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‘Economies’ of fuel stumble amid Sri Lankan crisis

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The Sri Lankan crisis is not unknown to the world – the country has been facing a large-scale food shortage, while fuel and energy supplies are scarce. As a result, there has been massive public unrest across the country. Experts believe the situation will not improve anytime soon and an acute food, gas and electricity shortage should be expected. The country was upgraded to an upper-middle-income country by the World Bank in 2019, but then downgraded again the following year, and hasn’t risen again since then.

Post the pandemic, Sri Lanka has been in an economic free fall, which started with the brakes that COVID-19 put on tourism and worsened with increasing foreign debts, inflation and economic mismanagement. The rising oil prices and tax cuts have reduced Sri Lanka’s useable forex reserves to a mere USD 50 million. Sri Lanka needs at least 40,000 tonnes of gas each month, and the monthly import bill would be USD 40 million at current prices. The country also has USD 25 billion of foreign debt to pay back.

Also read: India’s global trade logistics gains amid Sri Lanka’s economic crisis

Even basic necessities have become a luxury in the ongoing crisis and families have cut down from three meals a day to two or one meal a day. There is extreme paucity of medicines and power outages last anywhere between 3 to 13 hours a day.

Around the later half of June, Sri Lanka ran out of fuel reserves, brining the economy to a grinding halt as the hope of fresh supplies coming in diminished. Until 10th July, fuel usage for all non-essential activities has been stopped. Employees have been asked to work from home and schools have been shut too, in order to minimise fuel usage. However, one can still not help but notice the lines outside fuel stations stretching for kilometers.

Sri Lanka’s Minister for Power and Energy, Kanchana Wijesekara said that the state run Ceylon Petroleum Corp. (CPC) has not received any fresh supplies of fuel because the suppliers’ outstanding payments were acting as a deterrent to it. There is scarce public transport on the roads and the cost of running private vehicles amid the fuel crunch is exorbitantly high – diesel is retailing at LKR 460 per litre and petrol is retailing at LKR 550 per litre. The government has introduced a token system for fair distribution of fuel.

As Sri Lanka’s fuel taps run dry, only essentials like health, law, power, ports, airports, food and agriculture will be the functional economic activity in the island country. They will need to borrow around USD 6 million from the International Monetary Fund, as well as from countries like India and China in the upcoming months. Delegations have also been sent to Russia and Qatar in order to source oil for the sinking economy. According to Bloomberg Economics, a recession this year is unavoidable.

India has already extended a credit line of around USD 4 billion to Sri Lanka since January this year, and by the looks of it, Sri Lanka will need and is hoping for India to extend a credit line of another USD 500 million for fuel imports. Even if India supplies fuel to Sri Lanka, it cannot be for an indefinite period considering that there is already a global fuel shortage and India also imports fuel to meet its needs.

Wijesekera said the Cabinet approved opening up the country’s fuel import and retail sales market to companies from oil-producing nations. “They will be selected on the ability to import fuel and operate without forex requirements from the CBSL [Central Bank of Sri Lanka] and other banks for the first few months of operations,” he said in a tweet.

Economic activities that are a big source of revenue for the country have been facing the brunt of fuel scarcity. Everything from pharma to food requires fuel to be produced and transported. The country’s fishing activity has been crippled without the availability of diesel and kerosene. On the other hand, the garments industry is left with only a few days of fuel. Sri Lanka’s power regulator is also using its last stocks of furnace oil to run multiple thermal power plants. Natural gas is needed for manufacturing fertilizers, that are necessary for agriculture and large farm equipment are fuel guzzlers. To deliver essentials to people, logistics chains need to be well-oiled too.

Back in April, automotive firms like Tata Motors, Mahindra & Mahindra, Ashok Leyland, and TVS Motors had stopped exports of vehicle kits to Sri Lanka and halted production at their Sri Lankan assembly units due to its precarious forex reserves and fuel shortages.

The Port of Colombo, one of the key transshipment hubs in Asia is being avoided by shipping lines amid the entire fiasco. According to freight forwarders, due to the lack of fuel, the number of trucks transporting cargo to and from the port have been considerably reduced – inducing a container backlog, which the shipping companies want to avoid. A majority of cargo which earlier used to stop at Colombo port is being diverted to Indian ports of Nhava Sheva, Cochin, Mundra and Pipavav, among other western and southern ports. India also depends on the port in terms of global trade as it handles 60% of India’s transshipment.

Presenting a contradictory view, the Colombo Port officials have said that the port operations are running smoothly and trucks’ movement hasn’t been impacted much as they are being given priority for fuel. They said that some import activity was impacted, but that is because of the low to diminishing forex reserves. According to German shipping line Hapag-LLoyd AG, there has been some delay in berthing ships at the Colombo Port, but they haven’t felt the need to divert cargo to other places. However on the other hand, Maersk has opted for proactive cargo re-routing to Indian ports in order to avoid any shipment delays.

The Sri Lanka Society of Transport and Logistics (SLSTL) has suggested methods using which USD 1 billion could be saved on account of fuel imports and can be used to finance other important activities in this hour of need. They issued a statement saying that the CPC had increased the fuel prices to record high within first 4 months of 2022 and that the fuel for transport, at current prices, costs more than all other consumer imports.

The proposed plan would reduce oil imports for transport which cost us USD 4 billion a year or approximately two shiploads per week. The target is to reduce this figure by USD 500 million to 1 billion, which will depend solely on the government’s wiliness to implement the plan and the leadership they will provide in the implementation process,” the SLSTL said.

SLSTL made suggestions towards employing population scale public transport and imposing restriction on private vehicles, in order to reduce fuel consumption as they consume 51% of the fuel used for passenger transport. They also said that instead of petrol, the government should focus on importing diesel and an efficient fuel distribution is extremely important apart from adoption of smart technology. It also urged imposing restrictions on cars, vans, and SUVs carrying less than three passengers entering areas that experience regular traffic congestion.

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