By: Staff Writer
March 10, Colombo (LNW): Sri Lanka may be better prepared than during the 2022 financial meltdown to face a surge in global oil prices, but the question remains whether the country’s current financial buffers are truly sufficient if the Middle East conflict escalates and energy markets tighten further.
Speaking on the sidelines of the “IMF Conference: Asia 2050” in Bangkok, Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, said the country now holds about $7 billion in foreign exchange reserves, giving policymakers room to absorb rising oil prices without triggering another economic crisis.
He argued that Sri Lanka’s macroeconomic environment is far stronger than in 2022, when the country ran out of foreign currency to import fuel and other essentials. Inflation has dropped sharply to 1.6 percent, well below the central bank’s 5 percent target, providing what he described as “space” to absorb a potential energy price shock.
However global oil markets are becoming increasingly volatile. Benchmark crude traded through Brent crude oil surged above $93 per barrel last week as tensions surrounding the Israel–Hamas War threaten supplies from the Gulf region.
Global oil prices have surged above $110 (£82.74) per barrel while global stock markets declined sharply, as the escalating war involving the United States and Israel against Iran raised fears of prolonged disruptions to oil shipments through the Strait of Hormuz.
Energy analysts warn that prices could climb significantly higher if production or shipping routes across the Middle East are disrupted.
The concern for Sri Lanka is structural: the country imports almost all of its petroleum needs. A sustained spike in oil prices therefore hits the economy on multiple fronts from rising fuel import bills and widening trade deficits to higher transport and electricity costs.
Weerasinghe stressed that Sri Lanka’s flexible exchange rate system and cost-reflective fuel pricing mechanism would help cushion these shocks.
But international data suggests the margin for error could still be narrow.
According to estimates by the International Energy Agency, global oil demand is projected to remain near record levels in 2026 while geopolitical tensions are tightening supply expectations.
At the same time, the International Monetary Fund has warned that small import-dependent economies remain particularly vulnerable to commodity price shocks, even when reserves appear adequate.
In Sri Lanka’s case, the $7 billion reserve bufferthough a dramatic improvement from the crisis period still covers only a limited number of months of imports compared with regional peers.
The governor emphasised that the current challenge differs fundamentally from 2022, when Sri Lanka lacked foreign exchange to buy fuel regardless of price.
Today, he argued, the country has the financial capacity to pay for imports as long as oil remains available in global markets.
Still, a prolonged conflict could create broader economic repercussions.
Freight costs could rise sharply if shipping routes are disrupted, while a stronger US dollar—often a byproduct of geopolitical turmoil would increase the local currency cost of energy imports.
Sri Lanka’s economy is currently expanding at about 5 percent, stronger than earlier projections of around 3 percent.
However, analysts caution that this growth could quickly weaken if energy costs spike again, highlighting the delicate balance between optimism and vulnerability in the island’s still-recovering economy.