Sri Lanka struggles to pay for fuel imports after surge in crude prices

Sri Lanka's fuel import plans have been disrupted by a rapid spike in global crude prices after Russia's invasion of Ukraine, leaving the crisis-hit island nation struggling to pay for diesel amid power cuts as fuel pumps run dry, officials said.

With foreign reserves plummeting 70 percent in the last two years to just $2.36 billion by the end of January, Sri Lanka faces its worst economic crisis in years as crude stands at about $130 a barrel, or a near doubling since early December.

"We are facing a very challenging situation," K D R Olga, the secretary of the energy ministry, told Reuters on Wednesday.

After the cost of an incoming shipment of 38,000 tons of diesel jumped by 47% to $50 million over the last week, she said, it could prove tough for the government to quickly source adequate dollars to pay for further imports.

Analysts estimate Sri Lanka's useable reserves at only about $800 million, leaving President Gotabaya Rajapaksa's government scrambling to pay for essential imports of fuel, food and medicines.

The oil price spike has crippled the government's fuel import strategy, said two sources with direct knowledge of the initial plans.

"Our projections were based on fuel prices hitting $100 per barrel by mid-March," said one of the sources, who spoke on condition of anonymity. "We did not plan for the war."

The finance ministry and Rajapaksa's office declined to comment.

Since mid-February, rolling power cuts have hit businesses and homes across the island, some for as long as seven hours.

Commuters often wait in long queues outside fuel pumps in Colombo, the commercial capital, where hundreds of bakeries have run out of gas, driving up the price of bread.

The fuel shortages have disrupted consumption and daily diesel distribution has nearly doubled to 10,000 tons from about 6,000, Olga said.

"Rapid distribution has reduced the rush to some level," she added. "But we only have stocks for immediate needs."

Sri Lanka typically requires about 120,000 tons of diesel and 75,000 tons of petrol each month.

During the shortage, state-run Ceylon Petroleum Corporation (CPC) has held talks with the government to raise prices, its chairman, Sumith Wijesinghe, said.

"We are losing 50 rupees per liter of diesel and 22 rupees from every liter of petrol," Wijesinghe told Reuters. "We are discussing a fresh pricing mechanism as we cannot continue at these prices."

The other major fuel retailer, Lanka IOC, has already raised prices twice this year.