Pricing formula for fuel by March next year; electricity by September

The government is committed to introduce a cost-reflective pricing formula for fuel and electricity by next year, Central Bank Governor Dr. Indrajit Coomaraswamy said.

“The government is now committed under the structural benchmarks of the IMF to introduce a pricing formula for fuel in March and a pricing formula for energy probably by September, next year,” Coomaraswamy told a forum in Colombo, this week.

State-run Ceylon Electricity Board (CEB) has a near total monopoly in electricity generation and a total monopoly in transmission and distribution in Sri Lanka, while Ceylon Petroleum Corporation (CPC) has only one private sector competitor—Lanka Indian Oil Company PLC.

Both the CEB and CPC have been selling their products and services at subsidized prices and as a result, have accumulated losses running into billions of rupees, becoming two of the largest loss-making state-owned enterprises (SOEs). 

Although the government directs these two state-owned utilities to sell their products and services at subsidized prices, no budgetary transfers are done to support these subsidies, leaving them with a precarious financial predicament, which becomes toxic with their inherent inefficiencies.  

A pricing formula will allow these utilities to price their products and services in a cost-reflective manner and keep the political interferences at bay. Successive governments have used electricity tariffs and fuel prices to sway voters during election times. 

This has pushed Sri Lanka repeatedly into vicious economic cycles. For example, the decision announced in the November 2011 budget not to increase electricity tariffs during the Mahinda Rajapaksa administration led the country into a balance of payment crisis.

Sri Lanka is a net importer of oil and it is used as fuel in transportation and also used to produce thermal power. Due to the recent drought situation in the country, the hydropower generation came down to about 40 percent, making the country to import more oil.According to the Central Bank data, Sri Lanka’s oil import bill in the first eight months rose 43.4 percent year-on-year to Rs.2.2 billion. This was a result of higher import volumes due to increased thermal power generation as well as rising global oil prices. 

The average import price of crude oil was recorded at US $ 53.07 per barrel in August 2017 compared to US $ 46.71 per barrel recorded in August 2016.

The implementation of a pricing formula for fuel and electricity has always been a challenge for successive governments, given the political risks associated with such a move. The present coalition government is expected to face some tough local government elections this January.