Sri Lanka’s economic stability could face a significant long-term impact if oil prices are not adjusted effectively in line with the country’s economic conditions, said Advocata Institute Chief Executive Officer Dhananath Fernando on Ada Derana 360 programme with Kalindu Karunaratne. He stressed that failing to adjust prices could trigger a cycle of rupee depreciation, rising inflation, and economic instability.

“Oil prices have a significant impact on inflation in the country, and if oil prices aren’t managed effectively, the long-term impact is likely to be huge,” Fernando said, explaining that fuel pricing directly influences domestic inflation.

“Increasing oil prices is not necessarily desirable, but if oil prices are not increased or adjusted up to a certain level, it will depreciate the Sri Lankan rupee further,” he said. Fernando warned that if the rupee continues to weaken, oil prices will climb again, creating a repetitive cycle that negatively impacts economic development and could become a major cause of another economic crisis.

“Despite global geopolitical tensions, if oil prices are kept without being increased while the Sri Lankan rupee continues to depreciate further due to that reason, the impact on the economy could be more severe than a rise in inflation, as it would affect even the basic necessities of citizens themselves,” he added.

“If an economic downturn is to be avoided, a move limiting significant risks through controlled oil price increases alone would have a less severe impact and could be managed without leading the country into another economic crisis,” Fernando stated.

Furthermore, he said: “Oil prices should be adjusted while maintaining an economic balance by providing an effective social subsidy policy targeted at the low-income category.”

Fernando pointed out that the Government currently provides approximately Rs 15 billion to Rs 20 billion in social subsidies to citizens. “Hence, if subsidies are provided across all categories – both low-income and high-income, funds already reserved for cyclone Ditwah rebuild development and social welfare programmes would begin to drain solely for oil purchases. Therefore, an effective social subsidy policy is essential for the country to avoid a significant economic downturn in the long run, while taking necessary measures to increase oil prices,” he said.