ECONOMYNEXT – Sri Lanka’s Ceylon Electricity Board has asked for an 11 percent price hike from the regulator, incorporating higher oil prices and a rupee depreciated amid record current account surpluses which had pushed up fuel prices, despite falling global crude prices.
The so-called flexible exchange rate or market determined money is so bad and no longer serves the functions of money (a unit of account and standard of deferred payment) that renewable investors also have to denominate their tariff in US dollars.
The Ceylon Electricity Board based the request for a rise in power tariffs in December 2025, on an exchange rate of 308.65 to the US dollar, depreciated from 303.33 to the US dollar used in a request made in May 2025.
Falling Global Energy Prices, Rising Sri Lanka Prices
International fuel and coal prices fell in 2025 with broadly deflationary policy by the Federal Reserve (quantitative tightening has since ended raising future risks to commodity prices) but the CEB’s price assumptions contain higher diesel costs.
Singapore gas oil prices (Platts) fell from 95.41 to 82.37 in December, though there has been an uptick from June after falling to 79 dollars in mid-year. Refinery capacity shortages which drove crack margins have since eased.
CPC crude import prices fell from 76 dollar a barrel in January and 75 dollars in May to 72 in December 2025.
But the diesel price assumed in CEB’s price hike proposal rose from 274 rupees a litre in May to 277 rupees a litre in 2026 .
As the rupee depreciated, diesel prices have since been raised to 279 rupees in January, despite easing crack margins.
Furnace oil prices are up by 10 rupees and Naptha also up 10 rupees.
Coal prices also fell in 2025 with the Indonesian coal index by the nation’s statistics office down from 103.74 in January 2025 to 94.17 in December.
Projected coal prices for the first quarter of 2026 in the CEB price proposals are however lower than the costs in May 2026, when a price hike was denied by the regulator.
The depreciation will also undermine the government’s plans to bring down generation costs of down to 25 rupees a unit, shattering its election promises, analysts warn.
RELATED : Sri Lanka wants to bring generation costs below Rs25 rupees: Power Minister
While rising energy prices from currency depreciation can go towards meeting the central bank’s high inflation target of 5 percent, though the government’s economic program is undermined and public unhappiness rises.
Escaping Accountability
Sri Lanka’s central bank started to escape accountability for exchange rate instability from around 1980 after the International Monetary Fund’s second amendment to its articles, pushing up inflation to levels exceeding the Great Inflation period and making budgets impossible to manage.
As Sri Lanka was driven into repeated IMF programs in the 1980s, labor and social unrest intensified and the government had to grapple with a second civil war. To remain in power amid currency depreciation (competitive exchange rates), elections were rigged.
Advice given to then-President J R Jayewardene by Singapore’s economic architect who set up the non-inflating Singapore Monetary Authority on currency board principles were rejected by macro-economists.
“In 1980, the Rupee has declined in value from 15.445 rupees per US dollar on 31 December 1979 to 18.060 rupees on 30 November 190, a fall of 16.9 percent in 11 months,” Goh Keng Swee told J R Jayewardena in a policy paper written in 1980 as the country faced external instability undermining the most extensive economic reforms every attempted in Sri Lanka.
“The fall in terms of stronger currencies is larger.
“Unless the process is stopped and reversed, the country can find itself caught in the vicious spiral of increasing domestic money stocks, increasing demand for imports, depreciating exchange rates, higher rupee cost of imports and greater demand for Central Bank credit creation.
“It is politically easier to break the cycle at an early stage; once it has taken a firm grip on the economy the political cost is extremely high, as witness the present troubles the government of Poland is experiencing.”
Poland defaulted in March 1981, becoming one of the first victims of the IMF’s Second Amendment which allowed un-anchored money. In December, Martial Law was declared to put down the Solidarity movement as the currency continued to fall despite reaching a restructuring deal in April.
Latin American countries, which had aggressive open market operations and had borrowed commercially in the 1970s, like Poland, followed swiftly into external default. Sri Lanka at the time did not have commercial foreign debt.
When Sri Lanka defaulted with the flexible exchange rates and potential output targeting (printing money to boost growth) in 2022 after a frenzy of foreign borrowings in the previous 10 years, inflation shot up to 70 percent.
Macro-economists are insisting on 5 to 7 percent inflation a year to boost growth, despite the lesson on stabilization crises after printing money for growth and recent growth above ‘potential output’ of 3.1 percent, after inflation was extinguished from the economy.
Political Costs of Monetary Debasement
“In the case of Sri Lanka, a depreciation of the rupee must mean that administered prices must be increased and this is never a popular political measure,” Goh told JR.
“Most of the products whose prices are administered are either wholly imported or contain a high import content.
“All wheat from which four and bread are produced is imported. The same holds true of kerosene and milk powder. Bus fares are largely determined by the rupee price of imported oil and spare parts. Fertilizers are also mostly imported.
“Exchange rate policies involve many complicated technical issues which I do want to discuss here.”
Because of the application of classical economic principles, Singapore does not have external crises. Singapore’s tax rates are also low. In Sri Lanka taxes are hiked after each balance of payments crisis triggered by rate cuts, in the ensuring IMF program.
The exchange rate is an outcome of the central bank’s operating framework involving both its monetary and exchange rate policies. Depreciation comes when exchange rate policy conflicts with money policies. Appreciation when they are complementary.
Analysts have blamed the depreciation of the rupee in 2025, on its exchange rate policy of over-purchasing dollars above its deflationary policy after cutting rates in March to boost credit.
The central bank’s deflationary policy is now limited to coupons the Treasury pays on its restructured bond stock, small amounts of long term bonds that expire and any buy-sell swaps that are terminated.
The central bank however improved its operating framework slightly by allowing interbank rates to go up, and shifting back to a scarce reserve regime. (Colombo/Jan08/2026)