By Lionel Bopage –

A familiar storm gathers

Sri Lanka’s inflation reached 8% in September 2026, above the Central Bank’s 3–7% target band for a third straight month, and another push is coming from abroad. Brent crude settled near US$107 a barrel on 19 October, about 75% higher than a year earlier. The war that began with US–Israeli strikes on Iran on 28 February has widened: Houthi forces have struck Riyadh’s airport and Saudi oil infrastructure, tankers are under attack around Hormuz, and a Russia–Ukraine energy truce has collapsed.

Even rich economies are feeling it. In Australia, senior Reserve Bank officials reportedly fear that oil stuck above US$100 will keep inflation and interest rates higher for longer. The bank’s own forecasts assumed oil up to US$20 a barrel cheaper. Australian diesel is back around where it was when the Ukraine war began in 2022, and food prices are climbing with fuel costs and El Niño.

If Australia, with its deep reserves and its own gas, is anxious, Sri Lanka has far more to fear. The island imports every litre of oil it uses. The real question is whether Colombo uses this moment to cut that dependence or repeats the short-term fixes that deepened the 2022 crisis. Above all, it must ask who will carry this new burden, because the poorest have already carried the last one.

Distant wars reaching the Lankan kitchen

The shock travels through four channels at once.

Fuel: Sri Lanka buys crude for its Sapugaskanda refinery from the Middle East, and refined products from Singapore, Malaysia and South Korea. When Hormuz was effectively closed in March, pump prices rose by more than a third within weeks, and by almost 50% by May. After another increase on 1 October, petrol 92 costs Rs 414 a litre and auto diesel Rs 392. Under the IMF programme, these costs must be passed on rather than subsidised.

Transport and food: Diesel moves rice, vegetables and fish around the island. Food inflation rose to 8.7% in September, and core inflation climbed to 5.4%. That is a sign fuel costs are seeping into prices well beyond the pump.

Electricity: Thermal plants burn imported oil and coal. Higher fuel bills flow into electricity tariffs, lifting costs for every bakery, garment factory and hotel.

The rupee: The fuel import bill reached US$630 million in March alone, up 75% on a year earlier. That extra demand for dollars helped push the rupee down 6.3% against the US dollar in the first nine months of the year. A weaker rupee makes every import dearer, from flour to medicine.

The Ukraine war adds pressure through diesel, fertiliser and grain markets. Higher freight rates and war-risk insurance raise the cost of everything shipped to an island economy. And El Niño threatens both the paddy harvest and hydropower output.

The people paying the price

For millions of Sri Lankans, this is not a new shock but a second blow before the first has healed. The 2022 crisis pushed inflation close to 70% and roughly doubled poverty, to around a quarter of the population. Prices have never returned to their old levels; they have only stopped rising so fast. Wages, pensions and daily earnings have not caught up.

The hardest hit are those with the least room to adjust, such as daily-wage workers, Malaiyaha families, fishers paying more for kerosene and diesel, farmers facing dearer fertiliser and transport, and pensioners on fixed incomes. Poor households spend most of their income on food, fuel and bus fares, exactly the prices that move first in an oil shock.

These families have been remarkably patient. Many voted for change in 2024 in the hope that their living conditions would improve soon. Another round of price rises, with no visible relief, would test that patience and the social trust any reform depends on.

Short-term fixes that fuelled long-term pressure

Resuming vehicle imports in February 2025, after a five-year ban, was popular and filled the Treasury with duty revenue. But the foreign exchange bill has been heavy. Close to US$2 billion went on vehicles in 2025, well above the US$1.5–1.7 billion projected. Another US$1.25 billion was spent in the first half of 2026, even as oil prices surged.

The government reacted in May with a temporary 50% surcharge on vehicle import duties. Spending fell 27% in a month, to US$182 million in June. That shows the lever works. But it was a reaction, not a strategy.

The deeper problem is what is being imported. Most of the new fleet runs on petrol or diesel, and each vehicle locks in fuel demand for 15 years or more. In effect, the country spends a scarce dollar twice: once on the car, and every month after on the fuel to run it.

This adds to inflation in two ways. It drains foreign exchange and weakens the rupee. And it raises the national oil bill exactly when oil is most expensive. Leaning on vehicle taxes to hit revenue targets also makes the budget hostage to the very imports that unsettle the currency.

A renewable opportunity left on the table

Sri Lanka has year-round sun, strong winds, ocean currents, and a long hydropower tradition. Renewables already supply more than half of the grid electricity, and the national target is 70% by 2030. Rooftop solar grew from 1,141 MW to 1,935 MW during 2025, across nearly 109,000 connections.

Yet government policy has lagged behind households and investors. Net metering has been closed to new rooftop connections, and feed-in tariffs have been cut. In April, rooftop systems above 300 kW were ordered to switch off for ten days, citing grid stability on low-demand days. Shifting rules make small investors cautious, just when every locally generated kilowatt-hour saves imported fuel.

The bottleneck is the grid, not the sunshine. Storage has come late: the first grid-scale battery, 10 MW/40 MWh in Anuradhapura, was connected only in September 2026. Twelve more are due within months, and a 250 MW battery tender is under way. The 600 MW Maha Oya pumped-storage scheme is not expected until the 2030s. Meanwhile, restructuring of the electricity sector under the 2024 Electricity Act is still bedding down.

The cost of delay is easy to see. Every unit of solar curtailed at noon is replaced by oil or coal burned in the evening, paid for in dollars.

What the National People’s Power (NPP) government can do now

The NPP was elected on a promise to change the system even within a capitalist setup, and this crisis is the chance to prove it. Relief for struggling households must come first, followed by steps that ease price pressures within months and cut exposure for years.

1. Lightening the cost-of-living burden now: Expanding Aswesuma payments and linking them to fuel and food prices, so support rises automatically when costs do. Keeping a lifeline electricity tariff for small users, funding healthy school meals, and giving fishers and farmers targeted kerosene, diesel and fertiliser support. Acting firmly against hoarding and profiteering and keeping bus fares for workers and students affordable.

2. Treating energy as foreign-exchange policy: Setting an annual target for fuel imports avoided through renewables and efficiency. Having the Treasury and Central Bank track it alongside reserves.

3. Reopening rooftop solar, paired with storage: Offering a stable, long-term tariff for small systems, with a premium for battery-backed power exported in the evening peak. Letting households and small businesses borrow for panels through state banks at concessional rates, with community solar schemes so low-income families share the savings.

4. Fast-tracking the grid: Prioritising transmission from appropriate localities without damaging the local people, their homes, economies and the pristine environments, Keeping the 250 MW battery tender on schedule, and bringing pumped storage forward. Require smart inverters so rooftop output can be trimmed rather than switched off.

5. Making vehicle taxes reward fuel savings: Replacing the temporary surcharge with a permanent duty schedule based on fuel efficiency and emissions. Favouring electric buses, three-wheelers and motorcycles, and charging more for large fuel-hungry engines.

6. Investing in public transport: Using part of vehicle duty revenue to expand and electrify bus fleets and restore rail capacity. Exploring the possibility of free travel on state-run buses and trains. One full bus takes dozens of cars off the road, reduces pollution and thus long-term healthcare and environmental costs, and serves those who cannot afford a car at all.

7. Building a buffer and speaking early: Negotiating term supply contracts with diverse suppliers, expanding storage at the Trincomalee tank farm, and running a transparent price-smoothing mechanism within the agreed IMF rules. Publishing a clear energy security roadmap so families and investors can plan.

None of this requires abandoning the IMF programme. Long-term and effective planning, cost-reflective pricing and fiscal discipline sit comfortably alongside measures to bring costs down.

Breaking the vicious cycle

Sri Lanka is not in a position to stop wars in the Gulf, Ukraine or anywhere else, but it can decide how exposed it stays to them. Every rooftop solar panel, battery and electric bus is a small, permanent reduction in the import bill and the inflation that rides on it. Surcharges and fuel price formulas buy time. The NPP government can use that time to shield those who have waited so patiently, and to build a secure energy system the next oil shock cannot break. Their hopes are the government’s strongest mandate; meeting them is the government’s most urgent task.