Sri Lanka better placed than 2022 to absorb oil shock: Moody’s

• Middle East conflict keeps oil prices volatile; Brent seen at $ 90-110/bbl range through 2026
• Energy reforms, flexible exchange rate and IMF program have reduced vulnerability for SL
• FX buffers weaker but stronger than during 2022 crisis; tourism slowdown adds pressure
• Growth outlook cut but impact expected to be less severe than during sovereign default period

Sri Lanka is better positioned than during its 2022 economic crisis to absorb a fresh energy price shock from the Middle East conflict, although high oil prices continue to pose risks to inflation, reserves, and growth, Moody’s Ratings said.

Moody’s said Sri Lanka, along with Bangladesh and Pakistan, remained among Asia’s most vulnerable economies to higher oil prices due to heavy reliance on imported energy.

 However, the rating agency noted that reforms undertaken in recent years, including energy-pricing adjustments, cost-recovery tariffs under International Monetary Fund (IMF) programs, and more flexible exchange rates, had strengthened resilience compared with 2022.

The Middle East conflict is expected to keep energy markets volatile, with Moody’s central scenario projecting oil prices mostly within the $ 90-110 per barrel range during the remainder of 2026, although prices could move outside that range periodically.

High oil prices have already contributed to higher inflation pressures in Sri Lanka, but Moody’s said the impact has been significantly lower than in 2022 when oil prices surged following Russia’s invasion of Ukraine, worsening Sri Lanka’s sovereign default crisis.

“Energy-pricing reforms, cost-recovery tariffs under IMF programs, and more flexible exchange rates have reduced vulnerability to oil shocks,” Moody’s said.

The rating agency said exchange rates in Sri Lanka, Bangladesh, and Pakistan had remained relatively stable despite elevated energy prices, unlike in 2022 when currencies weakened sharply as authorities depleted reserves to defend exchange rates.

For Sri Lanka, the shift towards a more flexible exchange rate regime has reduced the risk of disorderly currency adjustments, although the rupee remains exposed to higher energy import costs.

However, foreign exchange buffers remain a concern. Moody’s said reserves in Bangladesh and Pakistan had remained broadly steady since the escalation of the Middle East conflict, while Sri Lanka’s reserves had declined as weaker tourism earnings combined with higher energy import costs weighed on external balances.

Despite this deterioration, the rating agency said foreign exchange buffers across the three economies were stronger than in 2022, when authorities rapidly depleted reserves to support currencies amid severe external pressures.

Remittances have also remained resilient, providing an important source of foreign currency liquidity. Moody’s noted that around half of remittance inflows to Bangladesh, Pakistan, and Sri Lanka originate from workers in the Middle East, but these flows have held up despite the conflict.

The agency said more market-based exchange rates had also encouraged workers to channel remittances through official banking systems, unlike in 2022 when currency collapses pushed inflows towards informal channels.

Moody’s has nevertheless lowered growth forecasts for Sri Lanka, Pakistan, and Bangladesh due to the impact of the Middle East conflict. For Sri Lanka (one basis point) and Pakistan, the revisions are smaller than in 2022, reflecting improved capacity to absorb external shocks.

For Bangladesh, Moody’s said the growth downgrade was larger as higher oil prices are expected to delay a post-election recovery in investment and confidence.

Sri Lanka remains exposed to external energy shocks, but Moody’s assessment indicates that reforms following the 2022 crisis have strengthened the country’s ability to withstand another period of elevated global energy prices.

For Bangladesh and Pakistan, Moody’s highlighted similar vulnerabilities, noting that all three economies remain dependent on imported energy and exposed to higher oil prices. However, unlike 2022, exchange-rate flexibility, improved policy frameworks, and stronger external buffers provide greater capacity to manage the shock.