Privatization Pitfalls

The International Monetary Fund (IMF) approved the third review of Sri Lanka’s $2.9 billion bailout in February 2025 to strengthen the country’s economy and ease the financial crisis. The IMF bailout programme for Sri Lanka requires the government to reform its 52 state-owned enterprises (SOEs) that are creating fiscal constraints for the national budget. In its report ‘Technical Assistance Report-Governance’, the IMF urged the government to form a state holding and register all commercial SOEs under the Companies Act. The government has established a state holding company to speed up the reform process of SOEs. The ‘super-holding company’ will follow models like those in Malaysia and Singapore. The move is expected to increase the country’s local and foreign private investment.

The IMF bailout, secured in March 2023, assisted Sri Lanka in stabilizing its economic conditions when the country faced its worst financial crisis in 2022. Public debt rose over 100% of GDP, and a severe foreign exchange crisis intensified fuel, gas, and essential food shortages. Inflation rose to 70%, and the currency fell to record lows after considerable economic contraction. After the third review of the IMF programme and the release of the fourth installment of its loan to Sri Lanka, the IMF emphasized that the government should restructure or privatize 430 SOEs.

SOEs intensified the fiscal challenges for the government, especially after the country’s economic crisis. SOEs, including Sri Lankan Airlines, the Ceylon Electricity Board, and the Ceylon Petroleum Corporation, have accumulated billions in losses due to inefficiencies, corruption, and political interference. The national airline of Sri Lanka cost the government 45 billion rupees in 2021. The losses burden public finances, forcing the government to use taxpayer money and rely on external financing to meet the expenditures. Furthermore, many SOEs operate as monopolies with inefficient management and outdated business models, which causes their service quality to be poor and operational costs to be high. In this context, privatization can be a viable option to provide fiscal consolidation, decrease red tape, and address the inefficiencies of SOEs. Besides, privatization minimizes political interference and ensures decision-making on a merit basis.

The restructuring and privatization of SOEs may lead to mass job losses, reduced wages and benefits for workers, and increased utility prices, such as electricity and water, to make them profitable and not burden the government. Around 86% of the tax revenue in 2021 went to paying the salaries of public sector employees. This trend is unsustainable and concerning as it leaves less fiscal space for the government to spend on other essential aspects, including health, education, and development projects.