Col R Hariharan in Sri Lanka
Perspectives April 2026 outlines how the AKD government is managing one
of the gravest economic and energy crises faced by the Island Nation eve as it
is on the path of fiscal recovery.
During the month of April, the
Straits of Hormuz continued to face the ‘double blockade’ of both the US and Iran.
The word ceasefire in West Asian wars has lost its meaning as Israel continues
to pound Iran’s proxies in Southern Lebanon. The war has triggered an energy crisis in most
of Asia, particularly India, China and Japan. This is more so in the case of
import-dependent small nations like Sri Lanka and Maldives, already struggling
with economic recovery in the post-Covid period. After the US’ ill-conceived
leadership decapitation operations in Iran there is leadership confusion in
Teheran. With POTUS Donald Trump in “full flow” at the other end of the table,
nobody really seems to know when maritime traffic will restored in the Straits of
Hormuz.
President Anura Kumara
Dissanayaka’s current plight in handling the economic uncertainties triggered
by the turbulence in world order due to the “choking” fits of Iran war brings
to mind, George Bernard Shaw’s famous lines from My Fair Lady of the heroine
Eliza Doolittle: "I sold flowers. I didn't sell myself. Now you have made
me a lady, I am not fit to sell anything."
Despite such adverse
circumstances, Sri Lanka celebrated the Sinhala and Tamil New Year (Avurudu) on
April 14, 2026, with traditional rituals. The AKD government timed its relief
package—fuel subsidies, electricity concessions, and cash transfers—to coincide
with the festival easing household expenses during the celebrations to shield
citizens from the economic shock of the West Asia war. It focuses on key
elements of shortage: fuel, energy, fertilizer and cash transfers. Fuel
subsidies in terms of litres amount to diesel LKR 100 and petrol LKR 20 cost. Fuel
subsidies will the government LKR 20 billion/month. Electricity concessions of
the Government cover the cost for households consuming under 90 units/month for
three months.
The government has introduced QR-code
based rationing system limiting weekly fuel quotas by vehicle type, ensuring
equitable distribution. Temporary 4-day work week was introduced to conserve energy;
however later it was increased to 5 days/week.
Last month, Sri Lanka managed
to get an emergency supply of 38,000 MT petroleum (20,000 MT diesel + 18,000 MT
petrol) from India. The government is now in talks with Russia and China to
secure fuel, gas, coal and fertilizer supplies.
An Economic Monitoring
Committee has been established to track supply chains and negotiate with
partner nations. To ensure macroeconomic stabilisation, Central Bank purchased
USD 700 million to strengthen forex reserves to nearly USD 7 billion. Relief
package aligned with ongoing IMF program (USD 2.9 billion assistance since 2022
crisis).
Sri Lanka’s approach so far
blends short-term relief (subsidies, cash transfers) with long-term resilience
(energy diplomacy, IMF programme). The aim appears to be to protect citizens
without derailing fiscal recovery. However, securing reliable external energy
supplies and sustaining confidence in economic management can only guarantee
success of the government’s current relief measures targeted at fuel, energy,
and cash transfers to cushion citizens from the West Asia war. This is contrast
with Gotabaya Rajapaksa’s COVID-era measures (2020–2022) focused on
moratoriums, debt relief, and food security during lockdowns. The key
difference lies in the present government’s emphasis on external energy
diplomacy versus Gotabaya’s reliance on domestic fiscal concessions.
However, question remains on
how long the government can offer a relief package of LKR 100 billion beyond
three months. Current fuel stock is expected to last until end-May 2026. Beyond
fuel supply stability depends on successful deals with Russia and China.
Sri Lanka and China are formalising
a framework to settle trade directly in Renminbi (RMB) as a strategic move by
both to movie away from a traditional reliance on the US Dollar for their
trade. Governor of the Central Bank, Dr. Nandalal Weerasinghe and the Governor
of the People’s Bank of China, Dr. Pan Gongsheng are believed to have discussed
this on the sidelines of the recent IMF-World Bank Spring Meetings in
Washington. According to the Sunday Times the process is built on a
direct clearing and settlement mechanism designed to bypass intermediary
western banks. China has an agreement with Sri Lanka for RMB 10 billion (about
US$1.4 bn) bilateral currency swap, renewed in early 2025. This will provide
the necessary “liquidity cushion” to facilitate these settlements. This will
mean Sri Lanka shifting a portion of the $4.3 billion annual trade with China
to RMB there by reducing the pressure on Sri Lanka’s limited US dollar
reserves.
Since 2022, India and Sri
Lanka have a similar arrangement to conduct trade in Indian Rupees
(INR) to facilitate international trade settlement in local currency, reducing
reliance on the US Dollar. To facilitate this, Sri Lankan banks open Special
Rupee Vostro Accounts (SRVA) with Indian banks to settle export and import
invoices directly in INR. Sri Lanka's Central Bank officially designated the
INR as a "designated foreign currency" in August 2022. The RBI
allowed trade transactions with Sri Lanka to be settled in INR outside the
usual ACU mechanism. This has helped Indian importers pay in INR into the
SRVA, and Indian exporters receive their proceeds in INR from these accounts.
Sri Lankan citizens are permitted to hold up to USD 10,000 (approximately INR
8.14 lakhs) in physical Indian currency. Indian tourists can use INR for
transactions in Sri Lanka, and students or tourists can withdraw up
to $5,000 equivalent in INR as a travel allowance.
The biggest advantage of this
arrangement is the National Payments Corporation of India (NPCI) and
LankaPay have integrated the Unified Payments Interface (UPI) to
simplify digital transactions for Indian tourists in Sri Lanka.
India strengthens its strategic
relations
During the month, India
strengthened its strategic relations with Sri Lanka with the first ever visit
of its Vice President CP Radhakrishnan to Sri Lanka. During the visit, a number
of Indian aided projects including the developing of Trincomalee as a regional
hub, completion of 50,000 houses under Indian Housing Project, restoration of
Northern Railway services with new bridge infrastructure came up for
discussion.
On the maritime front, the
biggest news was India's premier defence shipyard Mazagon Dock
Shipbuilders Limited (MDL) acquiring a 51% controlling
stake in Colombo Dockyard PLC (CDPLC) for approximately $26.8
million (₹249.5 crore). As Times of India says the acquisition is a strategic
hedge against China's the 99-year lease of Hambantota Port in the South. CDPLC
is located at the junction of the vital East-West shipping lanes in the Indian
Ocean Region (IOR). This gives MDL an offshore node for the repair,
maintenance, and refit of naval and commercial vessels without straining
domestic infrastructure.
India gains access to four
graving dry docks with a maximum capacity of 125,000 deadweight tonnes
(DWT) and a skilled workforce of 3,000, immediately augmenting its
shipbuilding ecosystem. Sri
Lanka is equally benefitted because the CDPLC
had been facing severe financial stress.
In 2023, it recorded
a loss of LKR 11.1 billion. MDL’s capital infusion and backing
will help
the resolve "going concern’s"
audit issues and stabilized the company's finances.
More than all this, with MDL's support, CDPLC has secured the largest contract in its history—a $150 million deal with France's Orange Marine to build two advanced cable-laying vessels. Moreover, CDPLC has now access to Indian supply chains, enhancing its global competitiveness. MDL’s partnership will help CDPLC to secure bank guarantees.
Tailpiece: The
new year hasn’t got off on the right foot for AKD and the ruling NPP. The “clean”
government is bugged by two scams: continued import of substandard coal and the
breach of the Finance Ministry’s computer systems, which resulted in a loss of
USD 2.5 million to hackers. AKD at the helm would do well to follow the
leadership advice of Lee Iacocca, the legendary American automotive executive.
The “capitalist” who steered Chrysler to recovery, said "In times of great
stress or adversity, it's always best to keep busy, to plow your anger and your
energy into something positive." Already
the President seems to be busy on the lines suggested by Lee.
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