CWA # 2113
Global Politics Explainer
Sri Lanka and the US-Iran War
Rising oil imports, Austerity measures and State capacity
Fuel prices have been rising significantly, with reports that have indicated increases of up to 25-30 percent. Rationing systems have also been introduced to manage the limited supplies.
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Aishal Hab Yousuf
22 May 2026
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The US-Iran war has implications for Sri Lanka. The global energy markets, financial flows, and supply chains are experiencing the domino effects of a conflict in the Middle East. For Sri Lanka, which is still recovering from its 2022 sovereign default and operating under the conditionalities imposed by the International Monetary Fund (IMF), these shocks have necessitated and renewed the imposition of austerity measures.
By April 2026, Sri Lanka had implemented austerity measures that included fuel rationing, increased electricity prices up to 40 percent, and a four-day work week. These actions are critical as the conflict potentially halts fuel imports, prompting rationing (example: 20 liters/week for tuk-tuks) and reducing public sector consumption by 25 percent. President Anura Kumara Dissanayake termed the measures a necessity to "prepare for the worst," despite facing public dissatisfaction.
What are the fallouts for Sri Lanka?
Rising oil import bills increased the demand for foreign currency, placing a downward pressure on the Sri Lankan rupee. This depreciation creates a cycle of economic instability that is self-reinforcing. The IMF has set conditions for Sri Lanka that include reducing government spending, cutting back on subsidies, and using market prices, which all make it harder for the government to respond to outside economic challenges by increasing spending.
Austerity measures in Sri Lanka have increasingly intensified in response to these external pressures. Fuel prices have been rising significantly, with reports that have indicated increases of up to 25-30 percent. Rationing systems have also been introduced to manage the limited supplies. These measures, traditionally regarded as technocratic responses, also stem from the intersection of external shocks and IMF conditionalities. Economists note that during a crisis, austerity measures focus more on maintaining economic stability than on social welfare, which can lead to negative effects that hit lower-income groups the hardest.
Rising fuel costs have cascading effects throughout the economy, increasing the expenses of transportation in addition to food prices. Al Jazeera has reported that the food prices in Sri Lanka could rise by as much as fifteen percent due to the disruptions in both fuel and also the fertilizer supply chains. The pressures of such uncontrollable inflation raise the possibilities of stagflation, an overlap of high inflation accompanied by slow growth. These economic conditions place households in a precarious position as they face a decline in real incomes, and access to basic state-sponsored services is also reduced.
Agricultural output faced threats from fertilizer shortages, particularly impacting rural areas. Reports from The Guardian highlight a similar pattern across the South Asian region, where farmers are reducing cultivation due to the rising input costs and uncertainty of the market. In Sri Lanka, where agriculture remains a significant source of employment, such trends risk the exacerbation of rural distress and, more importantly, food insecurity.
Additionally, the country’s reliance on remittances, approximately fifty percent of which, according to The Island, originates from the Middle East, introduces an additional layer of vulnerability. Therefore, any downwards trends in the Gulf economies resulting from regional instability could significantly reduce remittance inflows, which would further constrain Sri Lanka’s foreign exchange reserves that are already in a state of vulnerability.
What are the likely consequences?
For Sri Lanka, the fallouts of the war illustrate the vulnerabilities inherent in globalization, particularly for smaller economies with limited buffers and little leverage for negotiations in their favour. The uneven distribution of economic risk and political resilience within the global system reflects the broader North-South inequalities, wherein the developing countries of the global South bear the disproportionate burdens of crises they are not responsible for.
Historical precedence suggests that austerity, when combined with inflation and shortages, can trigger social unrest, especially amongst the economically downtrodden. Sri Lanka’s 2022 protests, which were driven by fuel shortages and economic mismanagement, remain an important reminder of the political volatility of such conditions and tensions. The IMF has also similarly warned that the rising inflation and declining living standards increase the likelihood of social instability in economically vulnerable states. Sri Lanka is currently classified as an economically vulnerable state. Thus, when basic needs become inaccessible, economic grievances can swiftly galvanize the population for a political mobilization.
References:
“Sri Lanka Braces for New Economic Crisis as War on Iran Continues,” Al Jazeera, 27 March 2026. https://www.aljazeera.com/features/2026/3/27/sri-lanka-braces-for-new-economic-crisis-as-war-on-iran-continues
“War in the Middle East Will Lead to Slower Growth and Higher Inflation, IMF Chief Warns,” Reuters, 6 April 2026. https://www.reuters.com/world/middle-east/war-middle-east-will-lead-slower-growth-higher-inflation-imf-chief-tells-reuters-2026-04-06/
“Sri Lanka Tightens Fuel Rationing as Supply Squeeze Deepens,” Reuters, 18 March 2026. https://www.reuters.com/business/energy/sri-lanka-tightens-fuel-rationing-supply-squeeze-deepens-2026-03-18/
“IEA, IMF and World Bank Coordinate Response to Middle East War’s Impact,” Reuters, 1 April 2026. https://www.reuters.com/world/middle-east/iea-imf-world-bank-coordinate-response-middle-east-wars-impact-2026-04-01/
“Fuel Crisis and Fertiliser Shortages Raise Fears for Farmers Across South Asia,” The Guardian, 4 April 2026. https://www.theguardian.com/world/2026/apr/04/india-fuel-crisis-fertiliser-shortage-farming
“Oil Prices Surge Amid Iran Conflict, Raising Global Inflation Concerns,” The Guardian, 7 April 2026. https://www.theguardian.com/business/2026/apr/07/oil-prices-donald-trump-iran-stock-market-imf-inflation
“Sri Lanka Increases Fuel Prices Amid Global Oil Surge,” Dawn, 30 March 2026. https://www.dawn.com/news/1984295
James Crawford Scott, “The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia” (New Haven: Yale University Press, 1976).
Joseph Eugene Stiglitz, “Globalization and Its Discontents” (New York: W. W. Norton, 2002).
About the author
Aishal Hab Yousuf is a postgraduate student at the Department of International Studies, Stella Maris College, Chennai. She is currently an intern at NIAS, Bengaluru.
