Sri Lanka will not raise power tariffs: Finance Minister

ECONOMYNEXT – Sri Lanka will not raise power tariffs this year, Finance Minister Ravi Karunanayake said, shortly after the power regulator determined that there was a 5 percent revenue gap that the utility should fill in the next six months.

"There are stories in newspapers that power prices will be raised, which is a baseless lie (amoolika boruwak)" Karunanayake told reporters.

"These are things that a bankrupt group says to create problems that are not there."

Power Minister Ranjith Siyambalapitiya had also denied there will be a price hike, even before the tariff setting process of the regulator, which is independent in paper, has barely begun.

Political meddling in energy tariffs and their accommodation with loose monetary policy are a prime trigger of balance of payments crisis and economic bubbles in Sri Lanka.

The Public Utilities Commission was set up to make sure that the power utility does not run losses, borrow from state banks and then de-stabilies the credit system, which will lead to a collapse in the currency and a higher debt burden for taxpayers.

However, analysts point out that its independence is badly compromised by political meddling in prices.

Over the weekend, a special tariff for farmers was announced apparently before approval was given by the regulator, further undermining the independence of the regulator.

Sri Lanka’s new administration has already loaded the CEB with high costs by scrapping coal plants, for which analysts say the people will pay a heavy price in terms of lost low-power tariffs.

At the moment, tariffs are lower, despite strong demand growth and dry weather primarily because of the Norochcholai coal plants. The three plants are now running flat out.





Market pricing of energy allows aggregate demand to be matched between the external sector and the domestic economy, preventing pressure on the currency.

Sri Lanka’s economic instability is primarily caused by the two key prices that the state controls: energy prices and interest rates.

Analysts who want to protect the poor have called for formula-based energy pricing and even the abolition of the Central Bank to create a Hong Kong or Singapore style currency board to prevent mis-pricing of interest rates.
In 2011/2012, the rupee collapsed after under the watch of Power Minister Patali Ranawaka, when no adjustment was made in late 2011 and the Central Bank also failed to raise interest rates to cover the sudden spike in credit demand and instead printed money.

In 2015, the balance of payments crisis was triggered by the Central Bank accommodating a state salary and subsidy hike.

Current Central Bank Governor Indrajit Coomaraswamy, however, has already displayed a readiness to tighten monetary policy to set off any fiscal lapse.

Under current law, Sri Lanka’s Public Utilities Commission has to set power tariffs in five-year periods, where adjustments are made every five years.

The regulator initiated work in the October 16 to March 17 period and it found a gap of 5 percent (about Rs18 billion) in projected revenues and ordered the Ceylon Electricity Board to submit a tariff.

The CEB proposed a hike across the board, without differentiating between users.

Economic analysts say it is essential to have market-determined tariffs to prevent economic stability and protect the poor.

However, there is little public understanding of the process.

Meanwhile, observers of the power sector say a sharply adversarial relationship between the two agencies, which has some advantages, is also not helpful in tariff setting. (Colombo/Oct0/2016)

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