Price and demand for oil could decide rupee’s fate: ICRA Lanka

• Says rise in domestic demand for oil is likely to increase with gradual recovery in economic activities
• Points out an energy price revision may have a cascading effect on many sectors of economy
• Says such a scenario could trigger a broad-based rise in general price levels
• SL’s external sector, inflation and economic projections are based on oil at or around US $ 60 a barrel

The crude oil prices, which began to nudge ahead to reach pre-pandemic highs in recent weeks and the growing demand for oil due to the improving economic activities, both domestically and globally, could determine where the rupee would be in relation to the US dollar, says ICRA Lanka Limited. 

In a fresh report on the global commodity prices, the rating agency rang alarms yesterday as they have been observing the recent climb in the oil prices in the global markets as well as the economic activities, which are fast picking up in Sri Lanka. 

The rising oil prices have a cascading effect on the general prices – both supplier prices as well as consumer prices—adding fuel to inflation. 

“With the gradual recovery of economic activities, a rise in domestic demand for oil is likely to increase the import bill and thereby can inflict further pressure on the currency. In addition, increase in petroleum prices will exert stress on the financial position of utility companies in the short run,” ICRA Lanka said in a report titled ‘Commodity price deflation is over! What’s next for Sri Lanka’. 

“Energy price revision may have a cascading effect on many sectors of the economy. Most importantly, it could trigger a broad-based rise in general price levels. Furthermore, downstream sector products such as kerosene, heating oil, fuel oils, lubricants, waxes, asphalt and other petrochemicals would also revise prices affecting a multitude of industries,” the report added. 
The report comes at a time when Sri Lanka is scrambling to keep its economy humming while keeping its inflation and interest rates under check—key ingredients to support the consumption and business spending, after a tough year. 

The rupee has already come under pressure and it opened trading last morning at around Rs.195.00/Rs.199.00 against a US dollar in the one-week forward market, weaker from Rs.196.50/Rs.197.50 on Tuesday. The rupee was trading around Rs.185 to a US dollar in December 2020. 

Sri Lanka’s external sector, inflation and broader economic projections are based on oil at or around US $ 60 a barrel. But recent moves in the prices at the Brent exchange hit US $ 65.63 a barrel on March 1, before shedding gains to end at US $ 63.02 a barrel on March 2.  “As per the procurement plan of CPC for 2021, cost of imports of crude oil and refined products is projected to be US $ 2.5 billion roughly benchmarking US $ 59 a barrel of crude oil,” ICRA Lanka said. 

The OPEC members are now looking at retreating from their earlier decision to cut production to stabilise prices as the global economy is accelerating with the large-scale vaccine rollout.

“Sri Lanka imported around 13.5 million barrels of crude oil (20 percent of the total import bill) worth around US $ 3.9 billion in 2019 and the decline in global oil prices coupled with a slump in domestic consumption helped to save around US $ 1.3 billion in 2020,” ICRA Lanka said.