Analysts say price hikes will help reduce pressure on an exchange rate peg with the US dollar and match re-balance domestic demand.
Petrol is now and 63 percent more expensive than diesel, despite costing less to import than diesel.
Refined diesel is traded at a higher price internationally as the fuel contains more energy and is also retailed slightly higher than petrol in other countries. Kerosene is traded at an even higher price. Jet fuel is also similar to kerosene.
The Singapore wholesale refined price for petrol was around 81.88 rupees a litre last Friday according to Central Bank data when an exchange rate of 110.10 rupees was used. Diesel was 86.76 and kerosene 87.68 rupees.
Diesel is used by business and rich people who own luxury jeeps and pick-up trucks. Petrol is used by small car owners, motorcycles and three wheelers.
Diesel is cross-subsidized by the exorbitant prices charged from petrol users. There has been little citizen action to end the discrimination so far.Sri Lanka does not have a cost-based formula which is fair to all citizens to raise fuel prices. Pump prices are arbitrarily raised by rulers on an ad hoc basis. There is also a belief among rulers that inflation is not a monetary phenomenon but is diesel-driven.
Delays in raising imported fuel prices cause losses in petroleum distributors which have to be financed by bank credit, pushing up aggregate demand and pressuring Sri Lanka's soft dollar peg with the US dollar and increasing inflation.
Raising fuel prices will help reduce pressure on the peg, it if reduces credit expansion and also extinguish demand. A monthly price formula will helps domestic demand adjust faster to external development and help maintain the exchange rate and inflationary pressure.
However Sri Lanka is yet to raise power prices. The state-run Ceylon Electricity Board is running large losses, the power minister has said.
There is a less arbitrary mechanism for raising power prices through a regulator, though politicians can still interfere and cause imbalances.