Sri Lankans brace for price hike at pumps by August

Economist says traders increase prices disproportionately when fuel prices spike

Central Bank may not be able to reach inflation target in case of price increases

By Kelum Bandara 

Fuel prices are poised to increase during revisions  expected by August because of spikes in the global market as a direct  result of the conflict between Israel and Iran, a top official said  yesterday.   

Iran is a big oil producer, and accounts for about 3 per  cent of global supplies. Sri Lanka purchases fuel from companies based in  Singapore. Besides, talks are underway with the United Arab Emirates  (UAE) for a fuel purchasing agreement, but it has not materialised yet.    

As the conflict between Israel and Iran entered its fourth  day, Brent crude rose by 0.5 per cent in trading, pushing  towards US $ 75 a barrel, while US crude rose by 0.7 per cent to $73.42.  Brent later dropped 0.5 per cent to US $ 73.78 a barrel.  

The official who wished to remain anonymous said that this would not have a major impact immediately.   

“When the prices are revised locally at the end of June, it  won’t be a problem. We are currently receiving stocks ordered at  earlier prices. Price hikes will apply for stocks to be ordered next  only,” he said.   

 Sri Lanka is a country that has introduced a cost-reflective fuel pricing formula. Any spike in the international market  will have a bearing on the local prices as a result. Fuel prices are  revised at the end of every month.   

Senior Lecturer of the Department of Economics at Colombo  University Dr. M. Ganeshamurthi, who commented on the implications of the global fuel price surge on the Sri Lankan economy, said it would have an  overall bearing on the cost of living.  

He said the conflict in the Middle East, which is the main  oil route, would trigger a price hike due to reasons such as high  insurance premiums. He said Sri Lanka will naturally have to adjust local  prices accordingly as an importer.  

“Once oil prices increase, it will result in the increase  of other products. It will happen disproportionately. When prices  drop, they don’t do it. Recently, the prices dropped. Yet, in Sri  Lanka, traders did not reduce the prices of their products on sale  accordingly. When the fuel prices surge, it is the other way round,” he  said.   

He said that though the Central Bank planned for  inflation at 5 per cent within the next two quarters, it would  overshoot in the event of fuel price hikes as a result of the conflict.