Experts outline policy choices as Govt. faces toughest test to fiscal discipline yet

• CT Smith Asset Management Director/CEO Bimanee Meepagala says maintaining cost-reflective energy pricing crucial; notes current oil price surge a sentiment dampener rather than structural concern
• Economist Prof. Sirimal Abeyratne says cost-reflective pricing inevitable to sustain fiscal gains
• Economist Dr. Nishan de Mel says refined pricing frameworks can reduce price shocks without abandoning formula; says choice is not binary

CT Smith Asset Management Director/CEO Bimanee Meepagala

Centre for Poverty Analysis Executive Director Economist Prof. Sirimal Abeyratne

Verité Research Executive Director Dr. Nishan de Mel

Sri Lanka’s hard-won fiscal stability could face its toughest test yet as the ongoing Middle East conflict pushed global oil prices above $ 100 per barrel, with economists warning that maintaining fiscal discipline will depend on preserving cost-reflective energy pricing and carefully managing price shocks.

Ceylon Petroleum Corporation (CEYPETCO) and Lanka IOC announced price revisions yesterday, but uncertainty remains as to the duration of the Mideast conflict, how high oil prices could trend, and how much space the Government has to manoeuvre.

CT Smith Asset Management Director/CEO Bimanee Meepagala, Centre for Poverty Analysis Executive Director Economist Prof. Sirimal Abeyratne, and Verité Research Executive Director Dr. Nishan de Mel told the Daily FT that while Sri Lanka has some macroeconomic buffers, sustained high energy prices could increase import costs and test the Government’s commitment to fiscal consolidation.

Meepagala said the Government should continue maintaining cost-reflective fuel and electricity pricing to avoid burdening its fiscal accounts, while prevailing low inflation provides a buffer to absorb price shocks.

“In 2025, fuel accounted for roughly 18% or $ 4 billion of Sri Lanka’s total imports. The CEYPETCO imported crude at an average price of $ 74 per barrel in 2025. The recent price escalation to over $ 100 per barrel marks an increase of more than 33% compared to last year’s average,” Meepagala told the Daily FT.

“If prolonged, this would likely impact Sri Lanka, causing it to spend over $ 1 billion extra on oil imports,” she said.

The Middle East conflict-driven energy crisis comes only months after Cyclone Ditwah, which is estimated to have caused over $ 4 billion in damage to the country’s capital stock. Meepagala said a prolonged conflict could slow tea exports, reduce worker remittances from the Gulf, and affect tourist arrivals, leading to slower growth.

“Regarding fuel supplies, CEYPETCO reports the country has sufficient stocks until April. Meanwhile, Sri Lanka is reportedly exploring imports from countries such as Algeria, Nigeria, and Russia. Hence, no immediate disruptions are expected,” she noted.

She said that given Sri Lanka’s existing macro buffers, the country should be able to withstand short-term energy market volatility. However, a prolonged crisis could also push European economies deeper into recession and create political pressures ahead of the US midterm elections.

“Amidst the volatility, Sri Lanka should continue implementing the cost-reflective fuel pricing and electricity formula so that it does not burden Government fiscal accounts. Higher energy prices will create upward pressure on inflation. However, since Sri Lanka’s inflation is currently below target (1.6% as of February), the economy is better positioned to absorb this impact,” Meepagala said.

Sri Lanka’s macro fundamentals remain relatively stable, with the country maintaining both a primary balance and an external current account surplus, while money market liquidity exceeds Rs. 337 billion.

“As it stands, the Middle Eastern conflict is more of a sentiment dampener than a structural concern for the Sri Lankan economy,” Meepagala said.

Commenting on yesterday’s Colombo Stock Exchange (CSE) performance, she said the market decline was not limited to Sri Lanka.

“We saw most global indices declining in response to production cuts by major oil-producing countries such as Iraq, the United Arab Emirates (UAE), and Kuwait,” she said.

Prof. Abeyratne said maintaining cost-reflective energy pricing would be unavoidable if the Government is to preserve its recent fiscal gains.

“If the Government is serious about sustaining the improvements in its fiscal position, then cost-reflective pricing of energy becomes inevitable,” he said.

He noted that past attempts to artificially suppress domestic energy prices during global price spikes had proved unsustainable.

“In the past, we tried to control prices when global energy costs spiked, and that approach did not work,” he said.

Prof. Abeyratne said allowing domestic prices to adjust in line with global market trends could raise inflation in the short term but would also help moderate demand and stabilise prices.

“Ultimately, the extent of the impact will depend on how long the Middle East conflict lasts and how far global oil prices rise,” he said.

Dr. de Mel said the policy debate should not be framed simply as a choice between applying the pricing formula or suspending it.

“It is possible to retain the principle of cost recovery by the utility while also reducing the price increases generated from applying the formula as it is. There are refined frameworks on cost recovery pricing that can reduce the price shock of applying the formula without compromising fiscal discipline during negative shocks,” he said.

“It requires understanding how the current formula embeds and amplifies taxes and various cost estimates that are not actual costs, and then de-amplifying them through modifications to the formula. Verité Research is currently working on setting out these modified options within such a refined framework, which we intend to share with policymakers and publish.”