Fuel Crisis: Market pricing, targeted subsidies ahead
Sri Lanka’s long-troubled fuel sector is once again under scrutiny, as policymakers and energy analysts push for a decisive break from the QR rationing system and loss-making price controls.
A new reform model centred on market-driven pricing and targeted cash subsidies is emerging as the most viable path to ensure stability, equity, and fiscal discipline, several energy experts and policy analysts said. This matter was discussed at a high-level meeting chaired by President Anura Kumara Dissanayake
It has been decided to consider this new reform model and immediately increase fuel prices to a reasonable level, a Finance Ministry official said. The President has informed the IMF that the government would be able to provide a fuel subsidy for a period of three months if necessary. The IMF has requested to submit a report on this matter without objecting to this proposal as the Gulf crisis is still persisting.
The earlier fuel pass system, introduced at the height of the 2022 economic crisis, is now widely acknowledged to have outlived its purpose.
While it initially helped manage acute shortages, it soon gave rise to widespread inefficiencies, including black market trading and queue jumping, the official said.
At the same time, the government’s pricing formula designed to shield consumers placed an unsustainable burden on the state, particularly on the debt-ridden Ceylon Petroleum Corporation (CPC).
Former CPC Managing Director, Prof. Prasanna Perera of Peradeniya University, has repeatedly warned that administrative controls cannot substitute for sound market fundamentals.
“A rationing system like the QR code may work in an emergency, but it distorts incentives and inevitably creates leakages,” he has observed in recent policy discussions. “You cannot run a modern energy market on temporary controls without long-term consequences.”
Analysts point out that the QR system’s core flaw lies in its attempt to artificially restrict demand without addressing supply constraints.
“Once scarcity is administratively enforced, a parallel market is almost inevitable,” noted Colombo-based macroeconomic analyst. “It becomes less about fuel and more about access.”
Likewise, the cost-reflective pricing formula has come under criticism for its inability to react promptly to oil price volatility in the world market and local fuel market and tax conditions.
Energy sector experts also stress that Sri Lanka’s fragile fiscal position leaves little room for such inefficiencies. “When global prices spike, the government simply cannot afford to cushion the entire population,” said a senior Treasury official. “The formula system ends up transferring massive financial risk to the state, which is precisely what the country is trying to avoid.”
Against this backdrop, the proposed “import parity pricing” model seeks to liberalise the market. Private operators would be allowed to set fuel prices based on global costs, with the government maintaining only a protective price ceiling.
This transition is already underway, with international players such as Sinopec, Lanka IOC, and RM Parks (operating under the Shell brand) expanding their footprint in the local market.
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