ECONOMYNEXT – Sri Lanka has breached a structural benchmark in the International Monetary Fund program after a 20 percent electricity tariff cut by the regulator, and an official said avoiding losses would be a key requirement to pass the next review.
Passing of a budget in line with program requirements would be the next important requirement.
“..[T]he downward tariff revision by 20 percent implemented by the regulator on January 17 resulted in the SB not being met, as the CEB is expected to start making losses in the coming months,” an IMF staff assessment said.
“To start restoring the cost recovery pricing, the authorities have committed to ensure the Bulk Supply Transaction Account (BSTA) operates as envisaged by triggering an automatic adjustment once the CEB’s cash balances reach the lower threshold.
“In addition, the April tariff revision will be used to adjust the tariffs to the cost recovery level if the BSTA-triggered adjustment is not sufficient.”
The CEB suggested a 3 percent tariff cut for January 2025, but a steeper cut was ordered by the regulator.
Automatic Mechanism
In Sri Lanka electricity costs can change dramatically based on rain as the CEB owned large hydro plants generate power for next to nothing.
“So these cuts essentially, at least on a forward-looking basis, implied that losses would be run,” IMF’s Senior Mission Chief for Sri Lanka, Peter Breuer told reporters on explained.
“Now of course these profits and losses by the electricity company depend on many factors including the weather, the rain and so forth.
“So what turns out exposed may be different from what happens ex ante, but this is a concern that we have because it could mean that debt starts building up again in the electricity company that could ultimately become a contingent liability for the government.”
“It’s important that these mechanisms be allowed to function. And then of course at the next tariff setting it’s important to ensure that tariffs will once again be set to cover the costs.”
“Another important issue for the next review will of course be that the budget that is finally passed at the end of this month is in fact consistent with the program parameters.”
Sri Lanka reduced the time gap between tariff adjustment to three months, after a sudden price hike was triggered when dry weather forced the CEB to run losses following a steep tariff cut.
But under a new administration six monthly tariffs appeared to start again.
New IMF Program
“We will maintain the electricity tariff at its cost-recovery level (overall across different types of
final consumers) with quarterly formula-based adjustments on a forward-looking basis (effective
from January 1, April 1, July 1, and October 1),” Sri Lanka said in the new IMF agreement.
“We will compensate the electricity sector for providing any residual electricity subsidies with on-budget transfers and we will use tariff surcharges in the periods between revisions to restore cost recovery in case CEB is making losses.”
Under the BSTA cash balance mechanism a 10 percent tariff hike is triggered.
Sri Lanka needed regular price hikes because the central bank prints money under ‘flexible inflation targeting’ and triggers currency crises, pushing up prices.
Since the last electricity price hike in 2012 under an IMF program, when the rupee collapsed to 131 from 113 levels to the dollars, the rupee fell to around 360 to the US dollars.
Inflationary rate cuts in 2015 triggered a collapsed of the rupee to 151 and inflationary open market operations in 2018 led to a collapse of the rupee to 184 to the US dollar.
The 2020 rate cuts and inflationary direct and open market operations led to a collapse of the currency to 360 when attempts were made to float the currency without lifting a surrender rule.
Economic Regulation
Chairman of Sri Lanka’s Ceylon Electricity Board Tilak Siyambalapitiya told an energy forum organized by the Asian Development Bank earlier this year that ‘economic regulation’ of the power sector had failed in Sri Lanka with the sector had ending up with 500 billion in ‘regulatory losses’.
They had been brought down through various mechanisms.
However, the sector ended up with about 300 billion in debt without corresponding assets, he said.
Central Bank Governor Nandalal Weerasinghe had also raised concerns about big changes in electricity pricing and short-term cuts which were not sustainable and may make it difficult for industries to plan and price products.
The rupee has been kept stable and the central bank was no longer factor in pushing up losses in state energy utilities since September 2022.
Under the 2024 previous IMF agreement, a structural benchmark required a debt repayment amount to be part of the tariff.
“The authorities will adopt by end-December 2024 a repayment schedule for CEB debt starting April 2025 (proposed SB),” IMF program documents in June 2024 said.
“The electricity tariff calculation will start accounting for debt repayments starting January 2025.”
However regulatory officials told reporters that no such premium was added after the last tariff cut was made.
The regulator was also constrained by existing pricing mechanisms and PUCSL officials already faced court cases as a result of past tariff changes which were challenged, according to industry officials. (Colombo/Mar04/2025)
