By: Staff Writer
August 02, Colombo (LNW): The Government’s decision to maintain fuel prices unchanged has reignited questions over whether Sri Lanka’s IMF-backed cost-reflective fuel pricing formula is still being followed or has quietly been set aside for policy reasons.
The cost-reflective pricing mechanism introduced under the IMF reform programme was designed to ensure that domestic fuel prices move in line with actual costs. Under this mechanism, the cost of imported fuel is the principal component of the retail price, while taxes, duties, dealer commissions, transport costs and other statutory charges generally remain unchanged unless specifically revised by the Government.
Against this backdrop, the latest announcement by the Ceylon Petroleum Corporation (CPC) has exposed what appears to be a contradiction.
CPC Chairman Shantha Rajakaruna stated that diesel is currently being sold at a loss of between Rs.63 and Rs.70 per litre, with the State absorbing the burden to avoid increasing prices because diesel is critical to the economy. He attributed the losses to renewed geopolitical tensions, including attacks on Russian refineries and disruptions in Red Sea shipping routes that have increased freight and insurance costs.
However, the Chairman also acknowledged that crude oil prices had declined during June and that these reductions normally take about two months to filter into domestic prices because of existing inventories.
This raises a fundamental question. If the major determinant of the pricing formula is the landed cost of fuel, and if taxes and other fixed charges remain unchanged, should consumers not have received at least some reduction in pump prices?
Instead, the Government opted to leave prices unchanged, effectively overriding what many believe should have been an automatic adjustment under the cost-reflective pricing mechanism.
Energy analysts argue that if governments begin deciding when to follow and when to suspend the pricing formula, the credibility of the entire mechanism comes into question. The formula was introduced precisely to prevent politically motivated pricing decisions and ensure transparency.
While protecting consumers from sudden price increases may be economically and politically attractive, maintaining prices when underlying costs decline raises a different issue—whether consumers are being denied the benefits that the pricing mechanism was intended to deliver.
The Government may well have valid reasons for maintaining existing prices, particularly amid volatile global markets. Yet transparency demands that authorities explain whether the latest decision was made within the framework of the IMF-backed formula or outside it.
Until that explanation is provided, questions over the integrity of Sri Lanka’s fuel pricing mechanism are unlikely to disappear.