Not enough, not enough, increase fuel prices and electricity bills further - IMF says

The latest staff report released by the International Monetary Fund (IMF) states that Sri Lanka has not met its target of implementing a tariff system that fully covers the cost of generating a unit of electricity since last January. The main reason for this is the failure to reconsider electricity tariffs despite high costs.

The financial institution also points out that the 10.9 percent tariff increase approved on March 31 for the second quarter does not fully reflect the increased fuel prices and expected changes in the energy mix.

For this reason, a new tariff revision proposal, adjusted to cover costs, is to be submitted to the Public Utilities Commission in accordance with the existing methodology. This proposal, to be submitted for the third quarter, also aims to recover the loss incurred due to not revising electricity tariffs in the first quarter. The International Monetary Fund (IMF) emphasizes that future methodologies should focus on minimizing the instability of electricity tariffs, ensuring the financial stability of electricity companies, and strengthening regulation in the sector, and has also stated that its technical team will provide assistance in developing a clearer and more meaningful electricity tariff determination methodology.

In addition to electricity, the IMF states that a cost-recovery pricing formula has not been implemented in the petroleum sector since last April. Although global fuel prices have risen due to unrest in the Middle East, domestic price revisions have not fully covered these costs. However, the report states that the government will compensate the Ceylon Petroleum Corporation for past losses incurred, and a cabinet decision will be announced soon, ensuring that the current fuel subsidies are based on an estimated amount. The provision of these fuel subsidies is scheduled to end completely in September, and maintaining cost-recovery pricing in the energy sector is a key condition of the IMF's assistance program.

Due to the Middle East crisis, fuel prices in the country have been increased four times from February to date, with increases ranging between 38 and 46 percent. According to data, a liter of auto diesel, which was Rs. 277 on February 28, increased by 42 percent to Rs. 392 by May 2, and a liter of super diesel, which was Rs. 323, increased by the same percentage to Rs. 458. During the same period, the price of a liter of petrol 92 increased by 40 percent from Rs. 292 to Rs. 410, and the price of a liter of petrol 95 increased by 38 percent from Rs. 340 to Rs. 470. Furthermore, the price of a liter of kerosene increased by 46 percent from Rs. 182 to Rs. 265, and the price of a barrel of Brent crude oil in the world market showed a 54 percent increase from Rs. 141 to Rs. 217.

The International Monetary Fund has also made a special disclosure regarding Sri Lanka's external debt management. Due to hackers gaining possession of a USD 2.5 million loan that was to be paid to the Australian government, the IMF has not monitored Sri Lanka's new external debt arrears settlements since last November. The report states that after identifying this incident, the Sri Lankan authorities are conducting investigations in conjunction with the Australian government and have requested that this default be disregarded as it is a minor incident and steps have been taken to rectify it. Nevertheless, the local authorities are committed to settling the outstanding amounts promptly.

Sri Lanka, which recorded an economic growth of 5 percent last year, was initially expected to achieve 4 percent growth this year, but it is now projected to fall to 3 percent due to the Middle East crisis. Similarly, inflation, which was 2.1 percent last year, was expected to be 5 percent this year, but it could rise to 6.1 percent given the current geopolitical situation. Although the country's net fuel import cost was expected to be 3.6 percent of GDP, it is set to increase to 4.9 percent. The International Monetary Fund also estimates that the price Sri Lanka will have to pay for a barrel of crude oil will increase from an estimated USD 72.7 to USD 98.

The IMF points out that Sri Lanka's economy is highly dependent on the Middle East region, stating that 34 percent of air tourists arriving in the country come through that region, and 50 percent of petroleum products are imported from there. In addition, 40 percent of foreign remittances received by the country also flow from the Middle East region. Meanwhile, the export sector is facing uncertainty due to rapidly changing global trade policies, and the upcoming Post-Disaster Needs Assessment report includes that Cyclone 'Ditwa' has caused damage of USD 3.4 billion (3.1 percent of GDP) to the country. In the context of these external crises and structural risks hindering economic growth and reserve accumulation, the IMF has proposed new and revised quantitative and structural targets to be implemented until February next year.