From airlines to electricity: The cost of ignoring markets

By Dhananath Fernando

Originally appeared on The Morning

Last week offered two clear reminders of a lesson Sri Lanka keeps learning the hard way.

Markets discipline decisions. Governments struggle to run businesses. The cost of ignoring this distinction is paid by taxpayers and consumers.

SriLankan: A repeating cycle

The first story was the resignation of the Chairman and several board members of SriLankan Airlines. This is not a story about individuals failing. It is a story about systems failing. Even capable professionals cannot succeed when incentives, governance, and political pressures are misaligned.

We have seen this cycle before. Successive governments have been persuaded that the airline can be ‘turned around’ with the right people and a new plan.

When the current President assumed office as both President and Finance Minister, his first Budget allocated Rs. 20 billion to support the airline based on the board’s recovery plan. Eighteen months later, we have not even managed to appoint a permanent CEO to run a highly technical, fast-moving industry that depends on precision and commercial agility.

This is not new. As far back as the time of J.R. Jayewardene, advice from Lee Kuan Yew was clear: do not run an airline as a state enterprise. Singapore structured its National Carrier under Temasek Holdings, separating ownership from political control and embedding commercial discipline.

Sri Lanka has done the opposite. From one administration to another, the pattern has been the same. Political ownership, weak governance, and repeated capital injections. The debt of roughly $ 510 million was absorbed by the Government, transferring the burden from the airline’s balance sheet to the public. Yet the core problem remains unresolved.

Every new board arrives with a familiar script. Fleet expansion. Optimistic projections. A promise that the airline is ‘rescuable’. But without basic building blocks such as professional management and independence from political interference, these plans collapse. If a government cannot appoint a CEO for its own airline, it raises a more fundamental question. Can the State effectively run any commercial enterprise?

Today, there is discussion of injecting another Rs. 20 billion as the airline struggles to remain a going concern. This is the trap of State ownership. Entering is easy. Exiting is nearly impossible. Selling is politically sensitive. Closing is economically disruptive. The result is a perpetual drain on public finances.

Energy pricing: The real risk

The second story was the electricity tariff revision. It is understandably unpopular, but the real risk lies not in raising prices but in failing to do so.

Energy pricing in Sri Lanka has long been disconnected from market realities. When global prices rise and domestic tariffs remain unchanged, the losses accumulate within institutions such as the Ceylon Petroleum Corporation. These losses do not disappear. They are financed through borrowing, money printing, or delayed payments, all of which eventually return to the public in the form of inflation, currency depreciation, or shortages.

At present, diesel pricing illustrates the problem clearly. Based on current global prices, diesel is being sold at a significant loss, estimated at around Rs. 163 per litre. Even if the Government were to remove the entire tax component, there would still be a gap. This is not sustainable.

Meanwhile, private players such as Lanka IOC and Sinopec are operating under the same administered pricing structure. The sharp increase in super diesel prices to around Rs. 600 signals that underlying costs are much higher than the retail price of standard diesel.

At the refinery level, the difference between diesel and super diesel is relatively small, often in the range of $ 0.05–0.15 per litre. In rupee terms, this would typically translate to a gap of around Rs. 45–50. The current price difference of nearly Rs. 190 suggests that standard diesel prices are significantly underpriced.

Underpricing has consequences. It creates implicit subsidies that are neither targeted nor efficient. In Sri Lanka, around 70% of fuel is consumed by the wealthiest 30% of the population. When diesel is sold below cost, the benefit disproportionately accrues to those who consume more, while the cost is borne by the broader population.

This is why the real conversation should shift. While prices must be adjusted to reflect market realities, the policy effort should focus on strengthening the social safety net. The objective is not to suppress prices artificially, but to protect the most vulnerable directly.

We cannot protect the poorest of the poor by keeping prices low. In fact, rising food prices, especially of essentials like rice, have already hit them the hardest. Broad subsidies on fuel do little to help them. Instead, they drain public resources.

The better approach is targeted support. Increase cash transfers to the poorest households so they can weather this period of high prices. Strengthen the social registry. Improve targeting. Ensure that assistance reaches those who genuinely need it, rather than being spread thinly across the entire population.

This also preserves fiscal space. Instead of subsidising consumption for higher-income groups, resources can be redirected to those who are most vulnerable. It is both economically efficient and socially just.

The link to electricity is direct. As water levels decline and hydro generation falls, the system shifts towards thermal power, relying on diesel and coal. If diesel prices remain artificially low, the losses in the energy sector widen. If prices are corrected, electricity tariffs must adjust accordingly. The alternative is power cuts or a return to the fiscal and monetary instability that triggered the last crisis.

The uncomfortable truth is that market-reflective pricing is not a choice. It is mandatory. Ignoring it does not protect consumers. It postpones the cost and amplifies it.

The high price of ignored signals

Both stories from last week point in the same direction. Governments are not designed to run commercial enterprises. When they try, inefficiencies and losses accumulate. Prices that ignore market signals create distortions, shortages, and fiscal pressure.

The solution is not complicated, though it is politically difficult. Exit from commercial activities where the State has repeatedly failed. Establish clear, rules-based pricing mechanisms for energy that reflect global costs. At the same time, build a stronger, better targeted social safety net that protects the poorest from the impact of these adjustments.

Markets are not perfect. But they are far better at signalling reality than administrative decisions. When those signals are ignored, reality eventually asserts itself, often at a much higher cost.

(The writer is the Chief Executive Officer of Advocata Institute. He can be contacted via dhananath@advocata.org)

(The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute)

When prices lie, crises follow

By Dhananath Fernando

Originally appeared on The Morning

The only certainty about the crisis in the Middle East is its uncertainty. Recent attacks on Iranian and Qatari gas infrastructure are already pushing global Liquefied Natural Gas (LNG) and energy prices upwards, and these pressures are unlikely to ease anytime soon.

Many Sri Lankans fear that our economy could collapse because of this crisis. There is some truth in that concern. But if the economy does collapse, it will not be because of the Middle Eastern crisis alone; it will be because of how we respond, or fail to respond to it.

At the heart of this response lies one critical decision: whether we adjust domestic energy prices in line with global realities.

In his address to Parliament on Friday (20), the President signalled the need to revise fuel prices again mid-month. Given the volatility of global markets, even weekly or daily revisions may be justified. This is not policy overreaction; it is economic discipline.

Prices are the most effective tool we have to manage scarcity. When prices rise, demand contracts – that is how markets signal reality. With global energy prices skyrocketing, price adjustments are not optional; they are the first line of defence.

Yet, the pressure to increase prices remains politically constrained. Sri Lanka currently has a degree of buffer, both in foreign reserves and domestic liquidity. This creates the illusion that we can delay adjustments. Governments often hesitate, fearing the political cost of passing global price shocks to consumers.

Keeping prices artificially low, however, has consequences. It encourages consumption beyond what we can afford. Every litre consumed above sustainable levels is paid for with scarce dollars. Eventually, this pressure will hit the exchange rate.

At that point, the Government will face an even harsher choice: either allow the rupee to depreciate sharply, or burn through reserves to defend it. Both paths are far more damaging than timely price adjustments.

If we choose to defend the currency while keeping fuel prices artificially low, we will simply deplete our reserves. If we float the currency under pressure, the impact will be economy-wide higher inflation, eroded savings, and a deteriorating investment climate.

None of these are better alternatives.

That said, fuel price hikes are not painless. They are not a perfect solution, nor a silver bullet. Higher fuel prices will ripple across the economy; raising transport, food, and other essential costs. Given the relatively inelastic nature of fuel demand, the burden will be felt widely, especially by the poorest.

This is precisely why price adjustments must be accompanied by targeted cash transfers. The answer is not to suppress prices for everyone, but to support those who truly need it. Well-targeted assistance can cushion the vulnerable without distorting the entire system.

It is also important to understand this: even if fuel prices rise to Rs. 1,000 in line with global markets, the economy will adjust. Growth may slow, but stability will be preserved.

The alternative, on the other hand, is far worse. If we avoid price adjustments, the gap between real costs and subsidised prices does not disappear, it accumulates. And eventually, society pays the price through currency depreciation, inflation, and another full-blown economic crisis.

We have seen this movie before.

The decision to allow private companies to import fuel is a step in the right direction. The President noted that five licences had already been issued. These players will likely enter the market at higher, more realistic prices. That, in itself, is a signal.

Higher prices attract supply. They also discipline demand. Both are necessary in a constrained environment.

Our hard-earned reserves should not be used to defend an artificial exchange rate. Nor should our hard-earned primary surplus be used to subsidise fuel consumption, especially when, as data suggests, nearly 70% of fuel is consumed by the top 30% who can afford higher prices.

Even mechanisms like the QR code system are, in effect, hidden price controls. Long queues, waiting time, and even informal payments to bypass quotas are simply non-monetary forms of price increases.

If we are serious about reform, we must go further. Price caps imposed on private players such as Sinopec, Lanka IOC, and Shell should be removed. These companies must have the incentive to import and supply fuel based on market conditions. Ceylon Petroleum Corporation (CPC) prices, too, must adjust accordingly.

The real test for the Government is simple: can it allow prices to reflect reality?

If it fails, the Middle Eastern crisis will not remain external; it will become our own economic crisis.

If it succeeds, the economy may slow, but it will endure.

And in times like these, survival with discipline is far better than collapse with denial.