The International Monetary Fund (IMF) has linked the liberalization of energy and utilities by this December as a requirement for the 3-year US$ 1.5 billion Extended Fund Facility (EFF).
“Implementation of automatic pricing mechanisms for fuel and electricity prices will be essential to preventing fiscal risk and enhancing the role of market forces in the economy,” the IMF staff report on the agreement said.
The Public Utilities Commission of Sri Lanka will also be granted greater powers to set cost-reflective pricing for water in the future as well.
The government has been promising a market price mechanism for utilities for the past one and a half years.
While promoting markets is commendable, IMF Sri Lanka Mission Chief Todd Schneider last week called on the government to reduce aggregate demand through fiscal policy.
Given the excessive number of vehicles imported last year due to the interim budget—a lot of which are not being used—and the prevailing low oil scenario, congestion could increase in the streets of Colombo, which may increase the pressure to set up toll booths around the entrances to the city.
Further, several fuel-fired power plants which had become impractical may become feasible in the short-term as the country is finding it hard to meet the growing electricity demand, while several industries would also welcome a market mechanism for the highly taxed furnace oil.
The IMF said that the new mechanisms will ensure the recovery of costs for the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB), and set a requirement for six state-owned enterprises, including the CPC and the CEB to submit statements of corporate intent by December 2016.
The prices of oil which were near US$ 110 a barrel in June 2014, fell by around 55 percent over the latter half of the year. The current government, fulfilling a promise of coming into power, reduced fuel prices by around 14-22 percent in January 2015.
Many multilateral agencies had said that oil importing countries could have maintained prices as an opportunity to increase revenue, which may have factored into the government’s decision to reduce prices partially.
Oil prices continued to fall during 2015, touching just below US$ 30 per barrel in January 2016, before going down a recovery track.
Oil, Sri Lanka’s highest import fell by 41.3 percent year-on-year to US$2.7 billion in 2015 as total imports for the year reduced to US$18.94 billion from US$19.42 billion in 2014 amidst a year of increased consumption arising from expansionary fiscal measures. (CW)