Curbing State Enterprise Borrowing Is Essential for Debt Sustainability

The problem is not that state-owned enterprises (SOEs) borrow; many need to, in order to invest and to keep day-to-day operations running. The problem is borrowing that the Treasury does not see in full, or does not see in time.

What 2015 revealed

In 2015, the IMF found Rs. 1.36 trillion, about 11% of GDP, in additional government and state enterprise liabilities, on top of central government debt already at 76% of GDP. The World Bank arrived at a similar picture, putting non-financial SOE debt at about 11.6% of GDP by the end of that year and noting that many of these entities had borrowed without a guarantee at all. Between the two findings, the headline debt figure told only part of the story.

Sri Lanka is not alone in this. Mozambique found itself in a similar position: undisclosed government borrowing from 2013 and 2014, worth about the equivalent of 10% of GDP, came to light in 2016 and led the IMF to suspend its support.

It would be wrong to say SOE liabilities alone caused Sri Lanka’s 2022 default. Large fiscal deficits, weak revenue, thin reserves, foreign currency borrowing and external shocks all played their part. But hidden or poorly monitored SOE debt made the country more vulnerable, and made the true risk harder to see in time.

A guarantee is not the only claim

A government may not guarantee every SOE loan, yet lenders often assume it will step in to rescue an enterprise that matters to the economy. That assumption is itself an implicit liability for taxpayers, guarantee or no guarantee.

The numbers bear this out. SOE debt was already substantial before the pandemic, and less than half of it was explicitly guaranteed. By the end of 2021, outstanding Treasury guarantees to SOEs alone had reached Rs. 1.5 trillion, or 8.6% of GDP, according to the IMF, and these were still not counted as part of core central government debt. The pattern repeated when the state absorbed the guaranteed debt of the Ceylon Petroleum Corporation: the Central Bank’s 2023 Annual Economic Review noted that this step alone pushed the public debt ratio higher than previously reported.

The law has moved. Practice must follow. The Public Debt Management Act of 2024 is a real step forward. An SOE’s public debt issues and foreign currency fundraising now need the prior written approval of the Minister of Finance, as do guarantees issued to or by an SOE. Enterprises must also give the Public Debt Management Office the terms of each planned borrowing, and a record of their outstanding debt within 45 days of each quarter end; a fuller breakdown, including non-guaranteed debt, follows only when the Office specifically asks for it.

The reform went further still at the end of December 2025, when the Central Bank announced the closure of its own Public Debt Department, with effect from 1 January 2026, transferring its debt management functions to the new Office. That shift ends the old overlap in which the same institution combined responsibility for monetary policy with managing the state’s own borrowing.

The scale involved still justifies caution. A recent IMF technical assistance report, as reported in the press, put the liabilities of 41 strategically important commercial SOEs at Rs. 3.2 trillion, or 11.7% of GDP, at the end of 2023, with five entities accounting for 90% of that total. This measures liabilities rather than debt alone, so it cannot be set directly against the 2015 figures. What it does show is how concentrated the exposure is.

In my research into how Sri Lanka measures and reports what it owes, practitioners kept telling me the same thing: SOE debt was hard to find. Several argued it belonged inside the same fiscal perimeter as central government debt, because markets already price in a bailout regardless of what the paperwork says. One expert described filing right-to-information requests just to obtain a breakdown, because SOE debts “are not calculated in the debt numbers”. The Act now requires that picture to be assembled; whether it is actually assembled, and published, remains the test. As of the latest Quarterly Debt Bulletin, published figures cover government-guaranteed SOE debt alone; the non-guaranteed portion the Act now requires has yet to appear in the public numbers.

Three practical steps

A few practical steps would help. Every major SOE should have an annual borrowing ceiling tied to its business plan, cash flows and ability to service debt, with Treasury approval required for anything above it and a real penalty for breaching it. Sri Lanka’s other statutory debt ceilings have shown that a limit without consequence becomes aspirational rather than binding.

Foreign currency borrowing deserves the closest scrutiny, since a weaker rupee can turn a manageable loan into a fiscal burden almost overnight. And the quarterly SOE returns should feed into one published picture, covering guarantees, on-lending and non-guaranteed borrowing together, so that Parliament, investors and rating agencies are all reading from the same numbers.

Borrowing discipline tackles only one side of the problem. A number of Sri Lanka’s most indebted SOEs do not borrow mainly to invest; they borrow to cover losses that cost-reflective pricing would otherwise avoid. The Ceylon Electricity Board and the Ceylon Petroleum Corporation have both, at various points, sold power and fuel below the cost of supplying them for reasons of policy rather than commercial judgement, with the shortfall landing on their balance sheets rather than in the budget. Strengthening these enterprises’ own revenue, through pricing that at least covers operating costs and through better collection of what they are already owed, would reduce how much they need to borrow in the first place. A borrowing ceiling without that reform treats the symptom and leaves the underlying cause untouched.

The public should see it first

Every rupee an SOE borrows is a potential claim on the public purse. Sri Lanka should not discover the size of that claim after a change of government, or in the middle of a crisis. It should see it, and limit it, well before either happens.

That discipline matters beyond the public accounts narrowly understood. Former President Ranil Wickremesinghe made a related point at a recent ICCSL webinar on the emerging global order: without rapid technological modernisation that builds what he called ‘a strong competitive economy’, he warned, Sri Lanka would have no place in that order. Transparent, disciplined SOE borrowing belongs squarely within that effort, not on its margins.

(The writer teaches Accounting and Finance at the University of Buckingham UK and her doctoral dissertation was on Public Debt management in Sri Lanka.)

Sources

1. International Monetary Fund, Press Release No. 16/281, 2016 (additional liabilities of Rs. 1.36 trillion; central government debt of 76% of GDP at end-2015).

2. World Bank, Sri Lanka Development Update, Fall 2016, p. 9 (non-financial SOE debt of about 11.6% of GDP at end-2015).

3. International Monetary Fund, Mozambique: Staff Report, 2018 (undisclosed government borrowing, about 10% of GDP).

4. Central Bank of Sri Lanka, Annual Economic Review 2023, Table on Central Government and Public Debt, footnote (g).

5. Public Debt Management Act, No. 33 of 2024 (Sri Lanka), Sections 4, 24, 26 and 27.

6. Newsfirst, ‘SOE Debt Still Major Risk to Sri Lanka’s Economy’, 2 October 2025, reporting an IMF Technical Assistance Report.

7. International Monetary Fund, Sri Lanka: Request for an Extended Arrangement under the Extended Fund Facility, Country Report No. 23/116, 2023 (Treasury guarantees to SOEs of Rs. 1.5 trillion, 8.6% of GDP, at end-2021).

8. Central Bank of Sri Lanka, Closure of the Public Debt Department of the Central Bank of Sri Lanka, press notice, 31 December 2025 (effective 1 January 2026).

9. Ranil Wickremesinghe, keynote address, ICCSL 50th Webinar, ‘Emerging New World Order: What Are Sri Lanka’s Options?’, Daily FT–ICCSL webinar series, 25 October 2026 (video transcript).

10. Department of Treasury Operations, Sri Lanka, Quarterly Debt Bulletin, end-June 2026 (government-guaranteed SOE debt of Rs. 971 billion, down from Rs. 1.03 trillion at end-March 2026).