Rising Dollar Demand Linked to Fuel Subsidies

COLOMBO (News 1st); Advocata Institute Chief Executive Officer Dhananath Fernando has stated that fuel subsidies should be removed.

Speaking during the the “Mawatha” programme held yesterday, he emphasised that it would not be possible to control dollar demand without reducing domestic fuel consumption.

Fuel prices in Sri Lanka remain slightly below global market rates, particularly in the case of diesel, according to Advocata Institute Chief Executive Officer Dhananath Fernando, who cautioned that current pricing does not reflect actual costs.

He noted that diesel is currently being sold at around Rs. 392 per litre, while estimates suggest that even without dealer margins, taxes or additional costs, the minimum cost would be approximately Rs. 409 to Rs. 410. He pointed out that under such conditions, selling fuel at the current price level is not sustainable.

Fernando explained that even if all taxes were removed, the demand for fuel would not decrease, highlighting that fuel accounts for the largest share of Sri Lanka’s imports, estimated at around 23 percent based on March data. As a result, reducing fuel consumption remains a key challenge.

He further observed that when fuel prices were increased during a previous period, consumption declined by approximately 13 percent, indicating a direct link between pricing and usage.

Emphasising the broader economic impact, Fernando stated that without reducing fuel consumption, it would be difficult to curb the demand for dollars. 

He expressed the view that fuel subsidies should not be maintained, as they tend to sustain higher consumption levels. He warned that increasing dollar outflows, from around 200 million dollars in one month to 300 million, 400 million and even 500 million in subsequent months, could place additional strain on the market. According to him, a shortage of dollars would lead to depreciation of the rupee, which in turn would result in further increases in fuel prices.

Fernando noted that such a pattern risks creating a cycle that is difficult to reverse, where currency pressure and rising fuel costs reinforce each other over time.