By Sanjeewa Fernando Sri Lanka has experienced an increase in overall price pressures in the economy over the past couple of months following the implementation of the fuel pricing formula. Further inflationary pressures seem likely, given the anticipated electricity pricing reform and the introduction of an electricity pricing formula. Background to the recent and anticipated pricing reforms The Government of Sri Lanka (GoSL), with the International Monetary Fund’s (IMF) assistance, initiated a reform process that was aimed at ‘improving debt sustainability and reducing the quantum of debt’ in July, 2016, which will be concluded by June, 2019. Among the reasons for fiscal slippage, losses in Non-Financial State Owned Enterprises (SOEs) were a key issue. The main SOEs under the loss-making category were Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), and SriLankan Airlines, which also includes the amalgamated budget carrier Mihin Air. While reforms to the national airline are in progress according toGoSL sources, this article will focus on the remaining SOE reforms and the resultant impact on the economy. SOE reforms The graph is evidence of the Non-Financial SOEs not bringing in much revenue to the GoSL coffers. This problem was exacerbated when crude oil prices were over $100/bbl, (i.e. during 2011-2013), given that Sri Lanka had a system of Government controlled Petrol and Diesel Prices in the past. Even though the GoSL has given up controlled fuel prices with effect from January, 2015, in line with world price corrections, it has been a politically sensitive issue and any reform which passes on fluctuations in global crude oil prices to the Sri Lankan consumer has traditionally been hard to implement. The GoSL recently adopted the fuel pricing formula, which impact Petrol and Diesel prices every 10th day of each month. It is expected to adopt a similar pricing reform for electricity within the next couple of weeks, as per the reform schedule agreed with the IMF, given below. Economic theory vs. political economy Adoption of these kinds of reforms is vital to the long term sustainability of strong economic fundamentals. However, it is likely to be a politically sensitive issue given the rising cost of living, particularly with Provincial Council elections expected to be conducted in early January, 2019. Given the recent Sri Lankan rupee (LKR) depreciation, especially within this month, fuel prices are likely to increase with the next few revisions. The immediate shocks of this may be passed on to the general consumer as imported inflation via all above inflation components. As the IMF may not have anticipated this kind of LKR downside (it was not predicted by either of their publications to date), the practicality of adopting these reforms during early Q4 2018 remains to be seen, given the significant impact of another reform that may further burden the rural lower middle class consumer. When to adopt the next ‘reform’ and is it really doable? While adopting the electricity pricing reform is a must, it could have been best adopted during the softening of the global commodity prices, which was likely to be followed by the current monetary tightening process in western markets. (The latest Federal Reserve rate hike in the US took place on 26 September). However, the decline of global commodity prices would take at least a year, which may again be a politically sensitive factor by that time, given the anticipated Presidential Election focused campaigns in late 2019, resulting in politics again trumping economics. This may lead to the old saying that, better take the bitter pill early without suffering later, which means the electricity reform also needs to happen sooner rather than later on account of the above dynamics. Sanjeewa Fernando is a visiting lecturer – Master of Financial Economics at the University of Colombo Crude oil prices $/bbl