Moody’s says Sri Lanka is better equipped to withstand an oil-price shock than during the economic crisis, but the country’s dependence on imported energy remains a significant vulnerability
COLOMBO – Sri Lanka may be in a considerably stronger position to withstand an international oil-price shock than it was at the height of the 2022 economic crisis, but that should not be mistaken for immunity from another sustained surge in energy costs.
That is the broad message emerging from an assessment by Moody’s Ratings, which places Sri Lanka among the Asian economies particularly exposed to higher oil prices because of its dependence on imported energy.
The distinction is important. Sri Lanka today has stronger foreign-exchange reserves, improved access to foreign currency and a substantially different economic framework from the extraordinary conditions of 2022, when fuel shortages, power cuts and depleted reserves brought much of the economy to a standstill.
Those improvements provide a buffer that simply did not exist four years ago. They do not, however, change the fundamental fact that Sri Lanka must spend scarce foreign exchange to purchase much of the energy required to keep its transport system, businesses and wider economy functioning.
A prolonged increase in world oil prices therefore works its way through the economy in several directions. The immediate effect is a higher import bill. Depending upon how international prices are transmitted domestically, consumers and businesses can then face increased fuel and transport costs, while higher production and distribution expenses eventually find their way into the prices of other goods and services.
For a country attempting simultaneously to rebuild reserves, contain inflation and maintain economic growth, that combination deserves careful attention.
The Middle East situation makes the issue particularly relevant. Sri Lanka cannot control international oil prices or geopolitical events affecting energy markets. What it can control is the strength of the financial buffers it builds while conditions remain manageable and the speed with which policy responds if those conditions deteriorate.
There is consequently some comfort in Moody’s assessment that Sri Lanka is better positioned than it was in 2022. Four years after one of the country’s worst economic crises, it would be considerably more troubling if that were not the case.
The more useful question is how much stress the present recovery can withstand.
Sri Lanka’s economic debate has understandably concentrated on growth, debt restructuring, reserves and fiscal consolidation. Energy remains capable of cutting across all four. A sufficiently large and sustained oil-price increase would place pressure on household expenditure, corporate margins, inflation and the country’s external account at precisely the same time.
The lesson of 2022 is therefore not that another oil shock would necessarily produce another 2022.
It is that countries dependent upon imported energy should use periods of relative stability to prepare for the shocks they cannot predict.
THE NEWSLINE QUESTION
Sri Lanka is better prepared than it was in 2022. But at what oil price – and for how long – does that comfortable buffer begin to become uncomfortable?
