Sri Lanka’s new economic crisis intensified

Iran responded by halting most traffic via the Strait of Hormuz, through which 20 percent of the world’s oil and gas passes.

Sri Lanka imports 60 percent of its energy needs, much of it through the strait. It also has no storage capacity beyond one month’s consumption needs. With the passageway largely closed, the South Asian island nation of 22 million introduced a QR-based fuel ration arrangement, a system followed by the government during the economic crisis of Sri Lanka in 2022.

Based on this per-week ration system, motorbikes are allowed eight litres of petrol, tuk-tuks 20 litres of petrol, cars 25 litres of petrol, buses 100 litres of diesel, and lorries with 200 litres of diesel, reports Al Jazeera.

But even that limited fuel now comes at a higher cost: Sri Lanka has raised the price of fuel by approximately 33 percent since the start of the war on Iran.

With fertilisers too now impacted dramatically – almost half of the world’s urea comes via the Strait of Hormuz, experts expect food prices in Asia to also rise significantly.

Researchers at the Kiel Institute for the World Economy (PDF) estimate that Sri Lanka could see a 15 percent overall increase in food prices.

For many Sri Lankans, their deepening woes carry echoes of a crisis they thought they had put behind them.

Sri Lankans suffered this ration system and price hike four years ago, during the economic crisis under the presidency of Gotabaya Rajapaksa.

The government led by Rajapaksa was accused of driving the Sri Lankan economy into a state of collapse by adopting policies that led the country to default on its foreign debts, for the first time in its history.

A foreign exchange shortage eventually forced Sri Lanka to restrict the import of goods – including fuel – resulting in soaring prices of essentials.

Rajapaksa fled the country after a youth-led popular uprising against him in July 2022.

Rathna, who is in his mid-60s, said there was a difference between the economic struggles then and those facing Sri Lanka now. Sri Lanka elected a left-leaning government in 2024, two years after Rajapaksa’s ouster.

“This time, no one can put the blame on this government as the war on Iran is not in Sri Lanka’s hands,” Rathna told Al Jazeera.

Still, the current government, under President Anura Dissanayake, faces major challenges as the war in the Middle East continues.

An official from the Sri Lankan Ministry of Energy, who spoke with Al Jazeera on condition of anonymity as he was not authorised to speak to the media, explained this loss – and its economic rationale.

“What we have increased [in terms of the price at petrol pumps] is less than the hike in the international market,” the official said, explaining that the Sri Lankan government was effectively subsidising fuel for its citizens by absorbing the remainder of the increased cost of fuel that the country imports.

That’s not just a social welfare measure, the official explained.

The loss resulting from this subsidy, he argued, would be less than the hurt to the economy if the full price hike were reflected at petrol stations: Transport would be crippled, work would come to a standstill and jobs would be lost.

“It could lead to insufficiency and unproductivity in industries,” he cautioned.

“The future of this crisis cannot be predicted, but the government is fully prepared to support the people,” he asserted.

Alongside fuel rationing, Sri Lanka has adopted a no-work-on-Wednesday policy, closing government offices and schools that day in order to minimise fuel consumption.

Sri Lanka stores its fuel reserves – mainly in three storage facilities across the country – but can hold reserves only enough for one month’s consumption.

Soon after the start of the war on Iran, President Dissanayake told lawmakers that Sri Lanka was building eight more facilities – they would be able to collectively hold another week’s worth of fuel.

On the other hand, Sri Lanka has entered into an agreement with India and the United Arab Emirates to renovate and use a colonial-era fuel storage farm in the eastern town of Trincomalee.

But fuel aside, Illanperuma pointed out that if the traffic halt in the Strait of Hormuz continues, it will impact Sri Lanka’s food security.

“We import fertilisers from China, and its main ingredient, sulphur, comes from the Middle East. If China fails to source sulphur, we will be in trouble.” Illanperuma told Al Jazeera.

For Rathna, the tuk-tuk driver, the current moment also carries a strange irony.
“During the 2022 economic crisis, the fuel ships were anchored around the country. But the government had no money to buy it,” he recalled.

Now, he said, the government has foreign currency reserves, “but the ships are not arriving”.