “The next couple of months will be the most difficult ones of our lives. We must prepare ourselves to make some sacrifices and face the challenges of this period,” he said.

This is not the first time Wickremesinghe — already a five-time prime minister before this month — has sought to privatize the national carrier. Previous attempts went nowhere.

Nor would success solve Sri Lanka’s spiraling problems. But experts say ditching the airline would not hurt, either.

Knight said SriLankan Airlines has weighed on the government’s budget for years. “Taxpayers ultimately have had to bear this burden, and these massive losses have crowded out much-needed social welfare spending,” she said. “Besides, I believe that entities such as airlines and hotels are not strategic enterprises that require state ownership.”

Rehana Thowfeek, an independent economist, agreed that Wickremesinghe’s proposal was sound, though she stressed that finding a buyer will be difficult given the airline’s grim finances and the national crisis.

“It took several years for the Indian government to finalize the sale of Air India,” she said. “One suggestion is for the country to take on the debt, which would make the airline more attractive, like what the Indian government has done. The key benefit will be that the public will not have to keep absorbing the massive losses this state-owned enterprise makes.”

In April, the airline stirred up controversy when it announced a tender to lease aircraft that would replace older planes, as part of a long-term business plan. “This must be a joke?!” opposition politician Harsha de Silva tweeted, wondering where the money would come from.

Knight at Verite Research acknowledged that political sensitivities and entrenched interests surrounding the airline could complicate any attempt at privatization. Still, she saw a path forward.

“How much interest there will be in acquiring SriLankan Airlines is difficult to predict. However, so long as the assets have value, and I believe that they do, selling the airline boils down to structuring the deal to make it attractive to potential buyers,” she said.

Echoing Thowfeek, Knight said the government would “inevitably” have to take on some existing liabilities and debt to pull it off. And she too pointed to Air India as a model.

“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). Something along these lines is what we need to do,” she advised.

The government, of course, already has plenty of debt to deal with and next to nothing in its coffers. Foreign debt payments for this year stand at around $4 billion, including a $1 billion international sovereign bond maturing in July. Meanwhile, Wickremesinghe disclosed that the treasury is struggling to scrape together $1 million, while the Ministry of Finance is finding it difficult to come up with $5 million to import cooking gas.

Sirimal Abeyratne, a professor of economics at the University of Colombo, warned that if subsequent defaults are not managed in an orderly fashion, it could dig Sri Lanka into an even deeper hole. “Further borrowing would be too costly, if not impossible,” he said, adding that while the country may have no way of avoiding default, it needs to show it can learn from mistakes and shape a sound program for reform in the short and long terms.

Since taking office, Wickremesinghe has held a series of discussions with international partners as well as officials of the World Bank and the Asian Development Bank. During meetings with India, Japan, the U.S. and China, he discussed the possibility of establishing an international forum on financial assistance for Sri Lanka.