Sri Lanka restores fuel subsidy as inflation spikes

Sri Lanka announced a $126 million fuel subsidy on Tuesday to contain the rapidly rising price of diesel -- key for public transport -- as inflation spiked to a 38-month high.

Import-dependent Sri Lanka has raised fuel prices by about 50 percent as the Middle East war, which broke out in February, caused a surge in global energy costs.

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Government spokesman Nalinda Jayatissa said motorists would not have to bear the full cost of diesel for three months from October, but there would be no subsidy for petrol.

He said $175 million had already been spent subsidising both diesel and petrol in the first three months after the war broke out. “We are trying to make sure that the increase is not too steep, at least for diesel,” Jayatissa told reporters in Colombo.

“Our hope is that the war in the Middle East will end soon. Very high global oil prices are hurting us badly.”

The government restored the diesel subsidy despite warnings from the International Monetary Fund (IMF) that the country could slip back into a financial crisis unless it ensures full cost recovery on energy sales.

Sri Lanka’s inflation hit a 38-month high of 8.0 percent in August as prices of food and other essentials rose across the board.

The country has warned that any prolonged conflict in the Middle East could threaten its fragile economic recovery from the meltdown of 2022, when the country ran out of foreign exchange to finance essential imports.