Maintaining a cost-reflective electricity pricing formula is crucial for Sri Lanka to adhere to the structural benchmarks set by the International Monetary Fund (IMF). Such a mechanism ensures financial stability within the energy sector, preventing the accumulation of unsustainable losses that could ultimately become a burden on public finances.
By adhering to cost-recovery pricing, Sri Lanka can avoid fiscal risks and ensure compliance with IMF parameters, which is vital for securing continued financial assistance and maintaining economic stability.
Sri Lanka has breached a structural benchmark in the IMF program following a 20 percent electricity tariff reduction implemented by the country’s regulator.
The tariff cut, which came into effect on January 17, has raised concerns about potential losses for the Ceylon Electricity Board (CEB) in the coming months. According to an IMF staff assessment, avoiding such losses will be a key requirement for passing the next program review.
One of the most critical next steps for Sri Lanka in meeting IMF program expectations will be to pass a budget that aligns with program requirements.
The downward revision in tariffs has led to a situation where the CEB is projected to incur losses, necessitating corrective measures to restore cost-recovery pricing.
To address this, authorities have committed to ensuring the Bulk Supply Transaction Account (BSTA) operates as designed, with an automatic adjustment mechanism triggered when the CEB’s cash balances reach a lower threshold.
If this mechanism does not sufficiently offset losses, an April tariff revision will be required to restore cost-recovery pricing.
Despite the CEB’s proposal for a modest 3 percent tariff cut for January 2025, the regulator imposed a more significant reduction.
The IMF has emphasized the importance of allowing automatic pricing mechanisms to function to prevent future debt accumulation within the electricity sector.
Peter Breuer, the IMF’s Senior Mission Chief for Sri Lanka, highlighted that fluctuations in electricity costs are influenced by several factors, including weather conditions, which impact hydropower generation.
He warned that failing to maintain cost-reflective tariffs could lead to rising contingent liabilities for the government.
Sri Lanka has already taken steps to reduce the time gap between tariff adjustments to three months, addressing issues caused by unpredictable weather conditions and fluctuating energy costs.
Previously, a sudden price hike was necessary when dry weather conditions forced the CEB into losses following a substantial tariff cut.
However, with the change in administration, there appears to be a reversion to six-month tariff adjustments, which could undermine financial stability if not managed effectively.
