Sri Lanka may see higher inflation if higher oil prices prolong says CB governor

Sri Lanka
By Editor_1

COLOMBO – Sri Lanka may see higher inflation if global oil prices remain expensive for a long period, Central Bank Governor Nandalal Weerasinghe said.

Inflation remained at a 40-month high of 8.1% in September measured by the Colombo Consumer Price Index (CCPI), mainly driven by market-reflected fuel prices and their spillover effect on the overall economy.

The state-owned Ceylon Petroleum Corporation (CPC) has raised fuel prices around 50% since the Middle East conflict started.

Weerasinghe told an investor forum this week that the Central Bank in June factored in the impact, hoping that oil prices would settle around $90 a barrel towards the end of the year.

“Right now, it appears fuel prices are still at an elevated level than what we expected,” Weerasinghe told an institutional investor forum organized jointly by the Colombo Stock Exchange and Securities and Exchange Commission of Sri Lanka.

“But even with that elevated level still, we think even around $100 a barrel, we should be able to manage this inflation at current levels,” he said, but cautioned that if the higher oil prices remain for “a longer period”, Sri Lanka will see price shocks due to supply side and increased oil pricing will reflect in domestic prices.

“That’s going to see higher inflation than what we see now,” he said, adding, “But still, the question is whether we need to fight with monetary policy or not… because we have to see source of inflation and whether that is creating anchoring future expectation as well as creating kind of a demand conditions on the other side.”

Noting that monetary policy was mainly demand-driven, he said “That’s what we are focusing on”.

Supply-side inflation in Sri Lanka is fundamentally driven by external cost-push pressures, where escalating global oil prices act as a catalyst across the entire economic system.

The island nation relies heavily on imported fossil fuels for thermal electricity generation, freight transport, and agricultural machinery.

Higher crude oil import bills rapidly transmit through key supply chains, driving up operational costs for manufacturers, farmers, and distributors alike.

Unlike in the past, Sri Lanka cannot subsidize energy due to the IMF condition on market reflected prices in return for its US$3 billion External Fund Facility (EFF).

Producers pass surged transportation and energy expenses onto consumers, triggering sharp increases in headline and food inflation.

This price cascade hits ordinary households directly through elevated pump prices, higher electricity tariffs, and costlier daily essentials, rapidly eroding real incomes and purchasing power.

For low- and middle-income families who allocate a disproportionate share of their budgets to basic food and commuting, this escalating cost of living forces drastic cuts in household spending.

Consequently, these persistent cost-push shocks are expanding vulnerability across both rural and urban communities, pushing marginal households below the poverty line and deepening socio-economic distress.

-economynext.com

Editor_1
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