Sri Lanka may be heading toward a governance conflict as it navigates IMF-backed electricity pricing reforms that appear to contradict the country’s own regulatory framework. According to Verité Research Executive Director Dr. Nishan de Mel, the divergence arises from differing interpretations of what qualifies as “cost-reflective pricing”—a central condition of the IMF programme.
Speaking to The Daily Morning Business, Dr. de Mel cautioned that the government now faces a difficult balancing act: adhering to its commitments under the IMF programme while preserving the independence and integrity of the Public Utilities Commission of Sri Lanka (PUCSL), the national power regulator.
“Sri Lanka is legally obligated to implement cost-reflective pricing under both the IMF agreement and the Sri Lanka Electricity Act, No. 20 of 2009,” Dr. de Mel said. However, he emphasized that the current dispute is not necessarily about whether cost-reflective pricing has been implemented, but rather how it is being measured.
Verité Research’s forthcoming analysis suggests that the issue lies more with the IMF’s methodology than with any failure by the regulator. “The problem is most likely not with the actions of the regulator but with the method used by the IMF to assess cost-reflective pricing,” Dr. de Mel noted.
The situation was further complicated when the Sri Lankan government, during its most recent IMF review, accepted fault for not achieving cost-reflective electricity pricing. According to Dr. de Mel, this admission has put the government in a precarious position—either meet the IMF’s expectations or risk undermining its own regulatory institutions.
“What complicates the matter is that the government mistakenly accepted blame, placing itself in a position where it must choose between complying with the IMF or steamrolling the regulator,” he said.
Dr. de Mel urged the government and the IMF to engage in constructive dialogue, stressing that institutional integrity should not be sacrificed in the name of fiscal reform. “Improving governance is a pillar of both the IMF programme and the government’s own reform agenda. Therefore, this conflict must be resolved in a way that honors both principles.”
As a solution, Verité recommends that the IMF modify its method of assessing cost-reflective pricing to better align with local practices, or alternatively, the government could adopt accounting mechanisms that bring state utility surpluses and deficits into the national budget, preserving both regulatory independence and fiscal transparency.