Sri Lanka is preparing for new economic challenges as the war against Iran continues

Kandy, Sri Lanka On a sunny March day in the hill town of Kandy in central Sri Lanka, Keerthi Rathna waited in a snaking line to buy her share of petrol for her three-wheeled tuk-tuk.

The amount he was allocated by the government was 20 liters (about 5 liters) per week. In the past, Rathna used to buy as much petrol as he needed, whenever he needed it, but everything has changed since the United States and Israel started their war on Iran on February 28.

Iran responded by halting major traffic through 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, most of which is powered by wind. It also has no storage capacity beyond one month’s usage requirements. With the road largely closed, the South Asian island nation of 22 million introduced a fuel supply arrangement based on QR, a system followed by the government during the economic crisis in Sri Lanka in 2022.

Based on this weekly food system, motorcycles are allowed eight liters of petrol, tuk-tuks 20 liters of petrol, cars 25 liters of petrol, buses 100 liters of diesel, and trucks with 200 liters of diesel.

But even that limited fuel now comes at a high cost: Sri Lanka has raised the price of fuel by nearly 33 percent since the start of the war with Iran. Since fertilizer is still very affected – about half of the world’s urea comes through the Strait of Hormuz, experts expect that food prices in Asia will also rise significantly. Researchers at the Kiel Center for the World Economy (PDF) estimate that Sri Lanka could see a 15 percent increase in overall food prices.

For many Sri Lankans, their mounting woes have the feel of a crisis they thought they had put behind them.

‘A common system, but scary’

The people of Sri Lanka suffered from this system of food and inflation four years ago, during the economic crisis under the presidency of Gotabaya Rajapaksa.

The Rajapaksa-led government was accused of driving Sri Lanka’s economy into recession by adopting policies that caused the country to default on its foreign debt, for the first time in its history.

A shortage of foreign exchange eventually forced Sri Lanka to ban exports – including fuel – resulting in a spike in commodity prices.

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

Rathna, who is in his 60s, says there is a difference between the economic problems at that time and the ones Sri Lanka is facing now. Sri Lanka elected a left-leaning government in 2024, two years after Rajapaksa’s ouster.

“This time, nobody can blame this government as the Iran war is not in Sri Lanka’s hands,” Rathna told Al Jazeera.

However, the current government, under President Anura Dissanayake, is facing major challenges as the conflict in the Middle East continues.

‘Loss despite price rise’

Nalinda Jayatissa, a Sri Lankan minister and cabinet spokesperson, has publicly stated that although bus fares – which disproportionately affect Sri Lanka’s low-income earners – have increased by more than 12 percent due to fuel price hikes, they will be reduced if fuel costs drop.

But that’s little incentive for many Sri Lankans right now: Their incomes haven’t gone up, only the cost of living has.

Shiran Illanperuma, a political economist at the Tricontinental: Institute for Social Research think tank, told Al Jazeera that “the impact of the oil crisis will be huge for Sri Lanka”.

Even though the price of petrol has gone up, the Sri Lankan government is bleeding $63m in monthly losses, Jayatissa said.

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

“What we have added [in terms of the price at petrol pumps] decreased more than the rise in the international market,” the official said, explaining that the Sri Lankan government was helping its citizens financially by absorbing the rest of the rising fuel prices the country imports.

That’s not just social welfare, the official explained. The loss caused by this aid, he argued, would be less than the economic risk if the full increase in prices could be seen at the petrol stations: Transport will be disabled, work will stop and jobs will be lost. He warned: “It could lead to inequality and lack of productivity in industries.”

“The future of this crisis cannot be predicted, but the government is fully committed to supporting the people,” he said.

In addition to the fuel shortage, Sri Lanka has adopted a no-work policy on Wednesday, closing government offices and schools that day to reduce fuel consumption.

‘Other sources’

After the US eased further sanctions on Russian oil, the Sri Lankan government is negotiating with Moscow to buy oil. Russian Deputy Energy Minister Roman Marshavin visited Sri Lanka this week for talks.

Illanperuma of Tricontinental said that Sri Lanka could enter into a bilateral agreement to buy Russian petrol at a lower price, as “Indian oil refineries are well equipped to refine Russian fuel”.

On the other hand, Sri Lanka thanked Iran for offering to supply Iranian fuel, but the offer was rejected because “Sri Lanka does not have a tanker”, Jayatissa, the cabinet spokesman told reporters.

Sri Lanka’s state-owned Litro Gas, which has the largest share of the liquefied petroleum gas (LPG) market in Sri Lanka, has storage facilities of only 8,000 tonnes of LPG, while the country’s consumption is about 33,000 tonnes per month.

Jayatissa told reporters that orders have been placed and stocks are expected to arrive in the Maldives, from where they will be transported by small boats to Sri Lanka.

Mohamed Sahir, an LPG seller, told Al Jazeera that the shortage of LPG was caused by panic buying. “The market has LPG cylinders, although there is a gap between demand and supply. I used to get 50 cylinders, but now I only get 35 cylinders,” he told Al Jazeera.

LPG prices have risen by around 8 percent in Sri Lanka, following the start of the war against Iran.

‘We’re going to be in trouble’

Political economist Illanperuma said in the short term, there is not much the government can do except fuel distribution, reduce fuel consumption and declare holidays.

In the medium term, he suggested that Sri Lanka should focus on building storage capacity.

“Sri Lanka does not have enough fuel storage facilities for long-term use, unlike other countries that have enough storage facilities for months,” said Illanperuma.

Sri Lanka maintains its oil reserves – mainly in three storage facilities across the country – but can only store enough for one month’s use.

Shortly after the Iran war began, President Dissanayake told lawmakers that Sri Lanka was building eight more facilities – they would be able to 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 operate a colonial-era oil storage farm in the eastern city of Trincomalee.

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

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

For Rathna, a tuk-tuk driver, the present moment also has a dramatic effect.

He recalled: “During the economic crisis of 2022, fuel tankers were stopped around the country. But the government did not have the money to buy them.

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