Electricity tariff reductions based on sound economics

The recent announcement by the Government to reduce electricity tariffs by 20% has been met with applause from the general public, offering much-needed relief in the face of rising living costs. However, while this move may sound like a step toward alleviating household and business expenses, it is crucial that such a decision be made with sound financial backing and a keen understanding of the long-term implications. 

The Government must tread carefully, as populist economic policies, particularly those that come without a robust financial framework, can have disastrous effects—just as we witnessed with the tax cuts under the Gotabaya Rajapaksa administration in 2019.

Electricity tariffs in Sri Lanka have been notoriously high, primarily due to structural inefficiencies within the State-run monopoly, the Ceylon Electricity Board (CEB). The lack of a competitive generation and distribution network has kept the utility sector mired in inefficiency. Rather than benefiting from a dynamic and competitive market, consumers have borne the brunt of these systemic inefficiencies, which in turn has hindered the country’s economic growth. While reducing tariffs on the surface appears to be a consumer-friendly decision, it can only lead to further long-term harm if these deeper structural issues are not addressed.

Reducing electricity tariffs without addressing the underlying inefficiencies will merely shift the burden onto the taxpayer. Essentially, it would create a subsidy system that is funded not by the utility sector, but by public coffers, which inevitably means more Government expenditure. In the worst-case scenario, this could lead to a further fiscal crisis, much like the one Sri Lanka currently faces after a series of poor financial policies and debt mismanagement. The risk is clear: if structural inefficiencies are left unaddressed, the long-term result will be an expansion of Government expenditure and a higher tax burden on the public.

Instead of opting for a populist measure that provides short-term relief, the Government must look at long-term solutions to reduce electricity prices in a sustainable and financially sound manner. The focus must be on increasing efficiency in the energy sector, improving the management of the CEB, and fostering greater private sector participation in both energy production and distribution. This would inject competition into the market, improve service delivery, and ultimately lower costs. A more competitive energy market, bolstered by sound policy and transparent governance, is the key to creating a more affordable and resilient electricity system.

The Government should prioritise reforming the sector, addressing inefficiencies, and implementing policies that encourage both public and private investment. If these structural reforms are made, a tariff reduction could be both sustainable and beneficial for consumers in the long run. Conversely, if tariff reductions are made without these critical reforms, the Government may find itself back at square one, struggling with ballooning public expenditure and a weakened economy.

Sri Lankans have long endured high electricity costs, and a reduction would undoubtedly provide immediate relief. However, as history has shown, decisions made purely for short-term political gain can have far-reaching consequences. The lessons of the Gotabaya Rajapaksa administration, particularly the disastrous tax cuts that deepened the country’s economic woes, should serve as a stern reminder.