• Sri Lanka risks eroding oversight after conceding fault in pricing

Sri Lanka’s approach to meeting IMF-backed electricity pricing reforms risks clashing with its own regulatory framework due to differing interpretations of what constitutes cost-reflective pricing, warns Verite Research Executive Director Dr. Nishan de Mel.

Speaking to The Daily Morning Business, he warned that the government may now face a dilemma between honouring its IMF commitments and protecting the independence of the regulator.

“Sri Lanka has a commitment to cost-reflective pricing of electricity not only under the IMF programme, but also under the Sri Lanka Electricity Act, No. 20 of 2009,” Dr. de Mel said, highlighting a legal and policy conundrum at the heart of the country’s reform efforts.

“If we consider the IMF’s claim that prices are not cost-reflective, it must mean that either the Public Utilities Commission, the regulator, has failed to meet the expectations of the law, or that the manner in which the IMF is assessing cost-reflective pricing does not align with how it is assessed and implemented by the regulator,” he added.

Verite’s own investigations, set to be published soon, indicate the latter. “The problem is most likely not with the actions of the regulator but with the method used by the IMF to assess cost-reflective pricing,” Dr. de Mel said.

That difference in methodology was complicated further when the government accepted blame during the most recent IMF review.

“What complicates the matter is that the government, in the last review, mistakenly accepted fault with regard to cost-reflective pricing of electricity. Therefore, the government has put itself in a position where it must choose between complying with a commitment it has made to the IMF or undermining governance of the sector by steamrolling the regulator,” he said.

He stressed that the integrity of Sri Lanka’s institutions should not be sacrificed in the process of fiscal reform.

“Given that improving governance of the country is a critical pillar of the IMF programme, as well as the mandate of the government, there needs to be some mature engagement between the government and the IMF to resolve this issue in a manner that respects the core concern of the IMF, which is that off-budget costs are not parked in state-owned entities, and the regulatory authority, whose cost-reflective calculation, though different from the IMF, also aligns with that core concern.”

As a resolution, Verite Research recommends a recalibration of the IMF’s assessment method.

“The most sensible way forward is to modify the method of assessment used by the IMF, while respecting its core concern,” Dr. de Mel noted.

Failing that, he suggests a workaround that does not compromise regulatory independence.

“The government can still work around the problems of the IMF assessment through accounting transactions that bring CEB surpluses and deficits into on-budget government revenue and expenditure,” he said. “Both these ways can resolve this conundrum on cost-reflective pricing and do so without undermining the integrity of regulatory governance in Sri Lanka.”