Sri Lanka has hiked fuel and transport prices, a long-standing measure to tackle its debilitating economic crisis, but the hikes are sure to exacerbate runaway inflation, at least in the short term.
Power and Energy Minister Kanchana Wijesekera said in a Twitter post on Tuesday that petrol prices would increase by 20-24% while diesel prices would increase by 35-38% with effect immediate.
“Cabinet has also approved the revision of transportation and other service charges accordingly,” he said.
(1) The fuel price will be revised from 3am today. The cabinet-approved fuel pricing formula was applied to revise prices. The price revision includes all costs caused by importation, unloading, distribution to stations and taxes. Profits not calculated and included.
— Kanchana Wijesekera (@kanchana_wij) May 23, 2022
Wijesekera also said people would be encouraged to work from home “to minimize fuel usage and manage the energy crisis” and that public sector officials would only work from their desks on instructions from the head of the institution.
Increases in food and transport prices will trickle down to food and other goods, economists said.
Annual inflation in the island nation hit a record 33.8% in April from 21.5% in March, government data showed on Monday.
Sri Lanka is in the grip of its worst economic crisis since independence as a severe shortage of foreign exchange has blocked imports and left the country short of fuel, medicine and hit by continuous power cuts.
The financial problems are due to the confluence of the COVID-19 pandemic hitting the tourism-dependent economy, rising oil prices and populist tax cuts by the government of President Gotabaya Rajapaksa and his brother, Mahinda , who resigned as prime minister this month.
Economists have said hikes in fuel and electricity prices will be needed to close a massive gap in government revenue, but agree it will cause short-term difficulties.
Dhananath Fernando, an analyst at Colombo-based think tank Advocata Institute, said petrol prices had risen 259% since October last year and diesel prices by 231%. Prices for food and other essentials have risen, he said.
“The poor will be the most affected by this. The solution is to establish a cash transfer system to support the poor and increase efficiency as much as possible.
Prime Minister Ranil Wickremesinghe, appointed to replace Mahinda Rajapaksa earlier this month after violence erupted between government supporters and protesters, said last week: “In the short term, we will face an even more difficult. Inflation may rise further.
The price hike comes at a time when Sri Lanka has hired heavyweight financial and legal advisers Lazard and Clifford Chance as it prepares for the difficult task of renegotiating its debts, Reuters reported, citing three unnamed sources as talks are always private.
Spokespersons for the Sri Lankan firm and Lazard, which has handled debt talks for dozens of crisis countries in recent years, did not immediately respond to requests for comment while law firm Clifford Chance declined to comment.
Experts and economists have been awaiting the appointment as the country seeks to restructure more than $12 billion in external debt that had accumulated for years but became unsustainable when COVID-19 hammered the economy.
“By far the most important thing is the extent to which the government will have the political will and the capacity to meet the preconditions for the IMF program,” said Petar Atanasov, co-head of sovereign research and strategy at Gramercy. .
“Governments are often ready to do the things that are needed when they have their backs completely against the wall.”
Although there are hopes that a deal could be reached to ease the economic crisis, it is unlikely to be straightforward.
A mix of loans from China, India and Japan, plus all the bonds held by private equity funds mean talks with the International Monetary Fund (IMF), long resisted but now embraced, could be complex, especially if social unrest worsens.
A group of Sri Lanka’s largest dollar sovereign bondholders have hired Rothschild as financial adviser and another law firm, White & Case, as legal adviser.
“I think the new cabinet should really show quick fixes to really pressing issues like electricity and importing goods to appease the people,” said Carlos de Sousa, emerging markets strategist at Vontobel Asset Management, who owns the Sri Lanka bonds.
“They’ll try, but I don’t know if they’ll be successful enough. We’ll see.”