Sri Lanka raised fuel prices by up to six percent on Sunday, executing a critical policy alignment with International Monetary Fund (IMF) plans to ensure energy cost recovery and systematically phase out state-funded subsidies to stabilize its economy.

Following the adjustment announced by the state-run Ceylon Petroleum Corporation, the price of petrol was hiked to 434 rupees (USD 1.33) per liter, up from 410 rupees.

Concurrently, diesel prices increased to 407 rupees a liter from the previous rate of 392 rupees.

The immediate price hike was implemented just days after the IMF released a USD 695 million installment of its comprehensive USD 2.9 billion bailout package, which was originally agreed upon in early 2023 to rescue the cash-strapped South Asian nation from an acute economic meltdown.

As a core condition of this bailout, the IMF has mandated that Sri Lanka guarantee full cost recovery for both fuel and electricity tariffs, which had been subsidized by the government following the outbreak of geopolitical hostilities in the Middle East in February.

In an official letter to the Washington-based international lender made public recently, Sri Lankan President Anura Kumara Dissanayake confirmed that the remaining fuel subsidies will be entirely phased out by September.

The global energy landscape has severely strained the island nation's finances.

Since the United States and Israel launched military operations targeting Iran on February 28, triggering a massive global energy crisis, Sri Lanka has been forced to raise domestic petrol and diesel prices by approximately 48 percent, while electricity costs have spiked by a third.

The situation remains precarious as the Strait of Hormuz—a vital maritime transit route handling roughly 20 percent of global oil exports during peacetime—has been effectively closed off by Iran.

Because Sri Lanka imports 100 percent of its crude oil and relies heavily on foreign coal to generate national electricity, Colombo remains exceptionally vulnerable to international supply chain disruptions.

The government has repeatedly warned that the ongoing fighting in the Middle East, along with any prolonged regional conflict, could seriously undermine its rigorous domestic efforts to permanently recover from its catastrophic 2022 economic collapse.

Sri Lanka officially defaulted on its USD 46 billion foreign debt in 2022 after exhausting its foreign exchange reserves and it has since depended on sequential drawdowns of the IMF bailout loan to keep its financial system stable.

Source: AFP