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Puvanya
Puvanya
Oct 06 2026
27Sri Lanka will need to heed the IMF’s call on avoiding suppressing domestic price signals for fuel, and instead allow the exchange rate to absorb the shock of global fuel price volatility experienced amidst the ongoing Middle East conflict, University of Colombo Professor in Economics Priyanga Dunusinghe said, speaking to The Daily Morning Business yesterday (5).
Speaking on the IMF’s statement on the conclusion of the Seventh Review of Sri Lanka’s reform programme, the Extended Fund Facility (EFF), he said: “They have highlighted the need for a flexible exchange rate to act as a shock absorber for the exchange rate to reflect demand and supply.”
The multilateral, in its statement, said: “In response to a protracted Middle East war, the Government should allow domestic fuel prices to adjust in line with international fuel price movements and preserve cost-recovery energy pricing, while protecting the vulnerable.”
Between January and August this year, Sri Lanka’s fuel import bill grew by 61.6% to $ 4.07 billion, increasing the country’s import expenditure on fuel by $ 1.55 billion compared to the same period last year, according to Central Bank of Sri Lanka (CBSL) data.
The August fuel import bill alone rose by 76.5% year-on-year to $ 450.6 million, compared to $ 255.2 million in August last year. This amounts to an increase of $ 195.4 million in a single month.
Referring to the subsidy allocation for fuel, the multilateral said: “Support should be well-targeted, on budget, carefully costed, and time-bound to avoid jeopardising fiscal and debt sustainability, eroding confidence, and reversing the recovery.”
According to market intelligence unit First Capital Research, fuel import costs peaked at $ 886 million in April, amid higher oil prices and elevated risk premiums. The fuel bill subsequently eased to $ 453 million by July, as oil prices moderated, premiums normalised, and domestic fuel demand softened.
Though crude oil prices fell in early trading yesterday, Brent remained above $ 100. Brent crude was trading at $ 101.20 per barrel, with West Texas Intermediate at $ 89.73 per barrel.
The IMF noted that Sri Lanka must exercise caution in withstanding an even more intense round of inflationary pressures as a consequence of the war, availing of monetary policy tightening. “In the event of stronger second-round inflationary effects from the Middle East war, monetary policy should stand ready to tighten to mitigate the risk of expectations becoming de-anchored.”
It also noted that Sri Lanka must continue with its efforts to strengthen public investment management and address bottlenecks to capital spending execution, including accelerating Cyclone Ditwah-related recovery and reconstruction.
