BANGKOK, May 7 (Reuters) - Myanmar's military government has lifted a ban on private companies importing fuel to try to ease a chronic energy shortage in the wake of Cyclone Nargis, a Yangon-based diplomat said on Wednesday.

The major needs in the former capital were fuel and water, the diplomat said, to replace supplies cut off by a storm that caused widespread structural damage but limited loss of life compared with the 22,000 dead in the Irrawaddy delta.

"Private companies have secured an agreement from the government to import fuel, I think, tax-free," the diplomat told Reuters in Bangkok. "I think it's also only on a temporary basis, but they haven't been given an actual timeframe."

Normally, only the government is able to import fuel.

Despite criticism of the reviled military authorities as being slow to respond, the diplomat said they were gradually patching up services in the city of 5 million, where food prices have skyrocketed amid fear of shortages.

"The major thing is fuel and water and we're still living a little on borrowed time on that," the diplomat said.

"But I think over the next few days the water source in most areas will be mended and I think fuel will be making its way in large supplies."

Vehicles are waiting in lines several kilometres (miles) long at filling stations and people are having to queue with buckets and tubs at water distribution points, stoking frustration. (Reporting by Ed Cropley; Editing by Grant McCool and Alex Richardson)

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