Sri Lanka stands at a critical juncture in its path to economic recovery, as delays in implementing a cost-reflective energy pricing policy threaten the disbursement of the next tranche of its International Monetary Fund (IMF) bailout package.
Since the National People’s Power (NPP) Government came into power, there has been growing tension between the administration’s commitments and the harsh fiscal realities inherited from years of economic mismanagement.
The IMF, having released four tranches under a four-year Extended Fund Facility (EFF), is now closely watching Sri Lanka’s adherence to structural reforms, particularly in the energy sector.
After sweeping into power in late 2024 on the wave of public backing following the Aragalaya protests in 2022, the NPP formed its first-ever Government, promising a clean, transparent, and equitable system. The party’s leadership has had to balance radical reformist rhetoric with the real politics of managing a debt-laden economy.
Initially welcomed by the public for its promise of people-centric policies, the Government has faced increasing scrutiny from both local stakeholders and international partners.
The IMF, in particular, has signalled concern over delays in meeting key structural benchmarks, especially cost-reflective energy pricing—a requirement for the upcoming review tied to the next tranche of funding. Sri Lanka slashed electricity tariffs sharply in January this year, as a short-term relief to households and industry.
However, the IMF has told Sri Lanka that consumers must be asked to pay according to the actual cost of generating and distributing electricity, holding the Government to a promise it has made. The move comes as the State-run Ceylon Electricity Board has incurred a loss of Rs. 18 billion in the first three months of the year.
The IMF has declared that “cost-recovery electricity pricing is essential’’ in a statement after the fourth review under the 48-month Extended Fund Facility Arrangement.
Approval of the fourth review of the reform program will depend on Sri Lanka carrying out “prior actions relating to restoring electricity cost-recovery pricing and ensuring proper function of the automatic electricity price adjustment mechanism’’. After the third review in February, the Government pledged to make tariffs on par with the cost recovery level in April.
Electricity tariffs were cut by 21.9 percent overall from January until June by the regulator Public Utilities Commission of Sri Lanka (PUCSL), though the CEB was not in favour. The CEB proposed 16 percent instead.
Sri Lanka’s energy pricing
Sri Lanka’s energy pricing system has historically been distorted by heavy subsidies, political interference, and a lack of transparency. Electricity and fuel prices have been kept artificially low for decades, often for populist reasons, without consideration of rising generation costs, global oil prices, and transmission losses.
The CEB and State-run Ceylon Petroleum Corporation (CPC) have incurred massive losses year after year, necessitating Government bailouts that strain public finances. In essence, the prices paid by consumers do not reflect the actual costs of producing and distributing energy, creating a gaping financial hole.
As a result, now, all the people, including who have not used personal vehicles, are paying for the past sins which have resulted in massive debts. Sri Lanka’s problematic energy pricing for political reason has made the CEB owning massive dues to State banks and the CPC.
Until the IMF imposed strict conditions, successive Governments never wanted to go for cost-reflective prices in the past.
The primary losers of the non cost-recovery energy pricing policy are the broader public and the national economy. While low prices might appear beneficial to consumers in the short term, they mask long-term consequences: worsening fiscal deficits, blackouts due to underinvestment, and poor service delivery.
Sri Lanka during the 2022 economic crisis witnessed all the long term adverse consequences. The CEB and the CPC, which should be self-sustaining, require massive Government subsidies, diverting funds from critical sectors such as health and education.
In addition, private sector investors are discouraged from entering the energy market due to price distortions, limiting competition and innovation. The IMF in its third review said that the fiscal reform momentum could slow after the completion of the debt restructuring.
“Fiscal risks could materialise if cost-recovery energy pricing is not restored. This, in turn, would have significant negative implications on confidence and financing conditions,” the IMF said. Sri Lanka has committed the IMF that it will restore cost reflective energy pricing to mitigate fiscal risks arising from the energy SOEs by allowing the existing automatic adjustment mechanism to function unimpeded.
Sri Lanka promised to raise tariffs to the cost recovery level at the next tariff revision in April 2025, but has yet to do so. Such a move could have been anyway politically unpopulour ahead of the May 6 Local Government polls.
IMF condition on cost- reflective energy pricing
The IMF’s push for cost-reflective pricing is rooted in the principle of fiscal sustainability and economic efficiency.
Subsidising energy through budgetary support not only creates persistent deficits but also undermines market signals essential for energy conservation and investment.
Cost-reflective pricing ensures that the true cost of energy production, including import dependency and climate-related risks, is borne by users.
This policy encourages responsible consumption, promotes renewable energy investments, and relieves the treasury from chronic financial haemorrhaging.
The IMF has been consciously insisting on the cost-reflective electricity pricing policy because the CEB has historically operated at a loss due to electricity tariffs set below actual production and distribution costs. These losses accumulate as debt, which can become a contingent liability for the Government, ultimately burdening taxpayers, especially the poor and vulnerable.
Implementing cost-reflective tariffs is part of broader structural reforms aimed at making the electricity sector more efficient and improving the governance of State-Owned Enterprises (SOE). These reforms are expected to lower the cost of electricity in the medium and long term.
Restoring cost-recovery electricity pricing is a continuous structural benchmark under the IMF-supported program. Recent reductions in electricity tariffs have breached this benchmark, prompting the IMF to stress the importance of adhering to agreed-upon reforms to ensure continued support.
Sri Lanka has committed to implementing automatic, formula-based electricity price adjustments on a semi-annual basis. This mechanism is designed to ensure that tariffs reflect actual costs, thereby preventing the accumulation of losses in the energy sector.
Other side of cost-reflective energy pricing
The NPP Government is caught in a political bind. Having come to power on a promise of reducing the cost-of-living and eliminating the burdens placed on ordinary citizens by corrupt predecessors, it is rethinking many times to hike energy prices, which would be highly unpopular.
There is also a fear of social unrest—memories of the 2022 protests are still fresh. Moreover, as a first-time Government, the NPP is keen to maintain its public image and political capital, especially with Local Government elections that was held early this month. Any perceived betrayal of campaign promises could alienate its core support base.
Excess profit
Some energy experts said that the CEB has to raise the tariff only between 4-6 percent. This is mainly because of the excess profit the CEB made last year. They said the excess profit means the consumers have made the payment in advance and that money should be disbursed among the four quarters of this year to smoothen the volatile price hikes.
However, refusal to adopt cost-reflective pricing is already having serious consequences. Firstly, the delay is jeopardising the next IMF tranche, which is crucial to maintain macroeconomic stability and support foreign reserves.
Secondly, continued subsidies are contributing to Budget overruns, forcing the Government to cut essential public spending or borrow more. Thirdly, this policy inhibits energy sector reforms, leading to underinvestment and energy shortages. Finally, failure to comply with IMF benchmarks sends negative signals to other international donors and credit rating agencies, risking broader financial isolation.
Sources who have knowledge of fund negotiations with the World Bank and Asian Development Bank said both multilateral financial institutions may not agree to lend any funds to Sri Lanka without a cost-reflective energy pricing policy.
Historical facts on energy pricing
Sri Lanka’s energy pricing history is marred by short-term populist strategies. Since the liberalisation of the energy sector in the late 20th century, successive Governments have manipulated tariffs to suit political agendas.
The CEB has rarely operated at a profit, and attempts at tariff reform have often been reversed due to political pressure. For instance, in 2013 and 2014, electricity tariffs were increased following a drought that reduced hydropower output, but protests forced rollbacks. Even under the IMF-backed programs in 2009 and 2016, energy pricing reforms were only partially implemented. During the 2024 election campaign, the JVP-led NPP promised a people-centric energy policy that would prioritise sustainability, transparency, and affordability. They pledged to overhaul the corrupt procurement processes in the energy sector, invest in renewable energy, and reduce dependency on fossil fuels.
While they did not explicitly support cost-reflective pricing in their manifesto, they promised “rationalised” pricing based on equity and access. However, their narrative has more focused on attacking the inefficiencies and corruption of previous administrations, but what the country needs is to lay out a clear roadmap for fiscal reforms. There are both political and structural reasons for the Government’s decision to go slow on the IMF’s repeated demand. Politically, any increase in electricity or fuel prices risks backlash from the public and trade unions, especially in a fragile post-crisis recovery phase.
Economically, the Government argues that household incomes have not recovered sufficiently to bear higher utility costs. Structurally, the Government is yet to have a comprehensive communication strategy to explain the necessity of such pricing to the public.
There are technical delays in finalising the pricing formula due to the lack of coordination between the Public Utilities Commission of Sri Lanka (PUCSL), CEB, and the Ministry of Finance. The absence of a robust social safety net to cushion low-income groups from price hikes adds to the hesitation.
