Out of power, out of money: Sri Lanka’s growing energy challenge is likely to add to debt

By Gerald Tnay

Background 

Sri Lanka generates electricity from three primary sources: thermal power (fossil fuels), hydropower and other renewable sources. In 2015, 52% of Sri Lanka’s electricity was generated from imported fossil fuels, with most of the rest generated by hydropower. Due to the volatile hydropower supply, however, its contributions to the power grid have diminished in recent years. The reliance on fuel imports has left the Sri Lankan economy with a trade deficit that is likely to last for many years.

Comment

The drought in early 2019 led to reduced water levels in reservoirs across Sri Lanka and forced the state-run power firm, Ceylon Electricity Board (CEB), to impose power cuts to conserve water. The firm has cut hydropower generation in half; down to 15% of the country’s total electricity production, to save water for household consumption and agricultural irrigation. The power cuts, which started unannounced on 22 March, leave parts of the country without power for up to four hours each day.

With Government analysts projecting a long drought, the Government devised a short-term solution to induce artificial rain. It was hoped that rain would help to fill the reservoirs, but to no avail. Consequently, the power cuts are continuing. A CEB spokesman stated that power cuts will continue until considerable rainfall occurs; however, there are growing concerns that if they continue for a long period, it could hurt the already weakened Sri Lankan economy.

While the Sri Lankan economy has grown since the end of its civil war in 2009, the country has a trade deficit of $ 849.8 million ($ 1.2 billion). This is largely due to the amount of fossil fuels that Sri Lanka imports to generate electricity. In 2015, the consumption of electricity for commercial and industrial use surpassed demand from the residential sector. Commerce and industry continue to grow rapidly, which enhances economic growth but also causes electricity demand to rise sharply. That increased demand, coupled with the drought, has increased the burden on Sri Lanka’s already fragile economy.

In response to the volatility of hydropower, the Government is attempting to replace the shortfall with Liquefied Natural Gas (LNG). As of May 2018, the Government has approved plans to build three power plants with a total output of 1,400 Megawatts, using funding from China, India and Japan. The projects are expected to cost around $ 200 million and $ 300 million ($ 279 million and $ 418 million). While low energy output from its hydropower plants could potentially hurt the Sri Lankan economy, it could mitigate that effect by increasing the output of thermal power, specifically coal and oil in the short term and natural gas in the long term. A high level of foreign debt, however, remains the most significant economic impediment.

Economic projections suggest that Sri Lanka is to repay $ 6 billion ($ 8.37 billion) in 2019 alone. In total, Sri Lanka has amassed a total foreign debt of $ 55 billion ($ 77 billion), equal to 77% of its GDP. The foreign debt crisis started with the Government taking loans from both large financial agencies, such as the International Monetary Fund and the Asian Development Bank, and sovereign loans, specifically from China, for infrastructure development purposes. The Chinese loans forced Sri Lanka to sell off a majority stake of $ 1.12 billion ($ 1.56 billion) in the strategic Hambantota port. That deal raised Japanese and Indian concerns about growing Chinese influence in the region. In 2018, the Government borrowed $ 1 billion ($ 1.4 billion) on an eight-year loan to pay off existing loans. To meet the upcoming debt repayment deadline at the end of 2019, the Government is likely to have to continue to borrow and risk falling further into the ‘debt trap’.

A reduction in hydropower generation requires the Government to invest in other sources of electricity; possibly borrowing money to do so. The amount required, however, is small compared to the debt that it already has and would provide the means to better position the Sri Lankan economy for continued growth.

(Source: http://www.futuredirections.org.au/publication/out-of-power-out-of-money-sri-lankas-growing-energy-challenge-is-likely-to-add-to-debt/)

(The writer is Research Assistant, Global Food and Water Crises Research Programme.)