Sri Lanka has raised fuel and transportation prices, a long-awaited measure to address the country’s crippling economic crisis, but the increases are likely to exacerbate the country’s already-high inflation, at least in the short term.
In a message on Twitter on Tuesday, Power and Energy Minister Kanchana Wijesekera warned that gasoline prices will jump by 20-24 percent with immediate effect, while diesel prices would climb by 35-38 percent.
People would be encouraged to work from home “to minimise the usage of fuel and manage the energy crisis,” according to Wijesekera, while public sector personnel would only work from their offices when instructed by the institution’s director.
According to analysts, price hikes in food and transportation will trickle down to food and other commodities.
According to government figures issued on Monday, annual inflation in the island nation reached a new high of 33.8 percent in April, up from 21.5 percent in March.
Sri Lanka is experiencing its greatest economic crisis since independence, as a severe lack of foreign cash has slowed imports and left the country short of fuel and medicines, as well as experiencing rolling power outages.
The COVID-19 outbreak, which is wreaking havoc on the tourism-dependent economy, has been compounded by rising oil prices and populist tax cuts implemented by President Gotabaya Rajapaksa and his brother, Mahinda, who resigned as Prime Minister earlier this month.
Economists believe that raising fuel and power prices will be necessary to close a significant revenue imbalance in the government, but that it will cause short-term suffering.
Petrol prices have risen 259 percent and diesel prices have risen 231 percent since October last year, according to Dhananath Fernando, an analyst at the Advocate Institute in Colombo.
Food and other vital products have increased in price, he claims.
“This will have the greatest impact on the poor. The idea is to create a cash transfer mechanism to help the impoverished while also increasing efficiency.”
“In the short term, we will have to face an even more difficult time period,” Prime Minister Ranil Wickremesinghe, who took over from Mahinda Rajapaksa earlier this month when violence erupted between government supporters and demonstrators, said last week. There is a chance that inflation will get even higher.”
Sri Lanka has hired financial and legal heavyweights Lazard and Clifford Chance as it prepares for the onerous task of renegotiating its debts, according to Reuters, citing three unnamed sources because the talks are still confidential.
Sri Lanka’s cabinet and Lazard, which has handled debt negotiations for dozens of crisis-ridden governments in recent years, did not immediately respond to demands for comment, while Clifford Chance declined to comment.
Experts and economists have been waiting for the appointment as the country attempted to restructure more than $12 billion in foreign debt that had been accumulating for years but became unsustainable after COVID-19 wreaked havoc on the economy.
“By far the most critical question is whether the government has the political will and ability to meet the IMF’s pre-conditions,” said Petar Atanasov, co-head of sovereign research and strategy at Gramercy.
“When their backs are against the wall, governments are generally willing to do the things that are required.”
While there is optimism that a solution may be reached to alleviate the economic crisis, it is unlikely to be simple.
Long-resisted but now embraced talks with the International Monetary Fund (IMF) could be complicated due to a combination of loans from China, India, and Japan, as well as all bonds held by private investment groups.
A collection of the country’s major sovereign dollar bondholders has recruited Rothschild as its financial adviser and White & Case as its legal counsel.
“To soothe the people, I believe the next government would have to show swift solutions to genuinely pressing concerns like energy and importation of products,” said Carlos de Sousa, an emerging-market strategist at Vontobel Asset Management, which holds Sri Lanka’s bonds.