IMF insists on cost-reflective electricity tariffs amidst disaster recovery

The International Monetary Fund (IMF) has reiterated the critical necessity of maintaining cost-recovery electricity pricing mechanisms, asserting that fiscal sustainability cannot be compromised even as Sri Lanka navigates the economic fallout from Cyclone Ditwah.

Responding to queries on whether the global lender would soften its stance on utility pricing in the wake of the recent natural disaster, IMF Communications Department Director Julie Kozack emphasised that the Extended Fund Facility (EFF) programme includes a firm commitment to cost recovery in the utility sector.

Speaking at a press briefing in Washington on Thursday, she termed this adherence “critical” to ensuring Sri Lanka’s fiscal sustainability, explicitly noting that it prevents state-owned utility companies from incurring further financial losses that could destabilise the broader economy.

The statement comes against a backdrop of mounting pressure on the government to provide relief to electricity consumers, many of whom have been severely impacted by the cyclone’s devastation. However, the IMF’s position underscores a core tenet of the ongoing reform agenda: that subsidies should be direct and targeted through the budget rather than hidden within the balance sheets of state-owned enterprises such as the Ceylon Electricity Board (CEB).

Historically, the decoupling of pricing from actual costs contributed significantly to the accumulated losses of state utilities, a trend the current program aims to permanently reverse.

While maintaining the firm stance on tariff policy, the Fund acknowledged the severity of the humanitarian and economic crisis triggered by Cyclone Ditwah. 

Kozack announced that an IMF fact-finding mission is scheduled to visit Colombo from January 22 to 28. The primary objective of this mission is to firm up the Fund’s understanding of the “size and scope” of the damage caused by the disaster. The findings from this visit will be instrumental in determining how the Fund can tailor its policy advice and technical assistance to support the country’s recovery while keeping the reform program on track.

Kozack also highlighted the swift financial support already extended to the island nation, referencing the Executive Board’s approval of approximately US$ 206 million under the Rapid Financing Instrument (RFI) on December 19. This emergency disbursement was designed to address urgent balance-of-payments needs arising immediately after the cyclone, providing a buffer for the central bank to manage external shocks without derailing macroeconomic stability.

Looking ahead, the IMF official noted that any specific adjustments to the program to accommodate the post-disaster reality would be discussed between the staff team and local authorities during the upcoming engagement. However, she maintained that the overarching goal remains helping Sri Lanka navigate the aftermath of the disaster while preserving the hard-won macroeconomic stability achieved over the past two years. (NF)