MediumIV Macro Policy & Sovereign Debt29 September 2026, Tuesday
Sri Lanka brings back diesel subsidy despite IMF warning
Sri Lanka's government announced a 126 million dollar diesel subsidy for three months starting in October. Inflation had reached a 38-month high of 8.0% in August.
The Daily Star, citing AFP, reported that the government will subsidise diesel with 126 million dollars over three months from October; petrol is excluded. In the first three months of the war in the Middle East, 175 million dollars was spent on petrol and diesel subsidies. Fuel prices have risen by about 50% since February. Annual inflation was 8.0% in August, its highest level in 38 months. The IMF had warned that the country could be dragged back into a fiscal crisis if energy sales do not recover their full cost.
The Morning reported on 27 September that the IMF programme sets a ceiling of 100 billion rupees on temporary fuel, electricity and fertiliser subsidies and required them to end by the close of September. According to the same report, the Secretary to the Ministry of Energy said the IMF had not rejected the president's subsidy proposal. The IMF mission left the country on 23 September without a staff-level agreement on the seventh review. Whether the new subsidy falls within the ceiling could not be verified.
Talay assessment
Bottom line
Faced with the IMF's condition of cost-based pricing on one side and public anger on the other, Colombo chose to answer the latter. That choice makes the seventh review, whose staff-level agreement is already delayed, even harder. As the oil shock persists, IMF programmes in South Asia can be expected to face similar pressure.
Likely effects
- IMF programmeNegativeWeeks
The return of the subsidy could delay completion of the seventh review and the tranche payment.
- InflationUncertainWeeks
Diesel support temporarily curbs inflation by limiting transport costs, but the burden on the budget grows.
- Regional precedentNegative1–6 months
Energy importers such as Pakistan and Bangladesh face similar demands; a loosening of IMF conditions comes onto the agenda.
Possibilities, ranked
- 1Interim compromise with the IMF50%
The subsidy is counted within the ceiling, and the review is completed with a delay.
Watch: The IMF's statement on the seventh review
- 2Review left in limbo35%
The IMF insists on its cost-recovery condition, and the tranche is postponed.
Watch: Sri Lanka's eurobond prices and reserve data
- 3Subsidy widens15%
Petrol is also brought within its scope, and the fiscal deficit grows.
Watch: Announcements on the fuel pricing formula
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- New diesel subsidy▼ $126m / 3 months
- Inflation, August▼ 8.0%
- Fuel prices, since February▼ +50%