- From subsidy politics to cost-reflective pricing, power and fuel are no longer shielded from the realities of economic reform
Before Sri Lanka’s economic crisis erupted in 2022, most citizens had grown used to enjoying electricity and fuel at heavily subsidised rates. The curious part? Many didn’t even realise they were receiving subsidies.
Fewer still were aware that the providers of these essential services, the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC), had been racking up enormous losses for years. To keep them afloat, the Treasury had been routinely stepping in with taxpayer money. Mismanagement may have played its part, but let’s set that aside for now.
The crisis, and Sri Lanka’s eventual reliance on an International Monetary Fund (IMF) bailout, pushed the country into making a series of painful but long-overdue decisions. After all, no government wants to be remembered as the one that hiked electricity or fuel prices. In fact, next to religion and culture, one of the most reliable political crowd-pleasers has long been price cuts, followed closely by promises of more jobs.
However, the IMF programme didn’t leave much room for populism. It came with clear conditions, or ‘prior actions,’ one of which was to increase electricity tariffs to offset the losses of the CEB, and to adopt a cost-reflective pricing formula for fuel. That meant pricing had to reflect real costs, with no more political cushioning or pre-election discounts. And for a while, that is exactly what happened.
Then, in a turn that felt all too familiar, the Government slashed electricity tariffs once again. Now, the IMF is pushing for a return to cost-reflective pricing, so much so that failure to do so could affect the outcome of the next programme review.
Against this backdrop, ‘Market Mine’ revisits the story of how electricity tariffs were increased, why they were later reduced, whether the fuel price formula is still being followed, and what long-term economic implications these pricing formulas could have for Sri Lanka and those who live below the poverty line.
Electricity tariff hikes and reductions
Since the onset of Sri Lanka’s economic crisis in 2022, the Government has implemented several electricity tariff adjustments to align with cost-reflective pricing models, as stipulated by the IMF bailout conditions. These adjustments include multiple increases and subsequent reductions.
- August 2022: The Public Utilities Commission of Sri Lanka (PUCSL) approved a tariff increase of 75%, marking the first revision since 2014. This hike aimed to reduce the financial deficits of the CEB.
- February 2023: A subsequent increase of 66% was implemented, compounding the previous hike. This adjustment was also in line with IMF recommendations to ensure cost-reflective pricing in the energy sector.
- October 2023: An additional 18% tariff increase was approved, further escalating electricity costs for consumers.
- March 2024: In response to improved financial conditions and public pressure, the PUCSL authorised a 21.9% reduction in electricity tariffs, effective from 5 March 2024. This reduction provided relief across various consumer categories.
- July 2024: A further 22.5% overall tariff reduction was implemented, benefiting domestic, industrial, and other sectors.
Financial performance of the CEB
For years, the CEB operated on the edge, charging too little and spending too much. Subsidised electricity kept households content and tariffs politically palatable, but beneath that, the CEB was bleeding money, year after year.
Table 1 shows a system that avoided reform for too long.
Can losses be pinned solely on lower tariffs?
Low tariffs are only one piece of the puzzle. What has played out over the years is also a slow, deliberate erosion of governance.
A key leadership post meant to oversee system stability was left vacant for over two years, despite engineers raising urgent red flags. That absence turned into vulnerability, and that vulnerability led to failure, as The Sunday Morning has reported previously.
Decisions were delayed. Warnings were ignored. And then, in moments of panic, unlawful measures were taken, such as cutting solar power without approval, putting investor trust and public access at risk. The numbers that show up in the CEB’s balance sheet are also a result of a structural breakdown in leadership, oversight, and direction.
Treasury, the rescuer
When a utility bleeds this heavily, someone must step in to stop the flow. In Sri Lanka, that role has long fallen to the Treasury, which responds with public funds every time the CEB falls short. This has happened quietly, year after year.
The State intervenes with emergency funds drawn from the same taxpayers it claims to be shielding from higher tariffs. Let’s take a look at the Treasury’s lifelines to the CEB since 2014.
- 2014: The Treasury secured foreign credit lines for the CEB to support generation diversification, distribution expansion, and system loss reduction. These loans were on-lent to the CEB, but due to its weak financial position, the Treasury had been servicing them. That year, the Treasury converted Rs. 162 billion of outstanding loans into equity to strengthen the CEB’s balance sheet and promote financial independence. Going forward, the CEB was expected to secure and service future loans on its own, whether obtained directly or via the Treasury.
- 2017: The Government transferred Rs. 6 billion to the CEB to cover non-commercial obligations, as part of its continued financial support.
- 2020: Amid Covid-19 disruptions, the Treasury channelled Rs. 48 billion to the CEB via the Fuel Price Stabilisation Fund (FPSF). This was done by issuing a Treasury bill, enabling the CEB to settle part of its dues to the CPC.
- 2023: In a major restructuring move, the Government absorbed foreign currency-denominated loans guaranteed on behalf of the CEB and then provided an equity injection of Rs. 126.3 billion. This allowed the CEB to settle long-standing dues to the CPC and Independent Power Producers (IPPs), which had stood at Rs. 191.8 billion at end-2022 and were brought down to Rs. 78.4 billion by end-2023.
Table 2 does not include borrowings by the CEB from State banks or foreign lenders unless they were explicitly backed, absorbed, or repaid by the Treasury. For instance, by end-2020, total CEB bank obligations, including project loans, stood at Rs. 356.5 billion.
Can the Treasury continue to rescue?
Sri Lanka must restore cost-recovery electricity pricing without delay to reduce fiscal risks and move forward with the next phase of the IMF-supported reform programme, according to IMF Mission Chief for Sri Lanka Evan Papageorgiou.
Speaking during a virtual press conference on Tuesday (29 April), Papageorgiou noted that reinstating cost-recovery pricing was a key prior action required to complete the fourth review of Sri Lanka’s Extended Fund Facility (EFF) arrangement.
The staff-level agreement reached with Sri Lanka remains subject to IMF Executive Board approval. That approval depends on several conditions, including the restoration of electricity tariffs to cost-recovery levels, ensuring the automatic electricity price adjustment mechanism functions properly, and the finalisation of the financing assurances review. The latter will assess whether multilateral partners have confirmed their pledged financing and whether adequate progress has been made on debt restructuring.
Once the Executive Board completes its review, Sri Lanka would gain access to SDR 254 million (approximately $ 344 million), bringing total disbursements under the programme to SDR 1,270 million (about $ 1.72 billion).
Will there be an electricity tariff hike?
The next electricity tariff revision, scheduled to take effect from 1 July, is yet to be initiated, as the CEB is still to submit its detailed proposal, according to PUCSL Director of Corporate Communications Jayanath Herath.
“No decision has been taken yet,” Herath said. “As per Government policy, the next revision is due from 1 July, but we have not received the proposal from the CEB so far. Only after we receive the detailed submissions can we begin our review process and finalise our recommendation.”
When asked how the PUCSL would ensure that future tariff adjustments were implemented reliably and transparently, Herath pointed to the legal framework and regulatory safeguards already in place.
“With the introduction of the Sri Lanka Electricity Act in 2009, the country adopted a cost-reflective tariff system. Since then, tariff determinations have been made on the basis of justifiable, merit-based costs,” he explained.
Under Section 38 of the CEB Act, the utility is required to recover only the revenue necessary to cover its expenditure. The PUCSL, as the regulator, ensures that all tariff proposals are reviewed for compliance with Section 30 of the Sri Lanka Electricity Act.
“The commission has adopted a methodology aligned with these legislative provisions,” Herath added. “This ensures that tariff revisions are consistent with the principle of cost recovery, providing a fair basis for pricing while safeguarding the financial sustainability of the electricity sector.”
Businesses concerned over tariff hike
“Any increase in utility bills directly raises the cost of doing business,” said National Chamber of Exporters (NCE) Secretary General Shiham Marikar.
“Right now, exporters are navigating multiple challenges, from negotiating tariff issues with the US to preparing for the removal of Simplified Value-Added Tax (SVAT). On top of that, the private sector is already absorbing the recent increase in minimum wages,” he added.
Marikar stressed that an increase in electricity prices would be especially damaging for exporters operating on thin margins. “They cannot pass these costs onto buyers,” he said. “Sri Lanka competes with countries where manufacturers benefit from economies of scale, lower labour costs, cheaper utilities, and substantial government incentives. We don’t have any of that.”
He cautioned that introducing new cost burdens at a time when Sri Lanka had set a high export target of around $ 14 billion ran counter to the Government’s own policy of building an export-led economy.
“Creating obstacles for exporters while promoting export growth as a national goal is contradictory,” he said. “This is not the way forward.”
While Marikar acknowledged that no official announcement had been made yet about an impending tariff hike, he noted that there was growing concern in the business community.
“Thus far, there has been no formal communication from authorities about a price increase. What we are hearing is based on discussions and social media posts,” he said. He added that the NCE would evaluate the situation more thoroughly once concrete details were available.
How will another tariff hike impact the underprivileged?
According to Centre for Poverty Analysis (CEPA) Adviser Dr. Herath Gunatilake, who has studied the social impacts of energy pricing, the country must face some uncomfortable realities about subsidies, affordability, and political will.
“CEPA did a study on the impact of the recent tariff increases,” he said. “At one point, tariffs rose sharply because the Government could no longer afford to subsidise electricity. That led to about 1.5 million household disconnections, roughly 20% of the CEB and LECO’s customer base. Although most were later reconnected, the shock was significant.”
Dr. Gunatilake pointed out that from 2014 to 2021, there had been no tariff revisions. During this period, the CEB accumulated losses estimated at Rs. 500 billion. When the economic crisis hit, the Government had little choice but to raise electricity prices steeply. “There was no fiscal space left. We simply couldn’t afford to subsidise electricity anymore,” he noted.
For the poorest households, the shock was severe. Tariffs in some cases increased by 1,100%. While subsequent revisions have brought rates down from their peak, the Government is once again facing losses. “After three or four rounds of tariff reductions, the CEB’s losses are mounting again,” he warned.
This puts the Government in a bind, especially as it works to meet the fiscal targets agreed with the IMF. “If we continue with low electricity tariffs, we will not be able to meet our budget deficit targets, perhaps around 5% of GDP. Someone has to finance that gap. Right now, it is not clear who that will be.”
“The best way is to price electricity at cost and then use social protection, like the ‘Aswesuma’ programme, to shield the poorest from the impact. If a household consumes a very low amount of electricity, chances are they are poor. The ‘Aswesuma’ programme already covers about two million households, and it is expected to expand by another 400,000. Linking that to electricity consumption could help direct support where it is needed most,” Dr. Gunatilake observed.
But ‘Aswesuma,’ he cautioned, was not without flaws. “The programme has large exclusion errors. Many of the poorest are not included. Yet our research shows many beneficiaries use the money to pay utility bills, so it is already helping them maintain energy access.”
Subsidies for all, he argued, were inefficient. “If you keep tariffs low across the board, you are subsidising the rich and middle class as well. That is not something Sri Lanka can afford. It is not just unsustainable, it is unfair.”
Dr. Gunatilake acknowledged that seasonal factors, such as higher hydropower generation, could allow for temporary reductions. “When there is more rain, more hydropower, we can ease prices. But permanent subsidies are not the answer.”
Instead, he called for a balanced solution. “Subsidise the people, not the product. Protect the poorest households, not everyone. Otherwise, we will be trapped in this cycle of debt and disconnection.”
Balancing fiscal sustainability with social equity
With the IMF pressing for cost-reflective pricing, concerns have resurfaced about how such reforms can be implemented without deepening economic hardship, especially among low-income households.
Former Deputy Governor of the Central Bank of Sri Lanka Dr. W.A. Wijewardena said: “There is a conflict between the two objectives – fiscal consolidation and social fairness,”
“You cannot simply raise fuel and electricity prices and simultaneously ensure fairness to low-income earners. When prices go up, the poor are hit hardest because their income is limited and they cannot absorb the shock,” he noted.
According to him, the IMF’s focus is squarely on removing the burden that State-owned energy utilities place on public finances. “The IMF is not concerned with distributional effects. Its view is that energy should not be subsidised by the Government or taxpayers. Cost-reflective pricing means those who use energy must pay for it in full,” he explained.
However, Dr. Wijewardena stressed that there was room for the Government to mitigate the social impact of higher prices through domestic policy. “While meeting IMF targets, the Government can, and should, develop a parallel policy to shield low-income households. That’s not the IMF’s job. It’s ours,” he said.
He pointed out that Sri Lanka had a long history of implementing tiered electricity tariffs, where lower-level consumers, often poorer households, pay less per unit. “This is a fair approach and it can be used again. Higher consumption levels are charged more, and that allows for cross-subsidisation.”
Fuel pricing, however, poses a tougher challenge. “Unlike electricity, you can’t easily identify who the poor users of fuel are. You can’t have targeted fuel subsidies in the same way. Therefore, equity is harder to achieve on that front,” he noted.
On the question of delaying pricing reforms, Dr. Wijewardena said Sri Lanka stood to lose more by postponing the inevitable. “In developed countries, dynamic pricing is the norm. Energy prices fluctuate daily based on market conditions and supplier competition. Even though electricity isn’t as frequently adjusted, many countries use differential tariffs to protect low-income users,” he noted.
Introducing and maintaining pricing formulas, he said, would bring long-term benefits to Sri Lanka’s economy. “It stabilises the sector and removes the fiscal burden from taxpayers. In the long run, that’s essential for economic sustainability,” he added.
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Formula for fuel
Sri Lanka’s fuel pricing formula, reinstated in 2022 as part of its IMF-backed reform programme, was intended to insulate public finances from global oil market volatility. The mechanism, designed to automatically adjust retail fuel prices in line with international crude prices, exchange rates, and import costs, marked a return to cost-recovery pricing after years of ad hoc interventions.
The economic rationale was that letting prices adjust would prevent the CPC from accumulating unsustainable losses and reduce the need for public subsidies, thereby freeing budgetary space for targeted social protection. Financial results in 2023 support this premise. The CPC posted improved revenue and slashed its finance costs by 94% after the formula took effect.
However, in practice, implementation has not always been consistent. Despite the formula’s intended automation, there have been notable gaps in monthly revisions in the past six to seven years, particularly when upward adjustments would have been politically sensitive.
In some instances, the Government deferred price increases, citing public hardship or market uncertainty. At other times, it delayed downward revisions even when global oil prices fell, raising questions about whether the formula was being selectively applied.
Historical prices of the CPC
Graph 1 reveals a clear declining trend in fuel prices across all four categories – octane 95 petrol, octane 92 petrol, auto diesel, and super diesel – from early 2023 through early 2025, following their peak levels in mid-2022.
Prices for all fuels surged dramatically during the 2022 economic crisis, with octane 95 petrol and auto diesel reaching or exceeding Rs. 500 per litre. However, from March 2023 onward, there has been a gradual but consistent reduction, particularly in premium petrol (octane 95 petrol) and diesel products.
Graph 1: Fuel prices in Sri Lanka in recent years
Table 3: CPC financial performance
Treasury, the rescuer (part two)
When fuel prices are kept artificially low, someone must foot the bill, similar to how it was done for the CEB. For the CPC, which imports most of Sri Lanka’s petroleum products, this has meant years of financial strain and reliance on State-backed borrowings to stay afloat.
Unlike the CEB, which has received direct equity infusions and subsidies from the Treasury, much of the CPC’s support has come in the form of Government guarantees for massive bank loans.
- 2015: The Treasury invested Rs. 25 billion in equity and issued $ 1.55 billion in guarantees to secure the CPC’s credit lines from the Bank of Ceylon and People’s Bank. Additionally, Rs. 3.6 billion was provided as a kerosene subsidy that year. Despite this, the CPC’s outstanding debt to State banks stood at Rs. 359.3 billion at end-2015, having accumulated years of losses due to non-cost-reflective pricing.
- 2017: The CPC’s borrowings from the Bank of Ceylon and People’s Bank reached Rs. 338.2 billion. This included import bills and overdue foreign currency loans, with the Bank of Ceylon alone accounting for over Rs. 200 billion. The interest burden from these loans severely affected the CPC’s bottom line, even when operational margins were positive.
- 2019: The trend continued. By the end of 2019, the CPC’s exposure to the two State banks had risen to Rs. 566 billion, with Treasury guarantees of $ 1.8 billion supporting this debt. The CPC was also indirectly financing the CEB’s fuel purchases, with Rs. 102 billion in unpaid dues from the CEB alone by end-2019.
- 2022: The Treasury transferred $ 2.44 billion of the CPC’s foreign currency debt to the Central Government’s books. This comprised $ 1.34 billion owed to the Bank of Ceylon and $ 1.09 billion to People’s Bank.
- 2023: The CPC settled Rs. 66 billion of legacy debt and cleared Rs. 228.8 billion in Indian Line of Credit obligations through a fresh loan from the Bank of Ceylon. Concurrently, the Government injected equity into the CEB and SriLankan Airlines, enabling them to repay fuel dues to the CPC totalling over Rs. 228 billion.
Throughout this period, Treasury-backed support, whether through guarantees, equity, or debt restructuring, has been the lifeline in keeping the CPC solvent. However, this support largely remained hidden in the banking system rather than flowing through direct fiscal transfers.
CPC confirms adherence to formula
Sri Lanka’s fuel pricing formula is now firmly in effect, with price revisions taking place every month according to a predetermined schedule and structure. CPC Managing Director Dr. Mayura Neththikumarage confirmed that the formula, endorsed by the Cabinet of Ministers, was being implemented on the last day of every month.
“The price formula is followed,” he said. “It is very transparent because it has a clear structure and process. We simply input the values and the formula generates the result. There’s no room for manipulation.”
According to Dr. Neththikumarage, the formula passes through the Ministry of Energy and the Ministry of Finance, and the final figures are published officially. “It’s a straightforward process. We do not have any discretion over the outcome,” he stressed.
While the formula ensures cost-reflective pricing, concerns have been raised about its impact on vulnerable populations. However, the Managing Director clarified that the CPC did not provide subsidies directly.
“The CPC is only following the cost-reflective pricing mechanism. If the Government wishes to assist certain groups, that support is organised separately,” he explained.
Currently, a Government-run subsidy scheme is in place for targeted groups such as fishermen. This involves an economic token system, which is being upgraded to a digital card-based mechanism. The ministry in charge, such as the Ministry of Fisheries, tops up the cards with the relevant subsidy amount.
“The CPC does not top up or provide the subsidy. We maintain our pricing. The relevant ministry provides the support through the token or card,” Dr. Neththikumarage reiterated.
While the CPC’s role is limited to maintaining fuel supply and implementing the formula, he stated that the system’s transparency and consistency were its strengths. “There is a formula – it is fixed and it goes through the appropriate ministerial process. That’s how we ensure it works reliably into the future,” he said.
Balancing financial discipline with poverty concerns
Sri Lanka’s lack of financial discipline is evident in the number of times it has gone to the IMF for assistance, 17 times in total, with the most recent one triggered by an economic collapse of historic scale.
Discipline, avoided for decades, is now being enforced under far harsher conditions. The result is that ordinary people, many already vulnerable, are paying the price through higher costs and fewer safety nets.
To be clear, reforms are necessary. The country cannot afford to keep propping up loss-making State-Owned Enterprises or delaying pricing decisions for political convenience. Fixing mismanagement and returning these entities to financial health is critical.
But in doing so, Sri Lanka risks sidelining the very people most affected by these decisions. ‘Aswesuma,’ the new welfare scheme, is a start, but it does not go far enough. It fails to cover households struggling to pay utility bills or those now skipping meals. A flat monthly payment cannot address complex, layered vulnerabilities.
At the same time, a system of open-ended welfare is not sustainable either. Subsidies must be better targeted and the Government must think beyond temporary relief. People need pathways out of poverty, not just payments to survive it and keep relying on it. That means linking support to education, jobs, and opportunities to build resilience. As such, financial discipline is non-negotiable.
All attempts to contact the CEB for comments proved futile, while subject ministries and Deputy Ministers Anil Jayantha Fernando and Harshana Suriyapperuma were also unreachable.