AATPfinal

Articulating Appropriate Trade Policy
Kamal karunagoda 10/12/2009
2009
Contents
1 Introduction ...............................................................................................................................................6 2 Economic Growth and Trade Liberalization ..............................................................................................7 2.1 Economic Growth ................................................................................................................................7 2.2 Income and Expenditure ....................................................................................................................10 2.3 Expenditure on Food .........................................................................................................................12 2.4 Rural Poverty .....................................................................................................................................13 2.5 Land Use Pattern ...............................................................................................................................15 2.6 Workforce and Wages .......................................................................................................................16 2.7 Agricultural Policy ............................................................................................................................18 2.8 Research and Development Investments..........................................................................................22 2.9 Trade Policy .......................................................................................................................................23 2.10 Liberal Trade Policies and Agriculture ............................................................................................24 2.11 Institutional Developments Related to Agricultural Trade ..............................................................29 2.12 Performance of Export Agricultural Sector ....................................................................................31 2.13 Sub-sectoral performances 1985-2008 .............................................................................................32 2.13.1 Export Agricultural Crops ...................................................................................................32 2. 13. 2 Incentives for Export Agricultural Sector .........................................................................37 3 Import Competing Agricultural (ICA) Sector .........................................................................................39 3.1 Performance of ICA ...........................................................................................................................39 3.2 Sub Sectoral Performances of ICA ...................................................................................................43 3.3 Trade Policy and Import Competing Crop Sector .............................................................................49 3.4 Livestock Sector ............................................................................................................................54 3.4.1 Performance of Livestock Sector ....................................................................................................54 3.4.2 Trade Policy of Livestock Sector ....................................................................................................56 4 Macroeconomic Policy Influence on Agriculture ....................................................................................57 5 Appropriate Agricultural Trade Policies ..................................................................................................61 6 Value Chain Analysis ...............................................................................................................................63 6.1 Introduction ........................................................................................................................................63 6.2 Value chain of Coconut ......................................................................................................................64 6.2.1 Production .......................................................................................................................................64 6.2.2 Marketing Channel ..........................................................................................................................66 6.2.3 Export market ..................................................................................................................................68 6.2.4 Main Issues of the coconut sector indicated by stakeholders ..........................................................69 6. 2.5 Recommended Interventions ..........................................................................................................69 6.3 Fruits and Vegetables .........................................................................................................................73 6. 3. 1 Vegetables .....................................................................................................................................73 6.3.2 Fruits value chain ..............................................................................................................................79 6.3.2.1 Introduction ..................................................................................................................................79 6.3.2.2 Economics of Fruit Production ....................................................................................................81 6.3.2.3 Value Chain Operators .................................................................................................................82
2009
List of Tables Table 1 Agricultures share in regional GDP economy 1995-2008 ................................................ 9 Table 2 Gross Domestic Product of Agricultural Sector : 2007 .................................................... 10 Table 3 Percentage share of different sources of income in agricultural households 1999/2000 . 11 Table 4 Income and Income Distribution: ..................................................................................... 12 Table 5 Percentage distribution of average monthly household expenditure ................................ 13 Table 6 Prevalence of Poverty in Sri Lanka 1985-2007 ................................................................ 13 Table 7 Percentage of Poor Households based on Official Poverty Line..................................... 14 Table 8 Poverty by Province in 2006/07 ....................................................................................... 14 Table 9 Number of Agricultural Holdings: Small Holding Sector ................................................ 15 Table 10 Labor Force Participation (000) .................................................................................... 16 Table 11 Changes in Labor Usage (labor days per acre) in Rice Cultivation: 1977-2007 ............ 18 Table 12 Agricultural Policy Changes - Major Events after 1977 ................................................ 20 Table 13 Agriculture and the economy ......................................................................................... 28 Table 14 Comparative advantage index of agricultural products .................................................. 28 Table 15 Institutional Development Related to Agricultural Trade .............................................. 30 Table 16 Status of Trade Liberalization 1977-2008 ..................................................................... 30 Table 17 India- Sri Lanka Trade Structure (US$ Millions)........................................................... 30 Table 18 Volume and Value of Exports of Other Agricultural Products ...................................... 37 Table 19 Applied tariffs levels on main food imports ................................................................... 40 Table 20 Non-Tariff Barriers......................................................................................................... 42 Table 21 Use of Para-tariffs .......................................................................................................... 42 Table 22 A Comparison of Most Favored Tariffs (MFN) in South Asian Economies ................. 42 Table 23 Real Return on Crop production (1985=100) ................................................................. 44 Table 24 Tariff changes- rice ........................................................................................................ 46 Table 25 Real Return on Crop production (1985=100) ................................................................. 49 Table 26 Tariff and para tariff on potato imports: 1985-2008....................................................... 52 Table 27 Tariff and para tariff on big onion imports: 1985-2008 ................................................. 53 Table 28 Tariff and para tariff on chili imports: 1985-2008 ......................................................... 53 Table 29 Changes in consumption of meat and milk: 1998-2006 ................................................. 55 Table 30 Custom duties on animals, meat, milk and milk products and animal feed ingredients. 57 Table 31 Fiscal Policy Indicators .................................................................................................. 59 Table 32 Average Money Supply Growth, Inflation and Interest Rates (percent) ........................ 59 Table 33 Important features of selected products .......................................................................... 64 Table 34 Key Government Policies in the Coconut Sector 1985-2008 ......................................... 65 Table 35 End uses and process of coconuts .................................................................................. 67 Table 36 Recommended interventions to develop the coconut sector .......................................... 70 Table 37 Vegetables: Production, Import, Export, Availability and Expenditure: 2006/07 ......... 73 Table 38 Main Vegetables Grown in Sri Lanka ............................................................................ 73 Table 39 Characteristics of Vegetable sector ................................................................................ 75 Table 40 Policy Options for Development of Vegetable Sector .................................................. 78 Table 41 Fruits: Production, Import, Export, Availability and Expenditure: 2006 ....................... 80 Table 42 Extent and Production of Fruit Crops (2007) ................................................................ 80 Table 43 Economics of Fruit Production....................................................................................... 81 Table 44 Characteristics of fruit production system ...................................................................... 81 Table 45 Fresh Fruit Imports ......................................................................................................... 85 Table 46 Key issues of fruit sector and necessary intervention..................................................... 86
2009
List of Figures Figure 1 Composition and Growth of GDP and Sectoral contribution to GDP: 1996-2007 ........... 8 Figure 2 Growth of different sectors of the economy: 1997-2008 .................................................. 8 Figure 3 Regional Share of GDP 2007 ............................................................................................ 9 Figure 4 Share of components of GDP 2007................................................................................. 10 Figure 5 Agriculture Real Wage Rates of (Index 1985=100) ....................................................... 18 Figure 6 Research Intensity ........................................................................................................... 23 Figure 7 Average import duty collection rate: 1985-2008 ............................................................ 24 Figure 8 Average import duty collection rate (%): Consumer goods ............................................ 25 Figure 9 Grain Self-sufficiency levels (Domestic production)/Total Availability (Domestic production+Import......................................................................................................................... 26 Figure 10 Trend in agricultural exports ......................................................................................... 32 Figure 11 Trends in Area, Production and Productivity ............................................................... 33 Figure 12 Trends in Tea Prices and Cost of Production ................................................................ 33 Figure 13 Tea: Volume and value of exports ................................................................................ 33 Figure 14 Trends in Cost of Production (COP) and Average Auction Price................................. 34 Figure 15 Rubber: Area, Production and Productivity .................................................................. 34 Figure 16 Export Quantity and Revenue ....................................................................................... 34 Figure 17 Trends in Coconut Production, (COP) and Average Auction Price Cost of ................. 35 Figure 18 Coconut Area, Production and Production Productivity ............................................... 35 Figure 19 Value of exports of coconut products ........................................................................... 35 Figure 20 Exports of other agricultural crops................................................................................ 36 Figure 21 Prices of major exports ................................................................................................. 38 Figure 22 Real prices of major exports ......................................................................................... 39 Figure 23 Value of Imports: Food and Beverages ......................................................................... 41 Figure 24 Compositions of Agricultural Imports .......................................................................... 41 Figure 25 Value of Selected Imports ............................................................................................. 41 Figure 26 Cost share of agricultural imports ................................................................................. 41 Figure 27 Import expenditure shares of onion, potato, chili and fruits ......................................... 41 Figure 28 Domestic paddy production (a) and imports (b) ........................................................... 44 Figure 29 Rice Self sufficiency ratio (SSR) 1985-2008: ............................................................... 44 Figure 30 Spread of margins: Paddy (farm-gate) and rice (wholesale and retail) ......................... 45 Figure 31 World market prices of rice 1985-2008 ....................................................................... 46 Figure 32 Changes in Protection level of rice ............................................................................... 47 Figure 33Area Cultivated: maize and chili .................................................................................... 48 Figure 34 Area Cultivated: pulses ................................................................................................. 48 Figure 35 Area Cultivated: potato and onions .............................................................................. 48 Figure 36 Yield of Other Field Crops............................................................................................ 49 Figure 37 NPC of big onion .......................................................................................................... 50 Figure 38 Changes of factors influencing NPC ............................................................................. 50 Figure 39 Onion production and imports ...................................................................................... 50 Figure 40 Seasonal NPC-Big onions ............................................................................................. 50 Figure 41 NPC-Potato ................................................................................................................... 50 Figure 42 Changes of Factors influencing NPC ............................................................................ 50 Figure 43 Potatoes- Production and Imports ................................................................................. 51
2009
Figure 44 NPC- Chili .................................................................................................................... 51 Figure 45 Seasonal Variation of NPC-Chili .................................................................................. 51 Figure 46 Chili: Production and Imports ....................................................................................... 51 Figure 47 Livestock Production .................................................................................................... 54 Figure 48 Stocks of Livestock ....................................................................................................... 54 Figure 49 Milk production and imports 1998-2007 ...................................................................... 55 Figure 50 Meat Production 1997-2006.......................................................................................... 56 Figure 51 Meat Consumption ........................................................................................................ 56 Figure 52 Egg Production.............................................................................................................. 56 Figure 53 Nominal Exchange Rate................................................................................................ 60 Figure 54 Annual Inflation ............................................................................................................ 60 Figure 55 Real effective exchange rate ......................................................................................... 60 Figure 56 Real Exchange Rate with respect to Indian currency (RER =NER*PIN/PSL) ................ 60 Figure 57 Trade policy and Agriculture Development .................................................................. 61 Figure 58 Export value of kernel and non-kernel (other) coconut products.................................. 69 Figure 59 Coconut Value Chain .................................................................................................... 71 Figure 60 Coconut marketing channel .......................................................................................... 72 Figure 61 Total Extent and Production of Vegetables: ................................................................. 74 Figure 62 Extent and Production of Low-country Up-country Vegetables ................................... 74 Figure 63 Total Extents and Production of Vegetables ................................................................. 74 Figure 64 Distribution of costs and benefits among producers and marketing agents: ................. 77 Figure 65 Quantity and Value of Vegetables Exports: 2000-2007............................................... 78 Figure 66 Fruits: Area and Production .......................................................................................... 80 Figure 67 Marketing margins: Fruits ............................................................................................. 84 Figure 68 Exports of Fruits............................................................................................................ 85
2009
ARTICULATING APPROPRIATE AGRICULTURAL TRADE POLICY
Introduction After a regime of strong inward-looking policies from 1970 to 1976, Sri Lanka embarked on free market policy reforms in 1977. The post reform period is associated with substantial changes in trade and macroeconomic policies. With the introduction of open
economic policies in 1977, agricultures share in Sri Lankan economy has shrunk. Rapid growth in services and industrial sectors during the past three decades has changed the structure of the economy. The share of agriculture in gross domestic product (GDP) has declined from 28 per cent in 1977 to 12 per cent in 2008.
Agriculture continues to remain an important sector in the Sri Lankan economy contributing 12 percent to GDP and providing employment to 31 percent of the labor force as of 2008 (CBSL, 2009). The population of Sri Lanka is 20.5 million in 2008 and about 78 % of people live in rural area and the majority of rural households are, directly or indirectly, involved in agriculture. Though the economy had grown in real terms, poverty is a widespread persistent phenomenon, particularly among agricultural households. The post liberalization period (after 1977) is also characterized by a large influx of foreign capital. Policy reforms were directed at manufactured exports and consequently the manufacturing sector became the leading sector of the economy. These structural changes in the economy can have strong influence on the agricultural production through the changes in the relative prices and exchange rates. The changes in the exchange rates profoundly inhibit the ability of non-booming sub sectors that produce exportable or importables. Public policies may influence incentives in all sectors of the economy or in a specific one. The development of the infrastructure, research and extension activities of the government generally provide non-price incentives for agriculture. The supply responses of the agricultural sector are the net effect of these general, sector specific and non-price incentives. Changes in the economic environment, trade and macroeconomic policies strongly influence the agricultural sector and can alter the impact of sector specific policies. The changes in trade policies and economic development have created more opportunities for agricultural trade. Under these domestic and global changes, articulating appropriate agricultural trade policies to attain sustainable economic development play very important role. Although, the reforms of 1977 eliminated import restrictions, the agricultural exports had been subjected to export taxes until 1992. The import substitutes had been protected using tariff and non-tariff measures. In 1992, main agricultural exports were exempted from taxes. In 1996, Sri Lankan government started an extensive program of agricultural trade liberalization under the Uruguay Round Agreement (URA) of WTO. It was 6
2009
expected that the trade liberalization under the URA may not jeopardize the domestic agriculture and set a lower bound rate of tariff under the WTO than that of other developing countries. In the Sri Lankan context, welfare gain and environmental benefits have predicted upon agricultural trade liberalization. The trade and other reforms are expected to contribute positively to the improvement of rural welfare. However, the rural poverty and malnutrition and equity indicators have provided evidences against this expectation. Trade policy had been geared to in the interest of the poor thus the changes in trade policy would have important inference for welfare of rural people. Further, the liberalization of non-agricultural sector and liberal exchange policy are expected to give an indirect incentive to the agricultural sector. Articulating appropriate agricultural trade policy can be understand as a participatory process of identifying, justifying and communicating suitable agricultural trade policies. During the past three decades, despite several setbacks in the economy, Sri Lanka was able to
maintain a growth rate of about 4-6 percent per annum. During the past decade industrial, services and agricultural GDP grew an average annual rate of 5.3, 6 and 2 percent respectively. In terms of the per capita income of an average Sri Lankan, the country is now falling in to the category of lower-middle income countries following the classification of the World Bank. In 2008, the per capita Gross National Income was 1900 US $ (CBSL, 2009). This paper reviews agricultural trade policy that has exercised by Sri Lanka during past two decades. The structural changes that have taken place over the years may have made the agricultural trade
policy inappropriate for the current stage of development and thus, attempt is made to identify appropriate policies for the current stage of economic development in realization of national development goals and the conditions necessary for achieving overall economic growth. The appropriateness of agricultural trade policy is evaluated using the, insights from the agriculture development literature, past experience and views of different stakeholders. The second part reviews the characteristics of the economy in terms of growth, employment, wages, and trade. The third section discusses the performances and trade policies of export and import competing agricultural sector. The third section reviews the influence of macroeconomic policies and exchange rates on the production of agricultural exportables and importables. Based on the observation of the previous sections, the fourth sections look into the appropriate trade policy for Sri Lanka. The final chapter analyzes the three selected value chains, coconut, milk and fruits and vegetables. .
2 Economic Growth and Trade Liberalization 2.1 Economic Growth The pre-trade liberalization period (pre 1977) was characterized with near stagnation of per capita income. Sri Lanka showed signs of growth after 1977 and it was accelerated in 1990s and beyond. The annual growth rate of GDP marked 3 percent during 1980-1990, shifted up to 4 percent during 1991-2000 and then to 5-6 percent during 2001-2008 (except 2001) (Figure 1). The remarkable growth has taken place in an environment of liberal trade and decades long civil war. The exports and imports have increased after trade liberalization and the share of exports to GDP increased from 20 percent in 1980 to 33 percent in 2000. The share of imports to GDP
2009
ranges from 33-51% during the period of 1980 to 2008. The faster growth of domestic economy, particularly the service sector reduces the trade share to GDP during the later stage. Although the share of the agricultural sector has been declining, agriculture remains the most important sector of the rural economy. The sector shows a positive growth ranging from 1.6 to 4.2 during the past three decade except 2002 and 2004 (Figure 1 and Figure 2). The share of agricultural GDP among different sub sectors of agriculture shows that vegetables (18%), paddy (11%), tea (12%), coconut (9%), livestock (10%), high land crops (8%) and fishing (13%) contributes to more than 80% of the agricultural GDP (Table 1 and Figure 3).
1400
Rs billion (constant 1996)
1200
1000 800 600 400 200 0

1985
Figure 1 Composition and Growth of GDP and Sectoral contribution to GDP: 1996-2007
Source: CBSL
Figure 2 Growth of different sectors of the economy: 1997-2008

Data source: Central Bank of Sri Lanka
1987
Agriculture
1989
1991
1993
Industry
1995
1997
Services
1999
2001
2003
2005
2007
2009
The government policies before 1977 were more focused on the regional and rural development with its welfarist principles. The regional share of GDP indicates the dominance of western province and it also indicates the policy bias towards the Western Province (Figure 3 and Figure 4). The regional distribution of GDP by industry shows the dominance of agriculture in all provinces except Western Province (Table 1). The share of agriculture in regional GDP was ranged from 26 to 53 in early 2000. The regional imbalance in growth is a prime concern in implementing development programmes. In regional economies, the share of agriculture in GDP has been declining and in 2008, the agricultures share in regional GDP was ranged from 17 (Southern) to 32% (Uva) (Table 3). It is further evident that economic growth has been concentrated in the Western Province, because its share in national GDP increased from 40% in 1990 to 48% in 2007, while the share of GDP in the Uva and Sabaragamuwa provinces fell from 16% to 11% (World Bank, 2007). While the national level GDP per capita in 2007 was Rs. 81,967, in the Western province it was Rs.136,183. The GDP per capita levels indicate a clear regional disparity Western province vis a vis other provinces.
60.0 50.0 40.0
GDP %
30.0
20.0
10.0 0.0
Figure 3 Regional Share of GDP 2007

Source: CBSL
Table 1 Agricultures share in regional GDP economy 1995-2008

Western 1995 2000 2004 2008 6 5 3 2 Southern 36 38 34 17 Sabaragamuwa 26 34 28 21 Central 34 32 33 21 Uva 53 47 52 32 Eastern 34 30 37 17 NWP 34 28 24 20 NCP 47 45 44 27 Nothern 20 19 28 16
Source: CBSL
2009
100
80 60 40 20 0 Services Industry Agric
Figure 4 Share of components of GDP 2007

Source: CBSL 2009
Table 2 Gross Domestic Product of Agricultural Sector : 2007

Major Division Agriculture, Forestry and Fishing 1. Agriculture, Livestock and Forestry 1.1 Tea 1.2 Rubber 1.3 Coconut 1.4 Minor export crops 1.5 Paddy 1.6 Livestock 1.7 Other food crops 1.7.1 Highland crops 1.7.2 Vegetables 1.7.3 Fruits 1.8 Tobacco 1.9 Betel & Arecanuts 1.10 Plantation Development 1.11 Other Agricultural Products 1.12 Firewood & Forestry 1.13 Fishing
Source: CBSL
Rs million 418353 363343 49485 21553 39828 11634 44566 40650 107760 31250 74354 2155 582 2297 7731 10603 26655 55010
Share %
11.8 5.2 9.5 2.8 10.7 9.7 25.8 7.5 17.8 0.5 0.1 0.5 1.8 2.5 6.4 13.1
2.2 Income and Expenditure

Although agricultures economic importance has declined considerably, a large percentage of rural households - higher among the poorer - remain heavily dependent on income from the agricultural activities. According to the Sri Lanka Integrated Survey 1999/2000, a higher percentage of agricultural households occupy in all provinces, except Western Province, and it is ranged from 41% (Southern province) 82% (North Central Province) (World Bank, 2003).
10
2009
According to this survey, about 45% of rural households were agricultural households1 and agricultural activities accounted for half of total agricultural household income (Table 3). The percentage of agricultural households is high in all provinces except western province and the share of income from agriculture ranges from 33% to 67% (Table 3). A higher share of agricultural households and their higher dependency on agricultural income and higher prevalence of poverty among agricultural households indicate the importance of agricultural sector development in alleviation of rural poverty. Given the large proportion of poorer households dependent on agriculture, and the large contribution farming activities make to their aggregate income, the removal of obstacles to raising agricultural productivity and income are important contributors to poverty reduction, as a complement to increasing job opportunities in manufacturing and services. Therefore, agricultural trade policies on exports/imports/nontradables could have strong impact on the income of agricultural households. The net impact of the trade policy depends on the relative changes in prices of tradables and non-tradables, characteristics of the poor households (net sellers/net buyers), sources of income of the poor households etc.
Table 3 Percentage share of different sources of income in agricultural households 1999/2000

Sector Western Agriculture Non-farm Transfer Remittance Other Agricultural household as % of Rural households 33.5 48.5 7.6 3 7.4 15.6 Average Agricultural Household Income by Source and Province Central Southern North North North Uva SabaraEastern Western Central gamuwa 46.9 47.8 67 35.6 43.8 59.3 59.6 33.1 40.5 19.5 46.5 32.2 26.5 26.6 15.4 6.3 3.5 8.5 10.4 8.9 7.1 3.4 2.7 7.6 5.4 5.5 2.3 3.6 1.2 2.8 2.4 4.1 8.2 3 3.2 45.3 42.4 52.6 48.0 82.6 75.9 51.1 All 49.9 33.9 7.9 4.5 3.8 44.8
Source: World Bank, 2003 (Sri Lanka Integrated Survey, 1999/2000)
Agricultural households are those who are engaged in crop cultivation, livestock rearing and/or casual agricultural wage employment.
11
2009
Table 4 Income and Income Distribution:

Sector Average monthly household income 1990/91 3,549 6,783 2,724 2,399 1995/96 6,476 11,240 5,852 4,059 2002 12,803 22,420 11,712 7,303 2005 20,048 31,239 18,634 12,070 2007 26,286 41,928 24,039 19,292 Income Distribution (Gini Households) 1990/91 1995/96 2002 0.47 0.46 0.47 0.62 0.47 0.48 0.42 0.46 0.45 0.25 0.34 0.34 coefficient for 2005 0.47 0.48 0.45 0.34 2007 0.47 0.54 0.46 0.41
All Urban Rural Estate
Source: Household Income and Expenditure Surveys, 1990/91, 1995/96,2002, 2005 and 2007
The income level of all sectors of the economy shows growth in nominal terms. The distribution of income, measured by the Gini coefficient2, shows a trend of broadening disparity in the economy (Table 4). About 4% of GDP has been redistributed to households over the years in the form of food subsidies, subsidized credit for improving living standards, education and health. The regional disparity in economic growth and income inequality are two major issues faced in the development of the country. The Gini-coefficient remains around 0.4 in the last five years indicating that though the level of poverty incidence reduced, the inequality remains high. In 2002, the household income ratio of the poorest 20% to richest 20% was reported to be around 1:10.8, whereas the consumption ratio was 1:6.9 (Country Report of MDG, 2005). Over 50% of household income is accumulated within the richest 20% of households in the country while the share of the poorest 20% is less than 5%. In 2006/07, the share of expenditure done by richest 20% was 49% while the share of the poorest 20% was 6.2% (HIES, 2007).
2.3 Expenditure on Food
The share of food expenditure of first 8 income deciles ranges from 34 to 102%. The percentage of average monthly household expenditure on major food groups of urban, rural and estate sector is 35%, 42% and 55% respectively (HIES 2007) (Table 5). It is very clear that the trade policy on cereals, pulses, condiments, milk powder, and sugar along could influence the considerable share of food expenditure of food expenditure. Expenditure on cereals (10%-28%), prepared food (6-18%), and milk and milk products (9-10%) is prominent in all three sectors.
Gini coefficient is an aggregate inequality measure and can vary anywhere from 0 (perfect equality) to 1 (perfect inequality)
12
2009
Table 5 Percentage distribution of average monthly household expenditure

Food Group Cereals Prepared food Pulses Vegetables Meat Fish Dried fish Coconuts Condiments Milk and Milk foods Fat & oil Sugar Fruits Other Total
Source: HIES, 2007
Urban (%) 10.2 17.9 2.5 6.8 5.5 10.4 2.4 4.0 8.3 10.2 2.0 3.5 4.6 11.8 100
Rural (%) 15.2 11.2 3.6 8.7 3.4 8.4 4.6 5.2 9.2 9.3 2.0 4.4 3.7 10.9 100
Estate (%) 27.8 6.2 4.5 8.7 3 3.4 2.7 4.8 10.0 9.0 2.7 4.2 1.8 11.0 100
2.4 Rural Poverty
The official poverty line is defined based on average per capita expenditure per month. Over the decade 1985-1995, agricultural households accounted for about 40% of the poor in Sri Lanka (Gunewardena 2000). The agricultural household comprise about half of the poorest of rural households (World Bank (2003). The official poverty line for 2006/2007 was Rs. 2,233(real total expenditure per person per month) and 15.2% of the population or 2,805,000 persons fell below this poverty line (DCS, 2007). Compared to dynamics of consumption poverty in the last two decades, the reported HCI of 15.2% and PGI of 3.1% in 2007 are a significant reduction of incidence and depth of poverty (Table 6).
Table 6 Prevalence of Poverty in Sri Lanka 1985-2007

Sector All Island Urban Rural Estate Poverty Gap 1985 36.31 1990 21.27 Poverty Headcount Ratio (%) 1995/96 2000 29.46 26.7 14.0 7.9 30.9 24.7 38.4 30.0 6.70 5.07 2006/07 15.2 6.7 15.7 32.0 3.10
9.55
4.48
Source: Household income and expenditure survey 1995/96, 2002 and 2006/07. Note: Poverty head count ratio= Number of households below poverty line/Total number of households*100. Excluding north and east provinces
13
2009
Table 7 Percentage of Poor Households based on Official Poverty Line

District Colombo Gampaha Kalutara Kandy Matale Nuwara Eliya Galle Matara Hambantota 1990/91 13.1 11.7 27.0 30.9 24.3 15.6 25.0 23.3 26.3 1995/96 8.8 11.3 24.6 32.7 36.8 25.9 25.5 29.5 26.2 2002 5.0 9.2 17.7 20.9 24.5 18.2 21.7 23.2 27.8 2006/07 3.9 7.2 10.3 13.9 15.7 27.5 10.7 11.7 10.5 District Kurunegala Puttlam Anuradhapura Polonnaruwa Badulla Moneragala Ratnapura Kegalle Sri Lanka 1990/91 22.8 18.6 20.1 21.2 26.8 27.4 26.4 27.3 21.8 1995/96 22.6 25.8 21.9 17.1 35.8 48.4 40.0 31.7 24.3 2002 21.2 24.5 17.2 20.1 31.5 32.4 30.1 27.5 19.2 2006/07 12.9 10.6 12.7 10.0 21.0 29.2 21.5 18.4 12.6
Source: Dept of Census & Statistics
In 1990, the prevalence of poverty in all districts, except Colombo and Gampaha, ranges from 16 to 31% while the level of poverty in Colombo (13%) and Gampaha (12%) in 1990 was relatively low. Substantial reduction in prevalence of poverty could be observed during the period of 1990 to 2007 in many districts3. However, the figures are still high for Badulla (21%), Moneragala (29%), Ratnapura (21%) and Nuwara Eliya (28%) (Table 7). The HCI in western province is 8.2% in 2007, where as in the other provinces it varies between 11% -27%. The largest reduction in poverty in 2007 occurred in districts that already had a low incidence of poverty in 199091, for example, Colombo: 13% to 4%, and Gampaha: 12% to 7%, which are in the Western Province, while Uva and Sabaragamuwa provinces rank highest on the headcount index 27% and 24% respectively. In terms of depth of poverty also, Uva (Badulla and Moneragala) is the highest and Sabaragamuwa (Kegalle and Ratnapura) is the next. The contribution to total poverty is highest in the Central province (Kandy, Nuwara Eliya, Matale), and its HCI and PGI are also relatively high (Table 8).
Table 8 Poverty by Province in 2006/07
Province HCI (%) PGI (%) Contribution to total poverty (%) Gini coefficient 0.40 0.41 0.38 0.37 0.33 0.36 0.40 0.35 0.34
National 15.2 3.1 Western 8.2 1.5 16.8 Central 22.3 4.6 20.4 Southern 13.8 2.6 12.1 Eastern 10.8 2.1 3.6 North western 14.6 2.9 12.2 North central 14.2 2.8 6.0 Uva 27.0 6.2 12.3 Sabaragamuwa 24.2 4.9 16.6 Note: HCI=Head Count Index, PGI= Poverty Gap Index Source: DSC, 2006/07
One major reason that explains the notable reduction in poverty is the large infrastructure development projects taking place in the regions. The premise in this regard is that new development projects in the district give a large number of employment opportunities for people and hence they have sufficient income for consumption. Hambantota district, which has the port, airport and road development projects: in 2002 its HCI was 28% and it was reduced to 10.5% in 2006/07. Puttalam district, which has the coal power plant project; in 2002 its HCI was 32, and it has reduced to 13% in 2006/07.
14
2009
2.5 Land Use Pattern According to the Census of Agriculture of 2002 (the latest available), the total agricultural land of the country is 1.86 million ha and permanent crops and paddy occupy about 49 percent and 27 percent of the agricultural lands respectively. The area under commercial small holding sector (holdings less than 8 ha), which represent about 90% of total agricultural holding, has increased by 6.7% during the period of 1982 to 2002 (Table 9). The area expansion was mainly due to land development under Mahaweli river diversion program started in 1980s. During the same period, the total number of holdings has increased by 82% (Table 9) while average size of the small holding sector has decreased from 1.97 ac (0.8 ha) in 1982 to 1.2 ac (0.5 ha) in 2002. The data indicate the degree of land fragmentations scale of operation. Table 9 Number of Agricultural Holdings: Small Holding Sector
Census of Agriculture 1982 2002 3.54 3.78 1.79 3.26 % <1 acre 1-2 ac 2-20 ac 42% 22% 36% 63% 17% 21% Change +0.24 +1.47
Agricultural lands (million ac) No of Agric Holding (million) Distribution of plot sizes
Source: Census of Agriculture Sri Lanka, 2002, Department of Census and Statistics Notes: Small holding sector consist of holding less than 20ac. the number of agricultural holding has increased in every districts of Sri Lanka while extent has decreased in Colombo, Gampaha, Kalutara, Kandy, Kegalle and civil war effected districts (Jaffna, Killinochchi, Mannar, Vavuniya and Mullaitivu) in North and East province.
The number of farmers with small holding is in the increase. By 2002, the number of farmers with landholding of less than one acre (0.4 ha) has increased to 63% from 42% in 1982. Such small farm size limit the income from agriculture and farmers have to depend more on trade protected agriculture or alternative income sources to maintain the livelihood. The reduction in area demands higher margins for import competing agriculture. During 1990s, the guaranteed prices set by the Government for ICA commodities ensure at least 25% of margin from cost of production. However, this ratio increased to 50% during late 1990s. Such a change is also influenced by the size of land holding (income) and the general changes in price levels. About 62% of agricultural land area is owned by the government and it could limit the efficient functioning of land market.
15
2009
2.6 Workforce and Wages
The proportion of workforce involved in paid employment shows a steady growth after 1977, especially in manufacturing, trade and services. Improved access to higher education reduced the labor force participation in the 10-19 age group. On the other hand, participation in the 25-54 age group has steadily risen. Commercialization of domestic agricultural sector among small holders has replaced the traditional labor exchange system between farms to wage employment.
The total workforce in Sri Lanka has increased by 36% during the period of 1977 to 2007. About 31% of the workforce remained in agriculture in 2007, compared with 52 % in 1977 (Table 10). However, total labor force reduction in agricultural sector is marginal (8%). The proportion of workforce engaged in services rose from 34% in 1977 to 42% in 2007 while the proportion of workers in industrial sector increased from 14% to 27% during the same period (Table 10).
Table 10 Labor Force Participation (000) Category 1977 1980 1985 Agriculture % in Agriculture Industry % in Industry Services % in Services Total Employed (000) 2415 52 638 14 1594 34 4647 2361 51 652 14 1660 36 4673 2495 49 715 14 1922 37 5132 1990 2361 47 749 15 1937 38 5047 1995 1967 37 877 16 2513 47 5357 2000 2267 36 1107 17 2968 47 6342 2005 2306 31 1844 25 3368 45 7518 2007 2202 31 1874 27 2966 42 7042
5521 5282 5972 6001 6106 6867 8145 7491 Total Labor force (000) Source: CBSL, 1998 and 2008. Notes: Industry includes and mining and services include construction.
Majority of export agricultural sector (EAS) work force (or plantation workforce) comprise of descendants of immigrant South Indian labor force who has later gained citizenship. The large plantations have resident labor force and their wage rates are determined largely by institutional and trade union actions. The minimum wage policy, which has been in operation since 1941, has had a little effect on wage formation in the export or domestic agricultural sectors (CBSL 1998). The nominal wages of the domestic agricultural sector (DAS) as well as other sectors show an increasing trend. The real wage rate of the DAS shows a downward trend until 1990 but since 1990 it shows an increasing trend (Figure 5). The Export Agricultural Sectors wage rates had been on an upward trend until mid 1990s and after that it shows a clear downward trend. Industry and commerce, and services sectors recorded higher 16
2009
growth rate during the post-reform period. Despite this growth, real wage rates of these sectors have been decreasing. The increasing wage rate of the DAS despite relatively higher rural unemployment and poverty levels indicate the prevalence of hysteresis related to agricultural employment in Sri Lanka. The labor unions of the plantation sector have, traditionally, been strong and various labor legislations, such as minimum wage, minimum number of working days and hours, have been adopted to protect the rights of resident labor force in the export agricultural sector. The DAS is characterized with small holders with an average land area of less than 1 ac. On these farms, labor requirements are concentrated on a few months for rice cultivation. Diversification of farm production with high value crops has significantly increased the on-farm labor usage. According to a study by Wikramasinghe at el. (1994) 30%-40% farmers work as wage laborers on others farms and the degree of such engagements is higher in predominant agricultural districts. In 2003, agricultural activities were accounted for only 23% of rural households. The total labor usage in rice cultivation show continuous decline in all agricultural districts due to increase in adoption of labor saving technological innovations in rice cultivation (Table 11). In case of import competing crop sector, labor intensiveness of crop production has not been changed. The analysis of supply responses indicates that a significant negative relationship with agricultural wage and supply responses of the import competing domestic agricultural crops. The changes in the economic environment can have strong direct and indirect impact on the agricultural labor market which is reflected by the higher agricultural wages and substitution of low cost capital to relatively expensive labor. The real price of output of the DAS and real wage rate of the non-agricultural sector exhibit a declining trend (Figure 5). The most important policy implication is that the wage rate of the DAS could rise with the expansion of non-agricultural sector. Capital inflows in the form of foreign investments and remittance would further expand the nonagricultural sector. Farmers in small holding sector have not been well organized and government interests had been directed to improve the welfare of small holders at the expense of consumers. Open economic policies have opened wide opportunities for farm families to seek employment outside rural areas. The lower cost of transportation and improved communication should have increased commuting distance from rural areas to urban centers. The capital formation in non-agriculture, therefore, has strong possibility to induce more labor movement out of the DAS. The structural factors had strong influence on the wage rate of the domestic agricultural sector thus, prudent macroeconomic management may not be sufficient to halt the current trend in real wage rate.
17
2009
Table 11 Changes in Labor Usage (labor days per acre) in Rice Cultivation: 1977-2007
District Season
1978/79 1984/85 1990/91 1994/95 2000/01 2007/08 Ampara 61 44 38 35 30 15 Anuradhapura 58 38 44 42 32 32 Polonnaruwa 73 60 52 46 30 31 Kalawewa 59 41 52 40 33 32 Hambantota 56 40 43 40 35 19 Gampaha 52 54 53 44 38 34 Kandy 57 57 55 55 48 37 Source: Socio Economic and Planning Center, Department of Agriculture, Sri Lanka
Real Wage Rate Index

160 140
Index 1985=100
120 100 80 60 40 20 0 Export Ag Industry
Services Foodagric
Figure 5 Agriculture Real Wage Rates of (Index 1985=100)

Source: Estimated from data in CBSL and Cost of Cultivation of Agricultural Crops, DOA
2.7 Agricultural Policy
Agriculture policy continued to evolve in the direction of government withdrawal from the production and marketing. Government intervention over prices of agricultural commodities and control over agricultural credit interest rates was withdrawn. Public sector monopoly on imports was gradually reduced and by 1997, such controls were limited to wheat, crude oil and defense related items. In 1980s, agricultural sector was accounted for one fifth of government expenditure and it has declined sharply in the 1990s. Since mid-1990s, agricultural expenditures have begun to rise and in 2000 it reached 10% of total government expenditure (Abesekara, 2002).
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
18
2009
Export promotion policies along with trade liberalization helped to increase employment in the manufacturing sector. The distributional impact of the export promotion and foreign investments is mainly limited to a single province (western province) of Sri Lanka. These developments may have forced the Government to adopt policies that make low urban food prices. Jayaweera et al. (1988) found that the trade liberalization (initiated in 1977) has had negative impact on agro-based industries. However, a contrary view was put forward by Laksman et al. (1994). They have observed that increased competition caused by trade liberalization has not affected those agro-based industries as these markets are localized and products border on inferior goods. Trade liberalization, removal of administered prices and government intervention in agricultural markets directly link to the welfare of farm households of the DAS. The effect of devaluation resulted price increase on the DAS depends on characteristics of the farm households. The changes in the price of basic commodities following devaluations can have an impact on consumption levels of low income groups. If farm households are net sellers, then the devaluation related price increase benefits farmers. If the farm households are net consumers, then their earning will not be effected significantly in the short run. However, higher prices may change farm households behavior in the long run. The agricultural census in 2002 (DCS 2003) indicates that the majority of farm households is net sellers and thus, the reduction in price reduction due to trade liberalization could reduce the farm income from ICA activities. Shan (1988) found that due to low price elasticity of rice and high share in the budget of low income household, changes in the price of rice causes reduction in the consumption of all other commodities. The impact of price changes on urban consumers is greater than the impact of rural consumers due to significance of imported goods in their consumption patterns (Laksman 1994). The major policies adopted after 1977 to 2008 are summarized in the Table 12. Subsides on fertilizers, irrigation and credit have been the major governments direct incentives to agriculture. The new high yielding varieties used in rice and ICA sectors show high response to fertilizer and consequently fertilizer has become a risky input. Despite the reduction in subsidies in some periods, the fertilizer usage has increased. Therefore, the possible effect of increase in fertilizer subsidies would be an increase in farmers earnings. Sri Lanka has entered into several multilateral (WTO), regional (SAFTA) and bilateral trade agreements (FTA with India and Pakistan) (Table 13). 19
2009
Table 12 Agricultural Policy Changes - Major Events after 1977

Policy Exchange policy Year 1977 Description Exchange rate was unified eliminating the foreign exchange entitlement certificate and convertible rupee account and managed float system was adopted. Rupee was substantially devaluated. Restrictions on capital transactions were lifted. Relaxation of exchange control and controls on current account transactions were removed.
1994 2001 1977
Agricultural Policy
Free float exchange rate regime started in 23rd January 2001. Liberal market economic policies started. Government encouraged private sector participation in agricultural production, storage, marketing and processing. 1987-84 Acceleration of Mahaweli River Diversion Program. This program was planed complete within 30 years but completed within 6 years. This program covers nearly 30 % of the countrys land area. The achievements include increase of irrigated land area by about 200,000 ha. 1990 1991 The Marketing Department, which involved in domestic agricultural product marketing and processing, was closed down. Restructuring of state managed plantation companies. Under this program the management was privatized on a profit sharing basis for a five-year period. Thirteen regional plantation companies were formed. Shares of regional plantation companies were sold to private sector and plantations were leased to the private sector for 50 years. Plantation Reform Project: Investment of 100 million dollars on plantation sector was made to increase productivity and profitability of plantation sector. Seed and planting material import restrictions were relaxed. A Private extension service was initiated as a pilot project. Privatization of government seed production centers. Private insurance companies are allowed to engage in agricultural insurance. Government allocated Rs.100 million to develop seed and planting material sections. Five-year development plans were prepared for fruits, vegetables, rice, livestock and other field crop sectors. Research, production promotion and extension, supply of seeds and planting material, private sector participation in commercial agriculture, marketing and institutional reforms are identified as six thrust areas for further reforms. Government declared the year 2000 as the year of Agriculture. Various institutions were mobilized to seek ways to improve agriculture sector to enhance economic growth.
1995 1996 1997 1998 1999 1999 2000
2000
2003
Government allocated Rs 100 million to boost the domestic agriculture, Market reforms, enhancing private sector role in agriculture development, food processing, conservation of natural resources are identified as key areas of interventions The government declared a comprehensive policy framework for national agriculture. The key objectives of the policy are to increase domestic agricultural production to increase domestic agricultural production to ensure food and nutritional security of the nation. Government proposed a policy package for further development of agriculture. These included the duty waiver for milk imports, promotion of agro-processing, credit tax concessions for machineries, policies and
2006
2007
20
2009
2008
The soaring food and fertilizer prices encouraged the government to take actions to improve domestic food production and national programs are targeted to improve domestic food production and organic fertilizer production.
Subsidies
The budget 2008 extended incentives to incentives to domestic agriculture production by providing safeguards from imports. Initiated let us grow & uplift the nationlet us develop three year program to increase agricultural production. 1977 General food subsidies abolished and food subsidies were targeted only at the poor with a food stamp program. 1988 Direct intervention in poverty alleviation. A monthly cash transfer to poor households with incentives to embark on self-employment projects. 1990 Removal of fertilizer subsidy. 1997 Refinance facility of agricultural credit was withdrawn and instead credit scheme with subsidized interest was introduced. 1994 Fertilizer subsidies reintroduced. 1994 Generic wheat flour subsidy of 40% granted. 1996 Wheat flour subsidy was removed. 1997 2005 2007 Fertilizer subsidy revised and apply only to urea Fertilizer subsidy was reintroduced for paddy in 2005 and 50 kg of fertilizer are provided at a subsidized price of Rs. 350. Fertilizer subsidy was extended to other crops cultivated in low lands. being
2008
Trade and Marketing
1977 1988 1989 1990 1991 1992 1995 1996
1999 1999
Fertilizer subsidy extended to small holders (<5ac) of tea. Rs 500 million was allocated to promote production of organic fertilizers Government provides interest subsidy for cultivation loans under the new comprehensive loans scheme. The participatory financial institutes utilizes own funds and obtained the interest subsidy from the Government. Replanting, rehabilitation, factory modernization, and fertilizer subsidies have been granted to export crops such as tea, rubber, coconut, spices and beverage crops. Removed general quantitative restriction on imports and tariffication of imports. However, seasonal import restrictions did not change in order to protect domestic agriculture. Export duties on all minor agricultural commodities and marine products were abolished. The import of rice and sugar handed over to the private sector. The tariff structure, which had 19 tariff bands ranging from 10% to 500 % reduced to 13 bands. The number of tariff bands reduced to 4 bands. Export duties on tea, rubber and coconut were removed. A three-band tariff structure with 10%, 20%, 35% was introduced. Most of the agricultural products were kept under the 35% band. Quantity restrictions on agricultural imports did not change. Under the trade agreement of WTO (Uruguay Rounds), all quantitative restrictions on imports were eliminated. Paddy marketing board closed in 1996 and price support operations taken up by CWE and multipurpose cooperative societies. Forward sale contracts for Agricultural Products started to reduce risk of product marketing and to stabilize the product prices. Imports of seed and planting materials were exempted from duties.
21
2009
2000
Specific duties are introduced to import competing agricultural crops Implementation of Indo-Lanka free trade agreement. Reduction of tariff for maize and lower VAT (10%) was introduced for essential food stuff, fertilizer, agricultural and fishing equipment Fruits and Vegetable marketing boards are established to facilitate marketing activities.
2001 2004 2005 2006 2007 2008
Buffer stock for paddy introduced through the multipurpose cooperative societies Implementation of Pakistan Sri Lanka free trade agreement Agricultural Product Marketing Authority was established to ensure fair price for agricultural produce. PMB is reestablished to purchased paddy directly from farmers at a guaranteed price Tariff reduction formulas of WTO required 38% cut in tariff levels. The tariff on ICA was increased to increase revenue and save foreign exchange and domestic production. improve
Source: Annual Reports, CBSL
2.8 Research and Development Investments
Over the past three decades, Sri Lankas agriculture based economy has become increasingly dependent on the manufacturing sector, primarily on the garment industry. Although the relative importance of the agriculture has steadily declined, agricultures contribution to exports (high net foreign exchange) and employment (30%) is still very significant. Further, agriculture sector possesses extensive linkages to industrial and services sector and thus, directly and indirectly the sector performances influence each other. Agricultural research primarily financed by the government and there are about 21 public agencies involved in R&D activities related to agriculture. Agricultural R&D conducted by private sector is minimal. Some private agencies (e.g. CIC agribusiness) have started investing on R&D activities of their own or thorough collaborative work with public agencies. Total public spending as a present of agricultural output is a research investment indicator. In 1981, Sri Lanka had invested $0,66 for every $100 of agricultural output. In 2003, this has reduced to $0.36 for every $ 100 of agricultural output (Figure 6) (Stad et al. 2005). Higher operating costs and lower capital costs are notable feature of the agricultural R&D expenditure. This is particularly true for food crop agriculture where 80 percent of expenditure is on salary. Operational costs accounts for about 43% of R&D expenditure of plantation crops (Tea, rubber and coconut). The funds for R&D basically come from national government, cesses imposed on export crop proceeds and donor finding and internally generated resources. Research agencies in the plantation sector received their budget through cess funds. The overall R&D expenditure shows a declining trend (Figure 6).
22
2009
Figure 6 Research Intensity

Source: Stad et al. 2005
2.9 Trade Policy
Trade liberalization initiated in 1977 reinforced the role of tariff as the main instrument of regulating Sri Lankas trade. The tariff structure introduced in 1977 was quite trade prohibitive but it removed the most of quantitative restrictions of the pre-1977 period and import monopoly of public agencies. In 1977, all imports were placed on six-band tariff structure: i) zero percent for essential goods ii) 5 percent on most raw materials and machinery iii) 12.5-25 percent on most intermediate goods iv) 50 percent on goods neither luxury nor essential v) 100 percent on domestically produced importables vi) 500 percent on luxury consumer goods. This tariff structure had not been subjected to a major revision until 1985 but, some commodities were added to the licensing list on balance of payment considerations. In 1980, Presidential Commission Tariff and Trade (PCTT) was setup to look into the structure of tariff and to recommend changes needed for the tariff structure while preserving the governments economic and social priorities. In 1985, on recommendation of the PCTT, further substantial reforms were made to sixband tariff structure. Reduction of tariff rates in all six bands was visible with this reforms and the highest tariff were reduced from 500 percent to 250 percent. Tariff rates on agricultural inputs such as fertilizers, seedsmachinery were reduced and importation of high performance crops: potato, chili and onion are brought under special license scheme. In 1988, another major revision to the six band tariff structure was made and the number of tariff bands was reduced to four: i) 5 percent on raw material, ii) 15 percent on intermediate inputs, iii) 35 percent on industrial chemicals, v) 50 percent on finished goods. In this round of tariff reforms, no major changes were made to the tariff on agricultural imports. In 1990, overall tariff levels were further reduced by 30 percent and most of the non-tariff barriers were removed. In 1995, a three-band tariff structure (5%, 10% and 35%) was proposed and implemented in 1996. The trade policy on agricultural imports did not change and the highest level of tariff on agricultural imports was 35%. With the implementation of WTO Agreement on Agriculture, all agricultural tariff lines are bound with maximum 50%.
23
2009
The duty collection on imports shows continuous decline during the period of 1977-2008 (Figure 7). This does not indicate that narrowing down of number of tariff bands and decrease in band specific tariff rates in many instances has reduced the duty rates of imports. These tariff adjustments are also offset by other duties and levies and details of these changes are discussed in the section three. The duty rates on intermediate and capital goods show a marked reduction but the average duty rate on consumer goods remains at a higher level than the other two categories (Figure 7). Sri Lankas trade and its manufacturing sector are dominated with export oriented garment industry. A marked reduction of Sri Lankas custom duty rates was observed in 1990 for intermediate and capital goods) and in 1993 for consumer goods. By 2008, tariff rates on investment and capital goods are ranged from 5%-10% while tariff rates on majority of agricultural imports ranged from 20-35%. The quantitative restrictions have been completely eliminated except for 12 items. These 12 items have been restricted on the basis of national security, health and environmental concerns.
30 25
20
15 10
consumer goods
Intermediate goods
Investment goods
5
0
Figure 7 Average import duty collection rate: 1985-2008

Source: CBSL
2.10 Liberal Trade Policies and Agriculture Sri Lanka has pursued specific agricultural policies for two main agricultural sectors, export oriented crop sector (tea, rubber, coconut and spices) and domestic market oriented food crop sector. Sri Lanka, similar to other developing countries, had been taxed the agricultural
activities directly through tax policies and indirectly through economy-wide policies (Krueger et al. 1988). The rationale for direct polices were to protect domestic industry, improve the terms of trade, raise revenue, alter the income distribution, raise nutritional levels, etc. The higher indirect distortions on agriculture were resulted from the overvalued exchange rate and the protection provided to the manufacturing sector. Economic policies aimed for export-led industrialization as a mean of achieving rapid economic development. This policy shift followed the economic liberalization and other various policy reforms were implemented to meet international obligations. Consequently, the exchange rate regimes changed from fixed to managed float or free float and the restrictions on current account and capital accounts were substantially reduced. The economic reforms in the early 1980s laid more emphasis on fewer trade restrictions and brought down tariff levels to a large extent. 24
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
2009
The food crop sector has been provided with a fair degree of protection from imports. It is assisted with subsidized inputs (fertilizer, seeds and planting material, low interest credit, guaranteed marketing price, free irrigation water). These supportive measures to food crop sector was mainly with the dual aim of providing economic benefits to the numerous smallholders as well as boosting food self-sufficiency During 1970s, Sri Lanka had a highly protected trade regimes supported with high tariffs, non-tariff barriers (NTBs) and stringent control on exchange. The tariff structures have transformed into a simple and number of tariff bands has reduced. The changes of tariff structure, exchange regimes and relaxation of payment restrictions during the 1990s show that Sri Lanka has moved towards greater openness in their trade regimes. Sri Lanka has been maintaining relatively lower agricultural tariff regimes than other South Asian counterparts. However, when compared to ASEAN countries, the tariff structure of Sri Lanka is relatively protective. In a global comparison of import protection, Blackhurt et al. (1996) and World Bank (2004b) noted that Sri Lanka maintain protective policy for agricultural products.
Before 1996, the agricultural trade policy of Sri Lanka was characterized with various incentives to production activities and these production activities were supported with public sector incentives such as research and development, extension services, input subsidies (fertilizer, irrigation, and credit). The parastatal organizations were directly involved with imports, exports and domestic trade and the prices of agricultural importables mainly determined by domestic supply and demand conditions. In general, the tariffs imposed on imports indicate a reduction during the period of 1985-2008. The tariff rates for consumer goods show a decline during this period but it had been fluctuating between 10-25% before 1995 and 10-15% after 1995. In 2007, the averages reached a marked low level of 6.7%. The higher variability could be observed in duty collection rates of different consumer commodities and it indicates escalation of duties time to time for different commodities (Figure 8). For an example, the custom duty for rice was heavily fluctuating during this period and it is related with the excess supply (higher import tariff) or short domestic supply (lower import tariff). A consistent reduction in duty collection rates could be observed non-food consumer goods, intermediate goods and investment goods.
Figure 8 Average import duty collection rate (%): Consumer goods
25
2009
Grain Selfsufficiency
Domestic Production /Total availability
120 100 80
60 40 20 0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Rice and wheat
Rice
Figure 9 Grain Self-sufficiency levels (Domestic production)/Total Availability (Domestic production+Import

Data source: DCS
Cultivation subsidies are available for export agricultural crops. However, the subsidies provided relative to the value of total production has been very low. The rice and ICA sectors had been supported with the guaranteed price schemes (GPS) operated by government agencies. With the liberalization of the economy, the open market prices exceed the guaranteed prices and as a result government agencies, which are used to operate GPSs became redundant (CBSL 1998). The fertilizer subsidy has been an important subsidy for DAS but it was abolished in 1990 as a part of a structural adjustment policy. It was reintroduced in 1994 and in 1997, all fertilizer subsidies were abolished except for urea. The fertilizer subsidy has been operation for three major types since 2000. The relationship of trade liberalization and economic growth is widely cited and openness and trade seem to generate and sustain higher growth (Bhagwati and Srinivasan4, 1999). The process is facilitated by distortion free price signals, availability of information and technology development, resource use efficiency and undistorted exchange rate. The role of agriculture in overall economic development has been discussed widely (Timmer 1988, Johnson 1993, Mundlak 2000). It is generally accepted that trade liberalization generate overall welfare gains for economy as a whole. However, the changes in the redistribution has always biased against poor in developing countries (Meerman 1997). The World Bank (1995) claims that Sri Lankas economic policy reforms have positively contributed to the improvement of rural welfare. However, studies by Dunham and Edwards (1997) and Aberathne (1997) have provided evidences against this assertion. Trade policy had been geared to in the interest of the poor thus the changes in trade policy would have important inference for welfare of rural people. The trade liberalization process of non-agricultural sector and liberal exchange policy are expected to give an indirect incentive to the agricultural sector. This is particularly important when the benefits of the open economic policies are largely urban biased (CBSL 1998, World Bank 2009) and rural poverty is one of the foremost socio-economic problems in Sri Lanka.
Bhagwati, J and T.N. Sirinivasan (1999), Outward Orientation and Development: Are Revisions Right, Yale University Economic Growth Center Discussion Paper Np 806.
26
2009
The process of articulating trade policy in Sri Lanka is based on several objectives; reduction of poverty of agricultural households, food security, relief consumers from price hikes and government revenues. The relationship between trade liberalization and reduction in poverty is ambiguous but evidences provided above clearly show that, though there were short term negative impacts, economy was gained in terms of growth and poverty reduction. The changes in the economy, agricultural trade, self-sufficiency ration of cereals and the capacity of the non-agricultural sector to bear the food imports are summarized in the Table 13.
The trade liberalization of agriculture could have a significant impact due to the higher dependence of population on agriculture, the relatively higher share of agriculture in national output. The economic growth of Sri Lanka has exceeded the growth of population and with positive income elasticity for agricultural products the domestic demand for agricultural products would be increased. The agricultural tradability index, the ratio of total agricultural imports and exports and agricultural GDP, provides an indicator on trade related to the agriculture and it measures how vulnerable a country is to liberalization of agricultural trade (Table 13). The indicator shows an increasing trend indicating that the share agricultural trade to agricultural GDP has been increasing during the past two decades. The direction of this change can meaningfully be analyzed with the changes in agricultural imports and exports. The net agricultural export index is positive (negative) for net exporters (net importers). The changes in net agricultural export index show that Sri Lanka has moved from net exporter to net importer status (Table 13). The Food Import Capacity (FIC), which is a ratio of value of food imports to that of total non-food exports measures the capacity of non-agric exports to finance food imports (Wilson 2002). The ratio has been declining and it indicates relatively low food imports or higher non-food sector exports (Table 13). The capacity to import food has increased with the development of non-agricultural exports. The main non-food export sector of Sri Lanka, clothing and garments, depends more on imported inputs. Hence, the FIC index over estimates the food import capabilities and therefore, the capacity depends heavily on narrow and sensitive export bases.
The trade and other policy environment have increased the domestic rice production in par with the population growth. However, there are no major changes on total grain sufficiency levels when wheat also included in the total grain requirement. Sri Lanka had been used quantitative restrictions (QRs) for agricultural products on the basis of balance of payment (BOP) reasons. With the improvement of the balance of payment situation and pressure of the WTO prompted Sri Lanka to abolish these QRs. Consequently, most of these QRs have removed. The competitiveness of agricultural exports, measured by the comparative advantage index, seems to be declining for Sri Lanka (Table 14). The reduction in comparative 27
2009
advantage index5 of agricultural products indicates that Sri Lanka has constraints on maintaining or expanding traditional agricultural exports. The highest advantage remains still on traditional export such as tea.
Table 13 Agriculture and the economy
Population (000') 15842 16127 16373 16599 16825 16267 16448 16631 16850 17089 17280 17490 17702 17935 18208 18467 18732 19007 19252 19462 19668 19886 20010 20217 Population GDP Density (#/sqkm) USD bill 253 5 257 6 261 6 265 6 268 6 259 8 262 8 265 9 269 9 272 11 275 12 279 14 282 15 286 16 290 16 294 17 299 16 303 17 307 18 310 20 314 24 317 27 319 32 322 39 Agric share of GDP 27 26 24 26 23 24 23 22 21 20 20 19 22 22 21 21 20 20 19 18 17 12 11 12 GDP Grain SSR ratio Rice SSR Ratio Agric Agricultural Tradability Index FIC per capita(US $) and wheat Rice Rice Net Exports Tradability 342 72 91 0.08 0.85 0.83 356 71 89 0.05 0.66 0.67 353 74 95 0.05 0.68 0.58 371 71 90 0.00 0.75 0.65 377 66 90 -0.01 0.77 0.61 472 72 94 -0.03 0.79 0.56 474 72 92 -0.09 0.68 0.58 507 68 87 -0.13 0.66 0.45 533 69 89 -0.13 0.70 0.40 592 72 97 -0.16 0.72 0.42 645 71 100 -0.16 0.78 0.40 758 58 80 -0.12 0.81 0.39 813 63 83 -0.08 0.79 0.34 840 69 92 -0.08 0.81 0.34 825 68 90 -0.12 0.77 0.34 868 74 99 -0.16 0.86 0.31 841 72 97 -0.14 0.82 0.32 871 70 95 -0.15 0.78 0.35 947 74 98 -0.20 0.82 0.36 1030 60 89 -0.26 1.08 0.35 1197 66 98 -0.22 1.02 0.32 1355 65 99 -0.27 1.07 0.35 1617 69 96 -0.18 0.98 0.33 1931 72 97 -0.24 0.95 0.41
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note: SSR=Self sufficiency ratio=Domestic production/Import+Domestic production, Agric Net exports=Agric Exports-Agric Imports/Agric GDP, Agric. Tradability= the ratio of total agricultural imports and exports to agricultural GDP, FIC (Food Import Capacity) = Ratio of value of food imports to that of total non-food exports.
Table 14 Comparative advantage index of agricultural products

Food category Live Animals Meat and Meat Preparations Fish, Crustaceans and Mollusk Dairy Products, birds eggs, etc. Coffee, tea, cocoa, spices Cut flowers and foliages Vegetables and fruits Cereals and cereal preparations Oil seeds and oleaginous fruits Tobacco and tobacco manufactured Sugar, sugar preparations, honey Beverages 1995 0 0 2 0 23 2 2 0 1 2 0 1998 0 0 2 0 24 1 2 0 1 2 0 2001 0 0 3 0 41 1 1 0 1 2 0 0 2004 0 0 3 0 37 2 1 0 1 4 0 0 2007 0 0 3 0 35 2 1 0 1 3 0 0
0 0 Note: The value zero indicates no trade or lack of comparative advantage. Source: Estimated using data in COMTRADE
5
RCA = (Xih/Xi)/(Xwh/Xw), Where, Xih=Country is exports of product h, Xi= Total exports of country i, Xwh= worlds exports of product h, Xw= Total world exports. A value zero means negligible or no RCA at all.
28
2009
2.11 Institutional Developments Related to Agricultural Trade
The most relevant institutional development related to agriculture is the AoA of WTO. The other most important trade agreements are regional trade agreements and FTAs with India and Pakistan (Table 15). Sri Lankans economic cooperation is enhanced in South Asia through regional and bilateral trade agreements. Sri Lanka entered into South Asian Association Regional Cooperation (SAARC) in 1993 and in December 1995, South Asian Preferential Trade Agreement (SAPTA). The SARRC envisages greater economic cooperation within member countries by establishing a free trade area by the year 2010, custom union by 2015 and economic union by 2020. The bilateral free-trade agreements are established with India (2000) and Pakistan (2004). Regional economic cooperation was fostered further with intra-regional agreements; Bangkok Agreement, Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Co-operation (BIMST-EC). The intra/inter- regional agreements include some concession for agricultural products.
In 2002, Sri Lanka signed two additional free-trade framework agreements. On 25 July 2002 it signed a Trade and Investment Framework Agreement with the United States, and negotiations continue with a view to concluding a free trade agreement. On 1 August 2002, Sri Lanka signed a Free Trade Agreement with Pakistan and implemented in May 2005. Sri Lankan products received preferential treatment under the GSP schemes of Australia, Bulgaria, Canada, Hungary, Japan, Korea, the Slovak Republic, Switzerland, and the United States; Sri Lanka was removed from New Zealand's GSP scheme at the end of 1999. Sri Lanka participates in the Global System of Trade Preferences (GSTP) among developing countries and offers tariff concessions with margins of preference ranging from 50% to 3.85% on 23 tariff lines at the HS four-digit level. Sri Lanka has finalized negotiations of a draft framework agreement of a proposed FTA with Egypt. Talks on the proposed comprehensive economic partnership agreement with Singapore and the proposed FTA with Bangladesh have started (World Bank, 2004). The Indo-Lanka Free Trade Agreement (ILFTA) is widely seen as an important step because it has granted Sri Lanka greater access to the larger Indian market, except for 429 tariff lines included in the negative list. Tea and spices are subjected to QRs. Coconuts and alcoholic products are the main agricultural items in the Indian negative list. All most all agricultural items are in the Sri Lankan negative list and it represents about 50% of 1220 tariff lines in the negative list. In accordance with the ILFTA, Sri Lanka entitles for duty free access for all other tariff lines from 2003. The trade development during past decade show that Sri Lankas agricultural imports from India have grown up rapidly (92% from 1995 to 2008). Sri Lankan agricultural exports show a growth of 130% during the period of 1995 to 2008 (Table 16). Sri Lankans major agricultural exports are spices and vegetable oils. The advantages of the duty free or preferential access to Sri Lanka would be disappeared with Indias FTA agreements with the other Asian countries. The real agricultural trade interests are subjected to the Sri Lankas negative list and the protection levels for most of those products (onion, chili, lentils, potatoes, sugar, etc.) have increased. Indian economy has been growing at a higher rate and ILFTA provides wide opportunities for Sri Lanka to seek alternative avenues for new 29
2009
market windows, particularly for the niche agricultural markets in India. A summary of institutional development related to trade is presented in Table 15 and Table 16.
Table 15 Institutional Development Related to Agricultural Trade
Agreement WTO Commitments related to agriculture The majority of Sri Lankas agricultural tariff lines are bound at 50% rate. No reported trade distorting domestic support (no amber box or Blue box) while support is limited to permitted support (Green box) (poverty alleviation (Samurdhi), irrigation, fertilizer, etc.) Sri Lankas average applied tariffs rates are around 23 per cent. The market access formula requires Sri Lanka a cut of 38 per cent. Thus, there would be limited policy space for Sri Lanka to deal with import surges. However, the modalities provided in May 2008 enable Sri Lanka to identify a certain number of Sensitive Products (SPs) tariff lines. Implemented in 2000. India offered 50% preferential tariff for tea for 15 million kg/year. Rice, sugar, spices, vegetables and fruits have been the major Indian agricultural exports to Sri Lanka and concessions have not been offered for these products because of revenue concerns. Sri Lankan agricultural products such as rubber products, tea, spices, which have higher export specialization, are subject to Indias negative list. Implemented in 2005. Sri Lanka offered TRQs on rice (10,000 mt of Basmati rice, duty free (MFN rate Rs. 9/kg) ) and potatoes (1000 mt of potatoes, duty free (MFN rate 18 Rs/kg)). Pakistans offer includes TRQs on tea (10,000 mt of tea, duty free.(MFN rate 10% for bulk tea, 20% for packed tea)) and betel (1200 mt of betel leaves with 35% margin of preferences (MFN rate 150 Rs/kg)). In 2007, Sri Lankas top five exports to Pakistan include natural rubber, tea, copra, coconuts and vegetable products. SAFTA came into force in July 2006. Sri Lanka offered 85 agricultural tariff lines (HS 1-24) for concessions. India accounts for over 90 percent of intra-SAARC trade.
India Sri Lanka Free Trade Agreement
Pakistan Sri Lanka Free Trade Agreement
South Asian Free Trade Agreement (SAFTA) Source: Department of Commerce, Sri Lanka
Table 16 Status of Trade Liberalization 1977-2008

1977 Exchange Rate Agricultural Import Restrictions QRs on Imports Import restrictions (Trade Reasons Licensing State Import Monopolies for agricultural products Average Custom Duty Rate: Agriculture Uses Anti-dumping for Agricultural Products Agricultural Exports Some Export QRs Some Export Taxes Some Direct Export Subsidies Percent Agric. Tariff Lines Bound at WTO Managed float Yes Yes Yes Yes Yes 35%+QR No No Yes No N/A 1998 Managed Float Yes Yes(minor) Yes(minor) Yes(minor) No 24.2 No No No No 100 2008 Free float No Yes(minor) Yes(minor) Yes (minor) No 23.1 No No No No
100 Average of Bound Rate N/A 50 50 Trade(Import+Export)/GDP % 77 77 54 Note: QR=Quantitative Restrictions, Source: World Bank (2004), World Development Indicators (2001), TPR (2000), CBSL
Table 17 India- Sri Lanka Trade Structure (US$ Millions)

Imports/Exports Indias Exports Sri Lankas Exports
30
2009
1990 Imports and Exports from India Agricultural Products 10(8) Non-agricultural 127(92) Products Total 137 Source: Compiled From COMTRADE
1995 93(18) 405(82) 498
2004 158(15) 1144(85) 1302
2008 179 (6) 2656 (94) 2835
1990 5(19) 21(81) 26
1995 10(28) 24(72) 34
2004 22(43) 363 (57) 385
2008 23 (5) 420 (95) 443
2.12 Performance of Export Agricultural Sector
The trade policy environment for agricultural exports is more favorable as restrictive policies, such as export restrictions or control by STEs, etc., have not been imposed during the post reform period. Further, other than the low level of cultivation subsides, exports are not supported with incentives, such as export subsidies, transport and marketing subsidies, etc. Some restrictions are imposed on imports of tea and spices which meant for re-exports to ensure quality of local exports. The promotion of agricultural exports through prudent macroeconomic management and liberal exchange rate policy is the main benefit of structural adjustment programmes related to agriculture. Export duties on all agricultural exports were abolished in 1988 for minor agricultural exports and in 1992 for major agric. exports. Consequently, the share of export taxes, which was as high as 25.2 per cent in the early 1980s, declined to 0.05 percent in 1992 (PTC 1994). There are no quantitative restrictions on agricultural exports, except licensing requirements on limited items on the grounds of environmental, genetic and consideration on endemic plant preservation. Sri Lankas Export Development Board promotes non-traditional agricultural exports with subsidies of 3% of the fob value during the first year of operations. They are also eligible for income tax exemption and custom duty waiver on intermediate goods imports. A variety of subsidies is available for value added agricultural exports. Similar export promotional supports are available for exporters of fresh fruits and vegetables. However, total value of these subsidies amounted to less than 1% percent of total export value (Athukorala and Kelegama 1996). Production subsidies are available to encourage domestic production of export agricultural crops. However, the subsidies provided relative to the value of total production has been very low. Sri Lankas agricultural exports were almost entirely commodities with tea, rubber and coconut making up over 90% of the total agricultural exports. Tea is the prominent crop and in 2007, 311.8 million kg of tea, more than 95 % of the total tea production was exported, earning US $ 12,952 million in foreign exchange. The second major commercial crop is rubber. A sizable proportion of rubber production is used in the domestic manufacturing sector (44 % in 2007) and the remainder is exported (51.6 000mt). In 2007, export earnings amounted to US $ 108.9 million. The performance of the rubber sector has been subject to instability due to unfavorable movements in world prices. Competition from synthetic rubber producers has caused rubber prices to drop. However, with rising petroleum price (the major ingredient for synthetic rubber) there is 31
2009
a chance for world rubber prices to improve. The third commercial crop, coconut is grown mainly in the hinterland of the western seaboard. Production in 2007 accounted for 2,869 million nuts. Nearly 45 % of the output is consumed locally. The reminder is exported in the form of kernel products (desiccated coconut, coconut oil, and copra), coconut cream and coconut milk powder (1,660 mn. nuts). In the 2007, kernel products generated us $ 141 million in foreign exchange (CBSL, 2008). In addition to the plantation crops, other agricultural products such as paper, cinnamon, cardamom, nutmeg, and clove are the major exports, making nearly 15 percent of the total agricultural exports (Central Bank, 2008). Since 1977, value and volume of the total agricultural export show an increasing trend (Figure 10).
Figure 10 Trend in agricultural exports

Note: Index 1977 =100, Source: CBSL
2.13 Sub-sectoral performances 1985-2008

2.13.1 Export Agricultural Crops
The two government sector Corporations (JEDB and SLPC), which managed the plantations since the nationalization for nearly two decades with huge losses and greater burden to the public coffers, were once more partially privatized between 1995 and 1997. The ownership was transferred to 20 Regional Plantation Companies (RPCs) on the basis of a 53 year-lease. Within the tea small-holding sector, a clear improvement in productivity and profitability fronts was observed. Tea, Rubber, sugar, cashew and palmyrah sub-sectors operate research centers (e.g. TRI, RRI, and SRI) and other development oriented institutions. As the highest foreign exchange earner, plantation industry was the leading industry until about the mid eighties when it was overtaken by foreign employment, garments and tourism, but it still plays a significant role by contributing to net foreign exchange. The total land extent utilized in the plantation sector is about 750,000 hectares. The direct and indirect employment generated through the sector is about 1.5 million (MPI, 2006).
32
2009
a)
Tea
The area under tea has decreased from 231,000 ha in 1985 to 188,000 ha in 1996 and then it has increased to 222,000 ha in 2008. Tea production shows an increase (48%) during the period of 1985 to 2008 (Figure 11). The production increase is mainly attributed to the productivity improvement due to proper management of estates and improved tea cultivars (Figure 12). The increase of world market prices of tea (143%) and improvement of exports (54%) have contributed to higher income from the tea sector (Figure 12 and Figure 13). In order comply with modern food safety management principle; tea factory modernization programs are being given high priority towards achieving HACCP certification.
Average Prices and Cost of Production
2.00 1.50
Rs/kg
Tea: Area Production and Productivity

350 300 250 200 150 100 50 0
350.00
300.00
Axis Title
250.00 200.00 150.00 100.00 50.00 0.00

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Tea AvePrice Tea COC
1.00 0.50 0.00
Production 000' mt
Figure 12 Trends in Area, Production and Productivity

Note: Prices are average auction prices Source: CBSL
1985
1400 1200
Value/Volume
1987
Tea: Volume and Value of exports
1989
1991
1993
Extent 000' ha
1995
1997
1999
2001
2003
Productivity mt/ha
2005
2007
Figure 11 Trends in Tea Prices and Cost of Production

Source: CBSL
1000
800 600 Volume (million kg) Value (US$ million)
400
200 0
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Figure 13 Tea: Volume and value of exports

Note: Prices are average auction prices Source: CBSL, Annual Report, 2008.
b)
Rubber
The area under rubber had declined 55 percent during the period of 1985 (204,000 ha) to 2008 (122,000 ha) (Figure 14). Rubber cultivation is mainly concentrated in Sabaragamuwa and Western Provinces and dominated by smallholders (64% of lands). The rubber production has
33
2009
decreased from 137,500 mt in 1985 to 86,000 mt 2001 and then it has increased by 50 per cent during the period of 2001 to 2008 to 129,000 mt (Figure 14). The decline in production was mainly due to the poor crop management under state ownership after the nationalization of rubber plantations ( in 1970). Use of improved clones, fertilizer application during and production techniques helped in improving the land productivity. The use of rubber by domestic industries as a raw material increased gradually and about 56 percent of the total production is now being used locally and the domestic value addition is being supported by relatively higher tariff level for rubber products. The exports earnings from non-value added forms show steady increase after the year 2000 due to steady increase of world market prices (Figure 15 and Figure 16).
Rubber: Area, Production and Productivity
250 1.20 1.00
Rubber: Average Prices and Cost of Production

300.00 250.00
Area (000 ha) and Production (000' mt)
200
Rs/kg
150 100 50
0
0.80
0.60 0.40
200.00
150.00 100.00 50.00 0.00

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Rubber AvePrice Rubber COP
0.20
0.00
Production 000' mt
Figure 15 Rubber: Area, Production and Productivity

Source: CBSL
1985
1987
Rubber Exports and Revenue

140 120 100 80 60 40 20 0
1989
1991
1993
Extent 000' ha
1995
1997
1999
2001
2003
Productivity mt/ha
2005
2007
Figure 14 Trends in Cost of Production (COP) and Average Auction Price

Source: CBSL.
Quantity/Revenue
Figure 16 Export Quantity and Revenue

Note: Exports in the form of sheet, crepe and other forms only Source: CBSL
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
Total (million kg) Revenue (UD$ million)
c)
Coconut
Coconut plays very important role in the rural economy of Sri Lanka and about 2/3 of production is consumed locally. Coconut is grown in most home gardens and commercial cultivations are concentrated in the coconut triangle comprising the districts of Kurunegala, Puttalam and Gampaha. The area under coconut has declined due to urbanization. The productivity of land has increased from 4,800 in 1980 to 7,300 nuts per ha in 2008 (Figure 18). Coconutdairy and coconut-fruits (pineapple) are common 34
2009
farming systems in the coconut triangle. Copra, coconut oil, desiccated coconut, poonac, fiber, activated carbon, coir, coir dust, brushes, ekel are the major commercial products obtained from coconuts. Kernel Products (oil, copra, desiccated coconut, fiber products, shell products, fiber finished products are the main exports generated from coconut industry. Non kernel based industries have shown a rapid growth in the recent past surpassing the export earnings from kernel products in the recent years (Figure 17 and Figure 19). The value of the coconut industry in Sri Lanka is approximately Rs. 70 billion. The value of domestic consumption of fresh nuts, coconut oil and coir fiber products is approximately Rs. 51 billion while export earnings is Rs. 19 billion in 2008 (Figure 19) (CBSL). The strengthening of integration with the international markets has lead to improvement in the value addition of the products in line with the international standards (e.g. EU Food Standards) and other WTO-based sanitary and phyto-sanitary measures. It will inevitably strengthen the possibilities for integrating with the international markets while offering niche, natural, health and organic products from the coconut industry.
Coconut: Area Production and Productivity

Area (ha)bbProduction (000 nuts)
Average price and Cost of Production

8.00
25.00 20.00
3500 3000 2500 2000 1500 1000 500 0

1985
1987 1989 1991 1993 1995
6.00
Rs/nut
4.00 2.00
0.00
1997 1999 2001 2003 2005 2007
15.00
10.00 5.00 0.00
Production (000'nuts) Productivity (000' nuts/ha)
Area (000' ha)
Figure 18 Coconut Area, Production and

Source: CBSL
Figure 17 Trends in Coconut Production,

(COP) and Average Auction Price Cost of
Source: CBSL
Production Productivity
Value of exports of coconut products: 1985-2008

180 160 140 120 100 80 60 40 20 0
US $ million
copra
coconut oil
Desiccated Coconut
Other
Total
Figure 19 Value of exports of coconut products

Source: SEPC, DOA.
35
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Coconut AvePrice Coconut COP
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
d)
Other Agricultural Exports
The other agricultural exports mainly include spices (cinnamon, pepper, cloves, and nutmeg) and beverages (coffee, cocoa), cashew, fruits (mainly pineapples), vegetables and others. Over the past two decades, total export volume from this sub sector shows a steady increase (Figure 20). A positive growth of exports can be observed for cinnamon (66%), pepper (317%), cloves (429%), nutmeg (352%), betal leaves (63%), tobacco (165%) and others (170%) during the period of 1985-89 and 2004-2008 (Table 18). During the same periods, a negative growth in export volume is shown in cardamom, sesame (oil and seeds), cocoa and cashew nuts. The world market prices of all these commodities have gone up, except for pepper, cloves and cocoa. Pepper and cinnamon mainly contributes the growth of exports of spices and these two products represent about 30% of export earnings from this sub sector. In 2008, this sub sector has contributed US $ 275 million of foreign exchange. When compared to the average earnings of the period 1985-89, it shows a growth of 239% during 2004-2008. These observations indicate that the positive supply responses to the changes in the prices of the world market. Most of these products are exported in bulk form without adding much value.
Limited quantities of vegetables are being exported and it has been fluctuating during the past two decades. Gherkin, leek, tomatoes, capsicum are the main vegetables exports in 2008. The value of vegetables exported in 2008 amounted to Rs. 996 millions. When compared to total volume, this is about 1% of the total production. Export Development Board of Sri Lanka believes that if Sri Lanka could maintain quality standards the potential for vegetables exports is very high. Quality, quantity available, seasonal supply and high transport cost are identified as the main constraints to increase fruits and vegetables exports.
Exports of other agricultural crops

120000 100000 300 250
Volume (mt)
80000 60000
40000 20000
200 150
100 50
0
198519871989199119931995199719992001200320052007
Volume (mt)
Value (US$ millions)
Figure 20 Exports of other agricultural crops
36
2009
Table 18 Volume and Value of Exports of Other Agricultural Products

Vegetables Fruits Volume (mt) 1985-1989 1990-1994 19951998 1999-2003 2004-2008 4136 11892 7418 9159 13830 2284 4435 6288 6770 11306 395 0.60 0.44 0.63 0.75 0.84 38 Arecanut 1011 1381 3559 1253 1485 47 0.59 1.07 0.79 0.79 0.91 54 Coffee 2953 2187 1178 221 96 -97 2.01 0.95 1.51 2.88 3.98 98 Pepper 1754 3393 3683 5285 7313 317 3.75 1.61 3.41 3.12 2.60 -31 Cinnamon Cloves 7397 8487 9998 10579 12300 66 2.43 4.01 4.16 4.31 5.28 118 818 1196 1728 2572 4330 429 4.15 3.60 1.07 4.39 3.94 -5 Nutmeg and Mace 377 604 875 1418 1703 352 3.05 1.35 1.68 3.68 4.09 34 S esame Cardamom S eeds 192 25 12 7 7 -96 7.20 7.96 12.78 16.37 15.36 113 3516 1778 441 204 1289 -63 0.46 0.36 0.44 0.32 0.86 89 Other Oil Betal S eeds Leaves 953 74 159 13 107 -89 0.87 3.02 0.50 0.95 2.42 179 2032 2508 1860 1869 3313 63 1.11 0.79 0.57 1.04 1.17 6 Cocoa Product 567 65 119 58 62 -89 1.73 1.19 0.89 1.09 0.90 -48 Unmanufa ctured Essentai Tobbacco oil 566 2887 2673 1871 1500 165 2.62 8.31 14.87 19.86 25.29 867 1436 689 294 305 298 -79 3.28 5.68 15.15 14.96 19.57 496 Cashew nuts 853 1044 426 108 170 -80 5.83 5.56 5.67 6.64 7.08 21 Other 12609 24077 25059 17249 34043 170 0.45 0.70 1.38 1.29 0.81 81
% Change 234 Unit Value (US $/kg) 1985-1989 0.78 1990-1994 0.65 19951998 0.68 1999-2003 0.69 2004-2008 0.92 % Change 19
Note: % change is calculated with respect to 1st and last periods mentioned in the table Source: Sri Lanka Customs
2. 13. 2 Incentives for Export Agricultural Sector
All three major export oriented crop sector show reduction in area due to population pressure. The output has increased mainly due to the improvement in productivity. The changes in production/productivity are associated with the R&D efforts and the incentives provided by the higher world market prices. The evolution of the productivity and production after a period of decline mirrors the impact of structural changes. Thus, the trade policy changes in the export agricultural sector, technological development and other economy wide changes have positively contributed to improve the performance of the export agricultural sector. However, the distributional impact effects of these positive developments could not be seen in the estate sector and small holder sector, where poverty, inequality and malnutrition are high. The price changes in the world market have provided an incentive for the increase in production and productivity (Figure 21). Nevertheless, the real price received by producers have not changed much and it has decreased in many instances, except for rubber after 2001(Figure 22). It indicates the need of prudent macroeconomic policies to sustain the incentives to export agriculture. Tea, kernel products of coconuts, spices and beverage products, and other food exports are required to satisfy the quality requirement imposed by importing countries. According to the SPS quality requirement, the most stringent ones for Sri Lankan food exports are the presence of mould, moisture content and aflatoxin. However, poor weather conditions experienced by many processors with low cost processing technology, poor storage facilities, small scale nature of production and immature harvesting could lead to inferior quality in final products. This situation leads to a direct loss of potential 37
2009
export volume due to non-compliance of SPS requirements. In case of spices, the estimated loss is about 5,500 mt during 1990-2000, which is 34% of the total exports of spices and beverages during the same period (Herath, 2001). Tea and coconut sector has been provided with incentives for factory modernization and other facilities to compliance the SPS requirements. However, the other food export sector has been deprived of such incentives as well as research and extension investments. The reasons for not channeling the market signals along the marketing channels are many. There is a notable gap of the knowledge among different partners of the marketing channel. Investments in R&D, promotion of suitable agribusiness institutional setups to trickle down the benefits of higher market prices to producers, development of suitable mechanisms to protect small producers during undue world market price fluctuations, educational and awareness programmes on quality product development and international standards, promotion of central processing facilities to ensure quality, development of quality related brand images, etc. are required for the overall development of the sector. The changes in international trade environment have provided incentives for export agricultural sector and the main constraints that prevent reaping the benefits remain within the export agricultural sector and macroeconomic governance. A concerted effort is need to identify the market failures and support measures have to be provided overcome those constraints.
Prices of major exports

3.00 2.50
US$/kg
0.25 0.20 0.15

0.10
Coconut US$/Nut
2.00 1.50 1.00 0.50 0.00
0.05 0.00
Tea
Rubber
Coconut
Figure 21 Prices of major exports
38
2009
Real prices of major exports

250
Index 1985=100
200 150
100 50 0
Figure 22 Real prices of major exports
3 Import Competing Agricultural (ICA) Sector

3.1 Performance of ICA
The changes in economic policies in 1977s did not change the protectionist policies related to the ICA. The average tariff rates applied were quite high and relatively higher tariff rates were applied for agricultural goods trade. A significant agricultural liberalization was not envisaged due to the important socio-economic position of the agricultural sector. However, the WTO agreement related to agriculture paved way to make efforts for liberalization in agricultural trade. Although the reforms of 1977 eliminated quantitative restrictions, rice and other import competing agricultural (ICA) products had been protected by state monopoly, using STEs. In 1996, Sri Lankan government started an extensive program of agricultural trade liberalization under the WTOs Uruguay Round Agreement on Agriculture (AoA). It was expected that the trade liberalization under the AoA may not jeopardize the domestic agriculture and set a lower bound rate of tariff than that of other developing countries in the region. In the Sri Lankan context, welfare gain and environmental benefits have predicted upon agricultural trade liberalization ((Athukorala and Kelegama 1996, Somarathne 2000). One accusation on the opening of the economy in 1977 and 1996 was the marginalization of protected agricultural producers. A sharp reduction of many OFCs was observed just after trade liberalization. The part of this reduction is also attributed to the removal of distortions (import licenses) introduced to the trade. The rice and ICA sectors had been supported with the guaranteed price schemes (GPS) operated by government agencies. With the liberalization of the economy, the open market prices exceed the guaranteed prices and as a result government agencies, which are used to operate GPSs became redundant. The political economy of liberal Sri Lankan trade policy worked towards protecting commodities that the Sri Lanka had been trying to achieve self-sufficiency; rice, chili, 39
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Tea Rubber Coconut
2009
onion, potatoes, sugar, etc. during the protective regimes (pre 1996 period). The ICA sector shows decline of protection rates between 1994 and 1999. Until 1994, government maintained stringent import licensing system for ICA and import monopoly was mostly confined to STEs. The policy was relaxed in 1994 and seasonal imports were allowed to the private sector, subjected to import licensing. All quantitative restrictions relevant to ICA were removed in 1996 and imports were subjected to 35 percent tariff. In 2008, the agricultural tariff structure comprises of four bands with maximum tariff of 28%, 15%, 6%, and 0% (except tobacco and alcohols). The weighted mean tariff rate of tariff lines show that the average tariff has gone down by 14% reduction during the period of 1990 to 1999. A summary of these changes in import tariff structure is presented in Table 19, Table 20 and Table 21. A comparison of applied tariff rates in South Asian countries shows that average applied rates has increased in Sri Lanka and it is mainly due to Government policy to promote domestic production in response to the higher cost of food imports.
Table 19 Applied tariffs levels on main food imports
Food Rice Wheat Wheat flour Potatoes Chilies Onions Lentils Maize Sugar Milk powder Turmeric Coriander Cumin seeds Fennel seeds 1986 25 25 35 100 5 5 5 5 60 60 60 5 5 5 1996 35 20 35 35 35 35 35 35 35 20 35 10 10 10 1996 35 20 35 35 35 35 35 35 35 20 35 10 10 10 2001 35 12 10 20Rs/kg 30% 35% 11.7% 10% 3.5 Rs/kg 10 25 5 5 5 2004 9Rs/kg 12% 12% 20Rs/kg 30 Rs/kg 8 Rs/kg 19.8% 3% 4.5 Rs/kg 12 27.5 12 12 12 2008 20Rskg 4.3% 4.3 20Rs/kg 30 Rs/kg 10 Rs/kg 7.6% 2.5% 10 Rs/kg 15 28 15 15 15 September 2009 20 Rs/kg 15% or 10 Rs/kg 15% or 10 Rs/kg 20 Rs/kg** 40 Rs/kg 25 Rs/kg 2.5 % 15% 18 Rs/kg 28% or 125 Rs/kg 28%* 15%* 15%* 15%
Note: * Cess 30 Rs/kg, ** Cess 30% or 35 Rs/kg. Source: Sri Lanka Custom, tariff notification
The value (quantity) of food imports shows gradual increase over the time (Figure 23). The expenditure on all sub components of food products; animal, vegetable (rice, pulses, wheat) and prepared food (sugar, milk, fish and meat preparations), shows an increasing trend (Figure 24 and Figure 26). A major portion (42% to 56%) of the food import expenditure has been incurred on three commodities; wheat, sugar and milk products (Figure 25). The other category mainly includes the expenditure on import of onion, chili, potato and fruits and these four products account for 47% of the cost of the other foods in 2008 (Figure 25). However, these four products account for only 6% to 9% of total import cost during the period of 1996 to 2008 (Figure 27). Onion, chili, potato and rice are the main products that have been protected through QRs (before 1996) and higher tariffs (specific duties after 2000). The major imports, such as sugar, milk, wheat had been subjected to lower tariffs during the period of 1996 to 2007. Import tariffs on these commodities were waived off in many occasions on cost of living considerations. The world market prices of these main food imports increased by 200%-300% in 2007 and similar changes were experienced in the domestic market as well. The domestic 40
2009
agricultural policies are focused more on promotion of local food production of essential commodities. Consequently, tariffs on food products were increased and substantial increase in custom duties and para tariffs could be observed in 2008 (Table 19).
Figure 23 Value of Imports: Food and Beverages

Source CBSL
Figure 24 Compositions of Agricultural Imports

Source CBSL, DCS
Figure 26 Value of Selected Imports
Figure 25 Cost share of agricultural

imports
Note: Import share defined with respect to total agricultural imports
Figure 27 Import expenditure shares of onion, potato, chili and fruits
41
2009
Note: The import expenditure share defined with respect to total agricultural imports Source: CBSL
The fertilizer subsidy has been an important incentive for local food production but it was abolished in 1990 as a part of a structural adjustment policy. It was reintroduced in 1994 with subsidy rates 40% for Urea, 15 % for ammonium sulphate, 9% for nitrate of potash and 22% for triple super phosphates. In 1997, all fertilizer subsidies were abolished except for urea. The fertilizer subsidy was reintroduced in 2006 and it was the major subsidy introduced for paddy farmers. The cost of the subsidy has increased substantially due to the increase of fertilizer prices in 2007 However, the total allocation is less than 1 % of the agricultural output (CBSL, 2008).
Table 20 Non-Tariff Barriers

Sri Lanka 1980s 1990s The removal of quantitative restrictions started in 1977 but agricultural commodities are subjected to the seasonal QRs while parastatal import monopolies involved in agricultural imports. The private sector was allowed to import seasonally restricted agricultural commodities under an import licensing system. About 3% of product lines are subjected to QRs. These QRs applied to Sri Lanka's principal import substitution food crops: rice, potatoes, chilies, and onions. Sri Lanka had justified its QRs at the WTO under the GATT Article XVII1:B. In 1997 this justification was challenged at the WTO. In 1998, Sri Lanka removed import licensing of these products. But high protection for the import substitution crops has continued with the use o f seasonally varying tariffs and specific duties. By 1998 only 3.7% of its tariff lines were still subject to traditional QRs. Import licensing imposed on rice and maize in order to safe guard the local producers from undue world market fluctuations and encourage domestic grain production to improve the food security levels. The Maximum retail price of rice was imposed to protect consumers. Source: World Bank (2004), Panagariya (1999), CBSL. 2000s
Table 21 Use of Para-tariffs

Year Para Tariff
1996 National defense levy (since 1996) 1981 Cess to fund the Export Development Board (Since 1981) 2001 Surcharge on Custom duties (Since 2001) 2002 Ports and Airport Levy (Since 2002) 2008 Cess on imported fruits and vegetables (2008) Source World Bank,2004, Tariff Guides, Sri Lanka Customs
Table 22 A Comparison of Most Favored Tariffs (MFN) in South Asian Economies

Country Sector Average MFN Tariff 1997-98 27.6 9.3 30.25 27.79 35.5 36.1 47.2 40.8 Average MFN Tariff 2002-03 21.5 7.2 22.56 18.02 40.7 32.5 19.6 16.9 Average MFN tariff 2007 23.0 9.1 16.9 14.2 34.4 11.5 15.8 13.8
Sri Lanka Bangladesh India Pakistan
Agriculture Non-Agriculture Agriculture Non-Agriculture Agriculture Non-Agriculture Agriculture Non-Agriculture
42
2009
Source: World Bank 2004, Data base of WTO ( www.wto.org), 2009. Note: Simple average MFN applied
Green revolution, investments on irrigation and land developments, and research and development substantially increased the rice production in the country. The protection was provided to import competing agricultural crops by means of tariff and quantitative restrictions and state owned import monopolies. The monthly producer prices of ICA show higher correlation with the CIF prices, except potato. .
3.2 Sub Sectoral Performances of ICA
a) Paddy: Domestic paddy production (imports) show an increasing (decreasing) trend during past two decades and the highest production level was achieved in 2008, 3.58 million mt. Blessing of the weather, higher producer price and fertilizer subsidy are the prime reasons for the increase in land area/production. Further, development of irrigation facilities, new varieties, usage of quality seeds, application of organic fertilizers are also contributed to the long-term improvement of production/productivity. In 1994, Sri Lanka achieved near self sufficiency in rice and higher level of production achievement could be seen after the year 2000. The climatic condition is the prime factor behind the variation in domestic supply of rice. The changes in trade policy are associated with the domestic production levels and the anticipated shortage in supply (Table 22). The duty structure for rice makes imported rice more expensive than the locally produce rice and therefore, the government had to adjust import tariff to promote off-seasonal imports. During the period of 1985 to 1994, the government virtually had the monopoly rights on import of rice through parastatal organizations (CWE). In 1994, private sector was allowed to import a quota at a competitive price vis a vis public agencies. With the liberalization of agricultural trade in 1996, the government entrusted private sector in supply of excess rice demand. The process of articulating the trade policies related to rice is based on a consultative meeting with the different public and private sector participants. These meetings are usually represented by officials of the Ministries and Departments related to Agriculture, Agrarian Services, Food Commissioner, Co-operatives, Trade and Commerce, Paddy Marketing Board, millers, wholesale, traders etc. The decisions on amount of imports were mainly taken based on the estimated domestic supply. The trade policy decisions were based mainly on the domestic availability of rice/paddy, world market price, domestic cost of production and expected domestic price levels. The imported quantities are associated with the level of domestic supply and the declining importing trend indicates the higher self-sufficiency levels (Figure 28 and Figure 29).
43
2009
Local Paddy Production (mt)

4000 3500 3000 2500 2000 1500 1000 500 0
400000 300000
mt
000' mt
200000
100000 0
1985 1994 2006
1988 1991 1997 2000 2003
Imports (mt)
(a) (b) Figure 28 Domestic paddy production (a) and imports (b)
120.00 100.00 80.00
SSR
60.00
40.00 Figure 29 Rice Self sufficiency ratio (SSR) 1985-2008: 20.00 Note: SSR=Domestic production/ Imports + domestic production 0.00
Paddy cultivation is a way of life in many parts of the island. Paddy accounts for about 40 % of annual area cultivated for all crops (0.7-0.9 million ha per year). During the period of 1985 to 2008, the average yield of paddy has increased by 6% and 7% respectively in the major (maha) and minor(yala) seasons. The nominal cost of production of per acre of paddy has increased by 130-200% from 1985 to 2008 while the real cost of production has increased by 17%. The nominal farm gate prices show an increase of 7% but the real prices show a declining trend except during 2007 and 2008 (Table 22). The gross income from paddy shows 17- 20% increase in nominal terms but in real terms it has decreased by 19-22% (Table 22). The real returns for paddy cultivation show a marked decline during mid 1990s and early 2000 and this has improved substantially due to large increase of rice prices and the fertilizer subsidy.
Table 23 Real Return on Crop production (1985=100)
Crop paddy Paddy: Major Irrigation (Polonnaruwa) Paddy: Minor Irrigation (Kurunegala) Paddy: Rain fed (Kandy) Source: Calculated using data in COC, DOA. 1985 100 100 100 1990 241 125 104 1995 44 50 42 2000 8 6 17 2005 161 71 0 2008 631 153 148
The rice value chain provides wide range of activities that Sri Lanka can optimally be utilized. The annual rice production is about 3.3 million mt and the milling ratio is 68% 44
2009
and the total amount of rice by products available is 1 million mt per year. About 50% of this amount is concentrated in five districts and the commercially available amount is about 500,000 mt. At present paddy husk is being utilized as fuel for broiler and dryers. Rice brand is supplied for animal feed to feed processors or wholesale and retail collectors. But the millers hardly utilize the proper technologies for stabilization of rice brand or invest more on value added products such as brand oil, furfural etc. These opportunities for trade development in the rice sector of Sri Lanka are highlighted in the annexure (Table A1).
A few government sponsored credit programs have been carried out to take small farmers out of vicious cycle of poverty and related unfavorable development with paddy traders. The ASC provides inputs on credit at concessionary interest rates through Farmers Bank but the ASCs have no capacities to serve all small farmers in respective regions (covers about 1% of the farmer population). The informal sector satisfies the major requirements of credit of rice sector and the informal sector comprises of rural money lenders, traders, mill owners, paddy collectors, friends and relatives. The credit provides in cash or in kind. The interest rate charged by rural money lenders is high as 36% to 120% per annum. Easy accessibility, flexible terms, quick and trust based transaction have made this system popular among farmers despite higher interest rate. The evolvement of quality related brand names of the rice market indicates that the entrepreneurs have positively responded to quality conscious consumers. These changes indicate that marketing system efficiently transfer marketing signals from consumers to producers and vice versa. The net benefit of these changes may have improved the overall welfare of the consumers and producers. The large scale millers with considerable storage capacity reap the benefit of low paddy prices of harvesting period and the higher off-seasonal prices during the lean period. The stability of marketing margins shows that margins are stable throughout the year and thus, paddy market is efficient even at the absence of major government intervention or supporting structures (Figure 30). Inter-market price spreads exists due to erratic supply increases due to the changes in trade policy which risks in inter-market arbitrage and dissemination of information on prices.
2004-08 1999-03 1994-98 1989-93
1984-88
2004-08 1999-03
Farmgate Wholesale Retail
1994-98 1989-93
1984-88
Farmgate Wholesale Retail
0%
20%
40%
60%
80%
100%
0%
20%
40%
60%
80%
100%
(a) Raw rice (b) Steam cured rice Figure 30 Spread of margins: Paddy (farm-gate) and rice (wholesale and retail)
45
2009
The trade policy on rice effectively protects the domestic producers from world market prices. The domestic market prices are largely determined by the domestic supply and demand and thus, little influence from the world market prices. The NPCs are therefore not comparable but it indicates the insulation provided by domestic trade policies. The low NPC s observed during late 1980s to early 1990s were mainly due to low producers prices. The lower NPCs after 2001 were mainly due to higher world market prices (Figure 31). The seasonality of production and associated price changes are quite distinctive in the domestic rice market. However, poor farmers usually deprived of getting the benefits of seasonal price hikes due to their socio-economic status. Despite three decades of liberal economic policies, many aspects related to rice sector are still lagging behind. Development of rice market, improvements in rural finance and institutional arrangement to improve farmers bargaining position and increase of farm level value addition by farmer groups and effective utilization of byproducts of rice are essential needs for the development of the rice sub sector.
World market prices of rice

900 800 700 600 500 400 300 200 100 0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Thai 2nd Grade 100%a

Thai A1 Superb
US$/mt
U.S rice Long Grain No. 2, 4%
Figure 31 World market prices of rice 1985-2008 Table 24 Tariff changes- rice
Year Period Statutory duty Duty Waiver 0 0 35 0 35 0 0 25 0 0 0 35 50% 0 0 0 0 0 9 Rs/kg 0 Effective Import duty 55 35 0 35 0 0 0 10 35 35 35 0 17.5 TT/GST/VA T Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex DL/NS L 4.5 4.5 4.5 4.5 4.5 4.5 4.5 5.5 5.5 5.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
1995 1996 1997 1998 1999 2000 2001
Jan 1 1995-Feb 7 1995 Feb 8 1995 April 14 1996 Apr 15 1996-Jan 30 1997 Jan 31 1997- Nov 20 1997 Nov 21 1997 Jan 31 1998 Feb 01 1998 Nov 05 1998 Nov 06 1998 Oct 23 1999 Oct 24 1999 - Dec 31 1999 Jan 01 2000 May 10 2000 May 11 2000 Jul 16 2000 Jul 17 2000 - 22 Nov 2001 22 Nov -10th Dec 2001 10 Dec -31 Dec 2001 21 Jan 2002 6 Nov 2002 6th Nov 2002 5 March 2003 5th March 2002 19 Aug 2003 19 Aug 2003 22 September 2004 5 Oct 2004 05 October 2004 -15 Jan 2005 15 January 2005-31 January 2006
35 or Rs 7/kg 35 35 35 35 35 35 35 35 35 35*(L) 35**(IQ) 35 Rs 7/kg Rs 5/kg Rs 7kg Rs 9/kg 9 Rs 9Rs/kg 9 Rs/kg
2002 2003
2004 2005 2006
46
2009
2008
31 January 2006- January 2008 January 2008-
20 Rs/kg
20 Rs/kg
Ex Ex
6.5 6.5
Source: Sri Lanka Customs, Note: *(L)= Import licensing, ** (IQ)=Import quota of 60,000 duty free,
NSL= National Security Levy

Rice: Nominal Protection Coefficient
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 32 Changes in Protection level of rice
NPC
b) Other Field Crops (OFCs)
The other field crop sector comprises of maize, millet, manioc, green gram, cowpea, chili, onions, potatoes, groundnut, soybean and gingerly. The promotion of OFCs was initiated in the mid 1960s with the introduction of the governments Food Production Drive programmes. Local production of these crops was encouraged during the period 1970-1977 through protective policies. The ban on imports of these commodities in 1971 resulted in short supply and unprecedented price increases. Farmers responded by increasing the area cultivated with these crops. The production of most such crops doubled as a result. Even after the economic liberalization of the country in 1977, some of these commodities (potato, chili, onion, and pulses) were heavily protected right up until 1996. During the period 1977-1980, production in this sector declined due to direct effects caused through the economic liberalization policies introduced in 1977. The production of most OFCs reached their peak production levels in the early 1980s. More emphasis was afforded for crop diversification programmes with the reclaiming of new lands for cultivation under the major river basin development project named Mahaweli Development Project in the early 1980s. However, the efforts made by the agricultural extension staff to persuade the farmers to diversify their crops did not materialize as anticipated, as the farmers were not enthusiastic due to various constraints encountered in production and marketing (Jayawardene, 1992). Declining trends have been observed in the area planted and in the production of many OFCs since the early 1990s (Figure 33, Figure 34 and Figure 35). Implementation of policies focusing more attention towards rice self-sufficiency, neglecting other crops, and trade liberalization are the other factors that have had a negative effect on the production of OFCs. Inadequate availability of information on new technologies, cultivation on marginal lands under rain-fed conditions, poor crop management practices leading to low productivity, low tangible price and profitability, poor marketing facilities and agro-based industries are the other salient factors that are attributed to the decline in production of OFCs.
47
2009
The removal of non-tariff barriers in 1996, which resulted cheap imports, has discouraged local production further. The changes in international markets (world market prices) and structural changes in the economy (higher agricultural wages) and unavailability of innovations (improved varieties) have altered the structure of labor intensive OFC sector. The increase in world market prices, availability of high yielding hybrid varieties and promotion of contract grower programs by private sector processors have induced local production of maize in recent years. The production levels of chili, green gram and cowpea have been declining during the past few decades (Figure 35). The real returns of onion, potato and chili cultivation show a declining trend (Table 24). The dismal performance of this sector is attributed to higher competition from high quality imports, higher labor cost, reduction in profit margins and incidence of pest and diseases. The research and development investments on these crops also show a drastic decline during past few decades (DOA). However, average yields of OFCs show increasing trend (Figure 36).
35000 30000
60 50 40 30 20 10 0
1979 1982 1994 2006
1985 1988 1991 1997 2000 2003
25000
ha
000' ha
20000
15000 10000 5000 0
MAIZE
CHILLI
GREEN GRAM
COWPEA
BLACK GRAM
Figure 33Area Cultivated: maize

and chili Source: DCS
Figure 34 Area Cultivated: pulses

Source: DCS
18000 16000 14000 12000 10000 8000 6000 4000 2000 0
ha
POTATO
RED ONION
BIG ONION
Figure 35 Area Cultivated: potato and onions

Source: DCS
48
2009
Land Productivity
1.20 1.00
0.80
mt/ha
millet
Land productivity
18.00 16.00 14.00 12.00
mt/ha
maize
greengram
10.00 8.00 6.00 4.00 2.00 0.00

1983 1985 1991 1993 1999 2001 2007
1979 1981 1987 1989 1995 1997 2003 2005
0.60
0.40
potato small onion

big onion chilli
cowpea
black gram sesame

ground nut
0.20 0.00
1981 1983 1985 1987 1989 1991 2003 2005 2007
1979 1993 1995 1997 1999 2001
(a) Figure 36 Yield of Other Field Crops
(b)
Table 25 Real Return on Crop production (1985=100)

Crop Potato (Nuwaraeilya) Onion(Matale) Chili (Anuradhapura) Maize (Anuradhapura) Green gram (Kurunagala) 1985 100 100 100 100 100 1990 11 179 159 71 259 1995 54 64 603 0 0 2000 3 35 47 174 1126 2005 63 70 525 525 324 2007 27 9 66 1544 901
3.3 Trade Policy and Import Competing Crop Sector
The ICA sector has been subjected to ad hoc trade policy changes and these changes pose serious uncertainty in different stakeholders of the marketing channel, particularly those who involved in production, storage, import, financing and distribution functions (Table 26, Table 27 and Table 28). Ironically, the two most promising sectors, sugar and milk, had been subjected to very low tariff levels while regionally concentrated potatoes, chilies and onion have received much policy attention and protection. This indicates that strong political economic consideration has been placed on crops that are concentrated in certain regions. The trade policy has become more restrictive but the sector performances are not really encouraging due to other changes in the production environment (pests and diseases) and the economy (higher cost and wage rate). A decline in area cultivated could be observed just after trade liberalization in 1996. The higher tariff levels have been introduced to promote ICAs . However, the higher tariff levels have not effectively increased the domestic production or reduced the imports (Figure 40, Figure 43 and Figure 46). Imports of OFCs show an upward trend indicating price inelastic demand or higher income elasticity for these products. Absence of effective price stabilization mechanism for OFCs increases the price risks for producers and marketing agents. The seasonality of production and low seasonal prices reduce the benefits to producers. The seasonal pattern of NPCs indicates that higher protection levels are set during the off-seasons and restrictive or ad hoc trade policies have provided intermediaries higher chance of accruing the benefit out of higher protection levels 49
2009
generated during off-production seasons (Figure 41 and Figure 46). Through it is protective, presence of dependable of trade policy could be observed after 2001 and producers have responded positively to the price incentives. All crops show improvement in productivity and stakeholders of value chain believe that further improvement is possible without much additional costs. The depreciation of nominal exchange rate has increased direct protection but the changes in real exchange rate are not conducive for domestic production of importables (Figure 39 and Figure 44).
NPC: Big Onion
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
1987 2001 2004
1985 1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002 2003 2005 2006 2007 2008
Pd/Pb
Figure 38 NPC of big onion
Figure 37 Changes of factors influencing NPC
Figure 40 Onion production and imports NPC-Potato

4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Figure 39 Seasonal NPC-Big onions
Pd/Pb
Figure 42 NPC-Potato
Figure 41 Changes of Factors influencing NPC
50
2009
Potato: Production and Imports

200 180 160 140 120 100 80 60 40 20 0
000' mt
Imports Production
Figure 43 Potatoes- Production and Imports
Figure 45 NPC- Chili
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Figure 44 Seasonal Variation of NPC-Chili
50 45 40 35 30 25 20 15 10 5 0
1979
000'mt
Imports Production
Figure 46 Chili: Production and Imports
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
51
2009
Table 26 Tariff and para tariff on potato imports: 1985-2008

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Custom Duty (%) TT(%)/GST(%)/VAT(%) NSL(%) PAL 60 60 60 60 60 60 60 60 35 35 35 35 35 35 35 35 20 20 20 20 20 20 20 10 10 10 10 10 10 10 10 5 5 6 6 Ex Ex Ex Ex 10 10 10 5 5 5 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 3 SRL Total Tax CIF (Rs/kg) CD (Rs/kg TT/GSTVAT (Rs/kg)PAL(Rs/kg) (Rs/kg) NSL (RS/kg) SRL (Rs/kg)a 25.67 22.81 14.42 14.00 15.00 16.00 17.00 20.94 11.48 13.45 15.92 12.00 13.51 11.65 12.15 14.00 15.77 13.28 14.83 18.69 23.22 25.72 25.69 15.40 13.69 8.65 8.40 9.00 9.60 10.20 12.57 4.02 4.71 5.57 4.20 4.73 4.08 4.25 4.90 20.00 20.00 20.00 20.00 20.00 20.00 20.00 5.13 4.56 2.88 2.80 3.00 3.20 3.40 4.19 0.97 1.13 1.61 1.21 0.00 0.00 0.00 0.00 4.47 4.16 4.35 2.42 2.70 2.86 2.86 0.51 0.46 0.29 0.28 0.30 0.32 0.34 0.42 0.19 0.23 0.27 0.20 0.23 0.20 0.21 0.24 0.45 0.42 0.44 0.48 0.54 1.71 1.71 21.47 19.08 12.06 11.71 12.55 13.38 14.22 17.52 5.28 6.19 8.83 6.66 6.10 5.26 5.91 6.81 28.38 27.83 28.17 26.57 27.29 29.44 29.72 Total Tax (%) 83.64 83.64 83.64 83.64 83.64 83.64 83.64 83.64 46.03 46.03 55.49 55.49 45.17 45.17 48.61 48.61 180.00 209.53 189.92 142.11 117.50 114.43 115.69
4.5 4.5 4.5 4.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
1 1.5
1.21 0.91 1.03 0.88 1.33 1.54 2.91 2.70 2.83 3.14 3.51 3.72 3.71
0.57 0.86
* - From 2002 to 2008 Specifc Tax of 20 Rs./kg Customs duty = CIF value * effective customs duty rate TT or VAT or GST= (CIF value + Customs duty) * 1.25 * (TT/VAT/GST rate / 100) DL or NSL or PAL or SRL = (CIF value + Customs duty) * 1.25 * (DL / NSL /PAL/SRL rate / 100) Total Tax Incidence = Customs duty + TT (or GST or VAT) + DL or NSL+ PAL+ SRL+Surcharge a- 2% stamp duty is included, Total Tax=Tax/CIF Value NA - Data not Available
52
2009
Table 27 Tariff and para tariff on big onion imports: 1985Year PAL S RL 1985 1 1986 5 10 1 1987 5 10 1 1988 5 10 1 1989 5 10 1 1990 5 10 1 1991 5 10 1 1992 5 10 1 1993 5 10 1 1994 35 5 1 1995 35 5 1 1996 35 6 4.5 1 1997 35 6 4.5 1 1998 35 Ex 4.5 1 1999 35 Ex 4.5 1 2000 35 Ex 6.5 1 2001 35 Ex 6.5 1 2002 6 10 6.5 1 2003 6 10 6.5 1 2004 8 10 6.5 1 2005 10 5 6.5 1 2006 20 5 6.5 1 2007 20 5 6.5 3 1 2008 20 5 6.5 3 1.5 * - From 2002 to 2008 custom duty is in Rs./kg Customs duty = CIF value * effective customs duty rate TT or VAT or GST= (CIF value + Customs duty) * 1.25 * (TT/VAT/GST rate / 100) DL or NSL or PAL or SRL = (CIF value + Customs duty) * 1.25 * (DL / NSL /PAL/SRL rate / 100) Total Tax Incidence = Customs duty + TT (or GST or VAT) + DL or NSL+ PAL+ SRL+Surcharge a- 2% stamp duty is included NA - Data not Available TT(%)/GS T(%)/ Custom Duty(%)VAT(%) NS L(%) TT/GS T VAT CIF (Rs/kg) CD (Rs/kg (Rs/kg) 5.61 6.86 0.34 0.90 8.76 0.44 1.15 7.43 0.37 0.98 10.90 0.55 1.43 10.31 0.52 1.35 13.52 0.68 1.78 10.76 0.54 1.41 11.42 0.57 1.50 11.18 3.91 0.94 11.12 3.89 0.94 12.21 4.27 1.24 11.00 3.85 1.11 16.80 5.88 0.00 19.53 6.84 0.00 12.78 4.47 0.00 15.88 5.56 0.00 14.41 6.00 2.55 15.76 6.00 2.72 18.84 8.00 3.35 16.49 10.00 1.66 16.24 20.00 2.26 31.20 20.00 3.20 23.69 20.00 2.73 Total Tax NS L (RS /kg) PAL(Rs/kg) S RL (Rs/kg) (Rs/kg)a 0.07 0.09 1.36 0.11 1.74 0.10 1.47 0.14 2.16 0.14 2.04 0.18 2.68 0.14 2.13 0.15 2.26 0.19 5.15 0.19 5.12 0.93 0.21 6.78 0.84 0.19 6.10 1.28 0.28 7.59 1.48 0.33 8.82 1.40 0.22 6.21 1.74 0.27 7.72 1.66 0.26 10.67 1.77 0.27 10.97 2.18 0.34 14.15 2.15 0.33 14.42 2.94 0.45 26.18 4.16 1.92 0.64 30.52 3.55 1.64 0.82 29.31 Total Tax (%)a 19.83 19.83 19.83 19.83 19.83 19.83 19.83 19.83 46.03 46.03 55.49 55.49 45.17 45.17 48.61 48.61 74.07 69.64 75.10 87.44 161.19 97.81 123.73
2008
Table 28 Tariff and para tariff on chili imports: 1985-2008

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Custom Duty(%) TT(%)/GST(%)/VAT(%) PAL% NSL(%) 5 5 5 5 5 5 5 5 35 35 35 35 35 35 35 35 30 5 30 30 30 30 30 10 10 10 10 10 10 10 10 5 5 6 6 Ex Ex Ex Ex 10 10 10 5 5 5 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 3 SRL CIF (Rs/kg) CD (Rs/kg TT/GSTVATNSL (RS/kg) PAL(Rs/kg) SRL (Rs/kg) Total Tax (Rs/kg)a Tax (%)a (Rs/kg) Total 29.54 28.39 1.42 3.73 0.37 5.63 19.83 41.04 2.05 5.39 0.54 8.14 19.83 34.84 1.74 4.57 0.46 6.91 19.83 53.01 2.65 6.96 0.70 10.51 19.83 113.74 5.69 14.93 1.49 22.55 19.83 70.43 3.52 9.24 0.92 13.96 19.83 56.58 2.83 7.43 0.74 11.22 19.83 35.86 1.79 4.71 0.47 7.11 19.83 48.42 16.95 4.09 0.82 22.29 46.03 48.42 16.95 4.09 0.82 22.29 46.03 63.78 22.32 6.46 4.84 1.08 35.39 55.49 44.28 15.50 4.48 3.36 0.75 24.57 55.49 54.28 19.00 0.00 4.12 0.92 24.51 45.17 63.54 22.24 0.00 4.83 1.07 28.70 45.17 56.82 19.89 0.00 6.23 0.96 27.62 48.61 58.85 20.60 0.00 6.45 0.99 28.61 48.61 66.24 30.00 12.03 7.82 1.20 52.07 78.62 78.40 5.00 10.43 6.78 1.04 23.71 30.24 69.22 30.00 12.40 8.06 1.24 52.74 76.19 59.76 30.00 5.61 7.29 1.12 44.91 75.14 93.12 30.00 7.69 10.00 1.54 50.22 53.93 1 130.61 30.00 10.04 13.05 6.02 2.01 62.34 47.73 1.5 128.73 30.00 9.92 12.90 5.95 2.98 62.98 48.92
4.5 4.5 4.5 4.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
* - From 2003 custom duty is in Rs./kg Customs duty = CIF value * effective customs duty rate TT or VAT or GST= (CIF value + Customs duty) * 1.25 * (TT/VAT/GST rate / 100) DL or NSL or PAL or SRL = (CIF value + Customs duty) * 1.25 * (DL / NSL /PAL/SRL rate / 100) Total Tax Incidence = Customs duty + TT (or GST or VAT) + DL or NSL+ PAL+ SRL+Surcharge a- 2% stamp duty is included
53
2009
3.4 Livestock Sector
3.4.1 Performance of Livestock Sector Livestock, especially cattle, buffaloes and goats, is an integral sector of the agricultural economy of Sri Lanka. The total contribution of the livestock sector to the GDP was 1.87 percent and contribution of the dairy sector to the GDP was 0.63 percent. The livestock sector plays a vital role in the Sri Lankan economy and self sufficiency in milk has been a prime objective of agricultural development policy of Sri Lanka. The sector significantly contributes to the economic development by providing employment, food and income security to agricultural households, alleviating poverty and reducing disparity and stimulating regional growth. According to DAPH, 1.18 million neat cattle, 0.316 million buffalos, 9.56 million poultry and 0.08 million swine populations in 1998 have increased to 1.22, 0.318, 13.77 and 0.09 million respectively by 2007(Figure 47 and Figure 48).
Figure 47 Livestock Production

Source: DAPH,2007
Figure 48 Stocks of Livestock

Source: DAPH,2007
The per capita consumption of milk and meat has slightly increased since 1998 from 4.46 kg and 31.08 kg to 5.78 and 38.55 kg respectively in 2006 (Table 29). However, this change is negligible compared to South Asian developing countries. The total output of meat production has increased during the past decade. Beef production is likely to increase more slowly because of consumer preference for other meats. However, poultry and pork production has increased at an average annual growth rate of 7.3 and 6.6 per cent respectively. Mutton production has declined annually 1.9 percent over the past decade (Figure 49).
54
2009
Milk is almost exclusively produced in small holdings. The national milk production in 2007 was 202,000 mt (84 percent cow milk and 16 percent buffalo milk). The balance of 410,000 mt was imported mainly from Australia, New Zealand and EU to meet the national demand and the import bill was about Rs. 19 billion (Ministry of Livestock Development, 2007). The total milk consumption was estimated to be around 612,000 mt or 32 kg per year/person. The per capita availability is nearly 33 kg, below the recommended quantities of the Medical Research Institute (MRI). The milk consumption of Sri Lankan is less than that of many regional countries such as Pakistan, India, and Nepal where consumption is reported to be 180, 72 and 40 kg per person year, respectively.
700 600
million litres
500 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Imports (LME)** 370 311 349 330 411 394 349 356 443 410
Domestic milk production*
177 180 181 183 183 187 190 193 197 202
Figure 49 Milk production and imports 1998-2007 There is no organized system for raising cattle or buffalo for meat purposes. Beef for consumption is predominantly obtained from herds from the dry zone as well as the surplus male stock and culled dairy animals in other regions. Beef is the second largest component in livestock production, although its share in total production and consumption is declining, it still accounts for 13 percent of the total meat production (Figure 50). Pork and the mutton account only for a small share of total meat consumption while shares of pork and mutton have decreased 3 per cent and 0.17 per cent respectively from 1998 to 2006. The consumption of mutton has decreased by almost half in the last decade from 0.02 kg in 1997 to 0.01 kg in 2006. Chicken accounts for almost 80 per cent of the total meat consumed (Figure 52). The per capita consumption of chicken has increased from 2.59 kg in 1997 to 4.29 kg in 2006. Egg production, which showed a decline during 2001-2005, shows an improvement during 2006-2007 (Figure 51). Table 29 Changes in consumption of meat and milk: 1998-2006
1998 Annual per capita meat consumption (kg) Annual per capita milk consumption (kg) Total meat production (000 mt) Total milk production (000 mt) Source: DAPH,2007 4.46 31.08 75.91 177.09 2000 5.27 34.19 87.2 181.45 2002 5.51 35.99 98.96 183.19 2004 5.57 33.28 103.8 190.3 2006 5.78 38.55 112.3 202.01
55
2009
Figure 50 Meat Production 1997-2006
Figure 52 Meat Consumption
Figure 51 Egg Production
3.4.2 Trade Policy of Livestock Sector
Low levels of tariffs (10-16%) had been imposed on imported milk powder during the period of 1998 to 2008 and a marked increase in tariff could be observed in 2009 (28% or 125 Rs/kg)) (Table 30). This tariff revision has twin objectives, increase tariff revenue and promotion of emerging local milk industry. Tariffs on ingredients of animal feed industry were subjected to lower tariff rates to promote domestic value addition in poultry industry. The tariff levels of maize and grain sorghum revised upward in 2009 to make the imported maize and sorghum prices higher than the forward contract prices of domestic producers (Table 30).
56
2009
Table 30 Custom duties on animals, meat, milk and milk products and animal feed ingredients
Items Custom duty and cess Year 1998 2001 2003 2005 2008 2009 Live animals for breeding purpose free free 2% 3% 2.5% free Meat and meat products 30% 25% 25% 28% 28% 28%+ cess 30% or 200 Rs/kg Milk powder 16.7% 10% 10% 15% 15% 28% or 125 Rs/kg Processed Milk products 30% 25% 25% 28% 28% 28% Feed Ingredients -Maize 35% 10% 2% 2.5% 2.5% (L) 15% + cess 25% -Grain sorghum 35% 25% 25% 28% 28% 28%+35% cess Note: In 2008, custom duty on grated cheese and whey is 6% and in 2009, 30% or 100 Rs/kg cess was imposed on whey. Source: www.WTO.org, Tariff Guide 2009, Sri Lanka Custom
4 Macroeconomic Policy Influence on Agriculture Policies concerning industrial protection, exchange rates and interest rates and other fiscal and monetary policies can strongly influence the incentives for agriculture1). The available literature suggests that macroeconomic policies have little impact on the poorest segment of the population (Gunathilleke 2000). It becomes widely recognized that fiscal policy of government, variation in public expenditure and tax totals, which create a surplus or deficit rather than a balanced budgethas profound effects on unemployment, total production, money and real income, and the level of prices. Macroeconomic polices of liberal Sri Lanka geared to reduction in demand through fiscal and monetary policies and to induce tradable supply through trade and exchange rate policies. The shift in trade and exchange rate policies aimed at improving resource allocation and exploiting more gain from trade. The policy reforms emphasized trade and exchange rate adjustment as well as the reduction of public expenditure. Fiscal policy, government tax and expenditure policy, contributes towards the maintenance of a growing economy free from excessive inflation or deflation. Government budget deficit can be taken as an overall measure of the fiscal policy changes (Table 31). Large government budget deficit with high inflation can be considered as an indicator of rapid growth of money supply. The higher fiscal deficit at the early post-reform period was mainly attributed to the concessionary foreign loans and aid received for investments. The deficit ratios show a marked reduction after the 198690 indicating the improvement in fiscal management. However, in 1985, the volume of governments foreign debts exceeded the level of domestic debts. Therefore, budget deficit may not indicate the real situation as government has recourse to finance the deficit through domestic and foreign borrowing. The entire foreign debt was on concessionary terms and debt-service ratio, therefore, grew at slower rate than the
1
For a synthesis of available results of impact of prices and macroeconomic policies on agricultural supply see Mamingi (1997) and Gunathilleke (2000).
57
2009
expansion of the debt stock. The proportion of the government expenditure to GDP can also be considered as an indicator of fiscal performance (Table 31). The ratio is in the range of 29% to 35 % and shows a decline by the end of 1990s. High sensitivity of the wellbeing of rural households in Sri Lanka to changes in fiscal policy is widely acknowledged (Edirisinghe 1987, Shan 1987, Alailima 1997). Growth rate of money supply and real interest rate are commonly use measure of monetary policy. Money supply facilitates government to finance budget deficit but it causes the rapid inflation in the long run. Moreover, the interest rate policy of the Central Bank can influence the economic performance. Table 32 presents the average money supply growth, inflation rate, and real and nominal interest rates of Sri Lanka from 1977 to 2008. The growth of broad money supply (M2) was relatively high during the period of 1977-81. This initial period of the open economic policy was characterized with the large capital inflow in the form of foreign aid. Growth of money supply is stable after this period and the money supply has grown up at about 16% a year during the periods of 1982-86 and 1986-91. The money supply rate has marginally increased in early 1990s but has declined in late 1990s. The annual inflation rates during the period of 1977 to 2008 ranged from 8% to 20%. The initial period was characterized with high inflation and it is correspond with the fiscal and monetary indicators of that period. The subsequent periods are characterized with lower inflation rates indicating the effective use of fiscal and monetary policies. Fuel prices and food prices induced the inflation during 2006-08 periods. Nominal interest rates show a declining trend until Real interest rates for deposits are negative for most periods and slight improvement can be observed during later periods. Real lending rates have been positive and the rates have increased towards the end of 1990s. The interest rates have not fallen with declining inflation rates and as a result real rate of interest have improved. There has been a significant expansion of rural finance in Sri Lanka during past three decades. However, the outreach and penetration is still inadequate to meet substantial amount of the financial needs of the poor farmers. The agricultural producers of Sri Lanka depend on informal sources of credits and the interest rates charged by the lenders are very higher than that of formal sources (CBSL 1998, Sanderatne, 2007). The reduction in budget deficit indicates the improvement of fiscal policy. The monetary policy at the early post-reform period and last stages of the analysis are highly expansionary. This was mainly due to heavy public expenditure and these periods are characterized with double-digit inflations. The influence of inflation on agricultural tradables and agricultural non-tradables may not be equal. Increase of prices of nontradables and wage rates more than the prices of tradables would incur adverse effect on production of tradables.
Exchange rate defines the purchasing power of a currency and the international competitiveness of domestic production. Maintenance of competitive exchange rate has been a major policy objective of liberalized Sri Lanka. Policy reforms that are expected to increase tradable output require accompanying real exchange rate depreciation. Sri Lanka followed crawling band exchange rate regime from 1977 to 58
2009
2000. In 2000, Sri Lankas exchange rate regime moved to the free-floating system with limited Central Bank intervention to prevent undue fluctuations.
Table 31 Fiscal Policy Indicators
Period Budget Deficit/GDP Government Expenditure/GDP 37.5 35.5 35.9 32.9 29.1 23.8 23.1
1976-80 15.4 1981-85 13.7 1986-90 13.2 1991-95 8.1 1996-2001 7.1 2002-2006 8.2 2006-2008 7.7 Source: Calculated from annual data in CBSL
Table 32 Average Money Supply Growth, Inflation and Interest Rates (percent)
Indicators 1977-81 Money supply growth (M2) Interest rate (deposit)Nominal Interest rate (deposit)Real Interest rate (Lending)Nominal Interest rate(Lending)Real Inflation 32.0 12.8 -0.92 13.8 0.36 16.2 1982-86 16.0 11.8 -0.81 20.0 7.73 9.6 1986-91 16.6 11.4 -0.35 19.3 7.79 9.8 Period 1991-95 18.0 12.9 3.3 19.3 9.68 9.8
1996-2000 12.5 9.79 2.5 16.0 8.83 12.5
2001-2005 17.3 6.34 -0.03 11.13 0.01 9.85
20062008 15.99 9.85 -0.07 16.91 -0.01 17.89
Source: Source: Calculated from annual data in CBSL. Notes: Real interest rate = (1 i) (1 P*) 1 : where i is deposit interest rate, P* is inflation rate. M2= broad money supply include M1(coins, paper currency, other currency) plus all kinds of saving and time deposits.
The nominal exchange rates (NER) of Sri Lankan rupee depreciated against major trading currencies during the post-reform. The incentives to production and consumption are well explained by the real exchange rate2) (RER) than the nominal exchange rate (NER). The RER is defined as a deflated nominal exchange rate (RER1) or as a trade theory definition of the RER which is the relative prices of the traded goods to non-traded goods (RER2); i.e. PT/PN, where PT and PN are price indices of traded goods and non-tradaded goods respectively (RER2) (Edwards 1989, Dornbush 1991, Sadoulet and Janvry 1995).
2
There are various definitions of RER that are used agricultural economics literature. See Dornbush (1991) and Sadoulet and Janvry (1997) for details for the concepts use here.
59
2009
The RER2 is a useful measure of incentives for resource allocation and also an indicator of relative profitability of producing tradables than non-tradables. A fall in the RER index indicates an exchange rate appreciation. RER depreciation will increase the domestic price of tradable. Consequently, this relative price variation induces the resource movement towards tradable goods production. The resource shift from importables to exportables can be expected if the depreciation of exchange rate is accompanied the trade liberalization. Under such an environment, liberal trade reforms facilitate improvement of current account through export promotion. Figure 54 and Figure 55 shows the movements of NER and RER for the period of 19772008. The early post-reform period is generally characterized with appreciation (decline) of RER. The decline of RER indicates a reduction of competitiveness of domestic production of agricultural tradables. The relative prices (RER) have been increasing since 1994, indicating a gain in comparative advantage. Divergence of different between RER and NER indicate the ineffectiveness of macroeconomic policy instruments to contain the appreciation of RER. The relative depreciation of RER during 1990s and 2000s should have supported the agricultural exports.
Nominal Exchange Rates
120 100 80 60 40 20 0 3 2.5 2 1.5 1 0.5 0
Rs/Indian Rs
30.0 25.0
Annual Inflation rate
Inflation rate %
Rs/US$
20.0
15.0 10.0 5.0 0.0
Figure 54 Nominal Exchange Rate
Figure 55 Real effective exchange rate
Data Source: International financial statistics Note: Real effective exchange rate has computed using a weighted average of nominal exchange rates of 39 trading partners and competitor countries. Weights are based on the trade shares of the each country. Index 1977 = 100
2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977
US$ Indian Rs
Figure 53 Annual Inflation
Figure 56 Real Exchange Rate with respect to Indian currency (RER =NER*PIN/PSL)
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
60
2009
India became a major trade partner for Sri Lanka and in 2008 the trade share stands at 14% of Sri Lankan total imports. The movements of Indian exchange rates clearly show the appreciation of Sri Lankan currency and this could have further promoted the Indians trade with Sri Lanka (Figure 56). Though there is a development in agricultural trade with India, appreciated exchange rates of Sri Lanka, relatively higher tariff levels of India may have limited the access of Sri Lankan agricultural exports. Other than the institutional arrangements, the relative changes in exchange rates have facilitated Indian exports to Sri Lanka. The RER of Sri Lanka with respect to Indian currency show continuous decline, indicating the improving the competitiveness of Indian products on Sri Lankan market, and then it stabilizes and shows slight depreciation after 1995 (Figure 56) 5 Appropriate Agricultural Trade Policies Liberal agricultural trade policy is necessary for growth and poverty reduction but it along is not sufficient for growth of agricultural trade and development. Trade policy supports with appropriate domestic institutions and policies contributes to the overall development of the agriculture development (Figure 57). The discussion above indicates how these factors have contributed to the development of the agricultural sector.
Agricultural Trade Policy

Trade restrictions (inputs)
Investments
Exchange policy Vulnerability of poor Export finance
Fiscal and Monitory policy
Agriculture Development
Political economy
Mobility of labor between sectors Standardrds Research and development Impact on Environment
Human resource development Property rights
Trade facilitation (custom clearance, Sanitary and phyto sanitary, port services, credit, infrastructure, standards, insurance, R&D) etc.)
Rural finance
Figure 57 Trade policy and Agriculture Development
61
2009
The distortions in the form of direct taxes have been minimized for export oriented plantation crops. The indirect taxation of exportables and importables has been lessened through the macroeconomics governance and exchange rate policy. In case of importables, the trade policy attention has been on a few commodities of ICA. The protection levels for these ICA products has increased and the protection is not desirable as it leads to misallocation of resources and taxing of efficient ICA and exportables (Kruger et al. 1988, Anderson and Martin, 2009 , Sharma and Morrison 2009). Price variation is an intrinsic characteristic of seasonal agricultural production. The price instability arises from ad hoc trade policy interventions as well as under developed marketing systems. The price instability affects the decision making behavior of various stakeholders and it impedes the investments in various stages of value chain from producers to consumers. The under developed marketing system helps the rent seeking behavior of marketing intermediaries and the transmission of trade policy objectives of higher prices to small scale producers is not clear. The farm-gate prices show higher correlation with the world market prices and it indicates the higher influence of trade policy on farm-gate prices. But it does not necessarily imply that farmers are benefitted from the trade policies. The marketing margins have moved in favor of intermediaries of the marketing chain so that farmers share show continuous decline. An intervention is necessary to address the market failures and new institutional developments are needed to assure reasonable share of consumers price to the producers. The recent policy changes advocate increase protection and assistance to agriculture to reduce dependency on imports. The unreliable world market is one of the justifications for protection. These products have been earmarked for qualification for special products, special safeguard mechanism and maintaining preferences etc. The rate of assistance for rice and other field crops has increased through fertilizer subsidies. The policy objective of achieving self sufficiency at any cost may not be a suitable criterion as it could leads to reduce resource use efficiency and could lead to anti-export bias. Further, heavy dependence on imported inputs, such as fertilizers, agro chemicals and seeds will lead to achieve the policy objectives at a substantial economic cost. Further, issues such as land policy, resource degradation, institutional development, macroeconomic governance, etc. are directly related with the performance of agriculture and not adequate attention has been placed on these vital issues. The promotion of rice will lead to highest multiplier effect on the rural economy and it helps to overcome food insecurity and vulnerability at village level. The current world market prices of rice make the Sri Lankan producers competitive. This trend would continue with the economic progress in developing countries and alternative uses of cereals such as animal feed and biofuels. Farmers respond significantly to the higher prices and strong linkages with value chain would facilitate easy access to world rice market. However, such efforts need investments on reaserch and development for exportable varieties. The value chain analysis shows avenues for further improvements of linkages. 62
2009
The reduction in comparative advantage in agricultural production requires strategic interventions on product developments and targeting for high value niche markets or shifting of resources for competitive activities. The slow absorption nature of labor from agriculture to non-agricultural sector requires search for alternative policies within the agriculture for an effective impact of trade policies on poor households. Several successful export oriented ventures have evolved within agriculture (organic spices, nonkernal coconut products, etc.) and many lessons can be learned from these successful agribusinesses and the public sector could immensely contribute to social mobilization and capacity building to the development of farmer centered agribusinesses with the participation of private sector.
A marked decline in investments on research and development could be observed and the repercussion would be visible in the long run. It has to be promoted towards productivity improvement, food safety as well as protection of environment. The private sectors involvement on R&D work could be encouraged through the development of remunerative environment by introduction of suitable institutional setup such as exchange of public germplasm, property rights, etc. The value chain analysis indicates that the non-responses to the opportunities are mainly attributed to the institutional (extension, finance, standards, etc. ) and infrastructural constrains (roads, electricity, processing facilities, etc.) and public sector or private sector investments can be directed to these potential areas to reap the benefits of liberal export (and import) policies.
6 Value Chain Analysis

6.1 Introduction
The value chain analysis provides more holistic picture of the socio-economic environment most stakeholders operate in and it allows for the formulation of more integrated solutions. In this study, coconut, milk and fruits and vegetables are selected as important agricultural commodities for detail analysis and the selection are based on the resource audit of small farmers, poverty and market information. The main reasons for the selections are summarized in the Table 33. Coconut, milk and fruits and vegetables production is mainly confined to small holders and these sectors possess very high potential for development. The unique nature of the selection is that these three product categories can easily be integrated into a farming system for the improvement of farm income.
63
2009
Table 33 Important features of selected products

Coconut Increasing export and local demand World market prices have gone up Adoptability to wide range of climatic conditions Provide regular cash income Diverse group of outputs with multiple uses: fresh coconut, copra, desiccated coconut, vinegar, virgin oil, alcohol, bio diesel, coir, peat, activated carbon, fuel wood, coconut juice, furfural, coconut shell powder, timber, oil cake (protein supplement for dairy cows) for animal feed Well established domestic and international marketing channels Strong interest on the government to improve the sector Niche markets for organic products Milk Increasing domestic demand and increasing world market prices Increasing world market prices Identified breeds available for different climatic conditions Provide regular cash income High potential for promotion among poor, small land holders. Manure reduces the dependence on chemical fertilizers in coconut, rice, fruits and vegetables cultivation. Bio gas provides cheap energy sources for cooking and lighting Presence of organized milk marketing system. Private sector willingness to invest in the sector Strong interest on the government to improve the sector Higher demand for value added products which can be initiated with simple technology Ability to run with minimal amount of external purchased inputs. Provide regular cash income for farmers Comparative advantage in milk production Fruits and vegetables Increasing domestic demand Higher potential for exports Agro climatic diversity can be utilized to produce number of fruit varieties Generate higher profits for investments than other crops High potential to generate employment and income. Diverse climatic conditions and varieties provide opportunity to take advantages of seasonality of production
Organized marketing system is available, Expansion of super markets and contract grower systems Strong interest on the government to improve the sector Presence of lucrative niche markets for organic products Provide higher net return than rice and other field crops
Provide regular cash income for farmers
Internationally competitive in terms of price and quality

Source: Stakeholder meeting,2009
Potential for improvement to match with international price and quality
6.2 Value chain of Coconut

6.2.1 Production
Coconut is one of the most important plantation crops in Sri Lanka, providing livelihood for nearly 0.5 million people. It is grown in an extent of 394,836 hectares, which is equivalent to 20% of the cultivable land in the country. The small holdings are defined as below 8 ha, which account for 99% of the holdings and 75% of the total extend. Coconut is grown mostly by small holders with less than half an acre who derive only a merge income from their crops. Coconut benefits people of all socio economic strata in numerous ways through its multitude of uses. It is internationally recognized as one of the most important categories of tree crops in the world securing food and shelter for millions of people living in the tropics, in addition to its vast range of value added products reaching the global market. The annual coconut production in Sri Lanka is about 3,000 Mn nuts. The area under coconut show a decline but the production shows an increasing trend due to improvement in productivity.
64
2009
Over 65% of total national annual production is absorb by domestic consumption and around 30% of nuts are utilized mainly in production of desiccated coconut and copra. Coconut oil is extracted from copra through mechanical and chemical processes, using capital-intensive industrial equipment. Coconut oil is valuable as a raw material for a wide array of industrial commodities such us margarine and soap, as well as lauric acid or glycerine-based industrial chemicals. Copra meal, remains after oil extraction, is a rich source of protein and used as a ingredient in animal feed industry. Desiccated coconut is the dried shredded kernel. In addition, there are fresh coconut exports, coconut milk powder and cream manufacturing industries, which utilize around 3-5% of the total nut production. Coconut cream is the processed milk extracted from fresh matured coconuts, which can either be used directly or diluted with water to make various preparations such as curries, sweets, desserts, puddings, etc. Coconut husk is used to extract coir which is further utilize in making many value added products such as ropes, rugs, etc. and coir dust provides excellent growing medium for horticultural plants (Figure 59).
Smallholding and resource-limited coconut farmers are basically price-takers of the commodities they sell, which is basically copra. There is very little post-harvest processing and value-addition at the farm level. Coconut research institute, Coconut Development Board and Coconut Cultivation Board are the main institutions involved in research and development work. Government provides planting/replanting subsidies, planting materials and extension servicers to growers (Table 34)
Table 34 Key Government Policies in the Coconut Sector 1985-2008

Policy 1985 Export duty on desiccated coconut as well as on edible copra was reduced by Rs 2,500 per metric ton to bring the export duty on edible copra from Rs 7,250 per metric ton to Rs 4750 per metric ton The minimum price at which desiccated coconut exports were permitted to export was abolished. The cess on coconut exports was revised and with effect from 1 st February, 1985 the cess was collected in terms of sub-section 1 Section 33 of the Coconut Development Act No. 46 of 1971. Exports of some coconut by-products such as fresh nuts, coconut shells, coconut ekels, young king coconuts or coconuts, coconut rafters, coconut shell charcoal etc. were exempted from the requirement of obtaining export licenses. With a view to enabling the production of quality desiccated coconut (DC) products to meet the requirements of overseas markets, the regulation was amended in 1985 to grant permission to open new DC mills or increase capacity of existing ones subjected to the guidelines laid down by the Coconut Development Authority. The export duty on DC was halved from Rs 5,000 per metric ton in 1985 to Rs 2,500 per metric ton while the duty on copra was lowered from Rs 4,750 to Rs 2,000 per metric ton, with effect from 3rd April, 1986. The cess on copra, coconut oil, desiccated coconut and fresh nuts exports was suspended. Remove in restrictive regulations, export licensing of copra, coconut oil, desiccated coconut and coir fiber, with effect from December 1, 1987. Labeling, sampling and testing of desiccated coconut products started Incentive allowance of one rupee per kilogram of DC produced, as an urgent measure of relief. Loans free of interest to DC millers, enabling them to pay relief wages to mill workers for the period for which mills remained closed.
1986
1987 1988
65
2009
1990 1991
1992 1996
1997
1998
2000
2002
2004
2005 2006 2007
2008
Coconut Development Authority (CDA) implemented a Price Stabilization Scheme for coconut during 1990 CDA introduced a scheme in 1990 to enable the DC millers to import modern machinery and equipment Rs 605 million was paid for the modernization of factories Tax free threshold for the levy of export duty was revised upwards from Rs 20,000 to Rs 25,000 per metric ton of coconut oil All export taxes on coconut products were abolished with effect from 12th, November, 1991. The cess rates pertaining to major export products were, Rs 750 per thousand fresh nuts exported, Rs 400 per metric ton of coconut oil exported, Rs 1,000 per metric ton of desiccated coconut exported and Rs 900 per metric ton of copra exported. The government intervened and reduced the import duty on edible oils (excluding coconut oil) from 35 percent to 5 percent with effect from 12 June 1996 for a 3 months period, to stabilize domestic coconut oil prices. The import duty on copra was also reduced from 35 percent to 5 percent with effect from 12 June 1996. The duty reduction was extended upto 12 January 1997. Turnover tax on edible oils was at 7 percent (increased to 8 percent in November 1997) while for a majority of coconut products, turnover tax was 20 percent (reduced to 18 percent in November 1997). Edible oils other than coconut oil, enjoyed an import duty waiver of 30 percent until 15 January 1997 when it was reduced to 20 percent. The general tariff rate was 35 percent. Except for DC, the other cess rates for coconut product exports remained unchanged in 1998. The cess on DC exports was increased from Rs 1.00 per kg to Rs 2.00 per kg with effect from 1 March 1998 for a three year period ending 1 March 2001. The duty on edible oil other than coconut oil was reduced from 35 percent to 5 percent. The duty waiver granted to edible oil was removed and the duty was fixed at 25 percent in April 2000. To arrest the fall in nut prices further, the government decided to impose a 25 percent surcharge in addition to the revised tariff on all edible oil imports. Specific surcharge of Rs 20 per kg on coconut oil was reduced to Rs 5 per kg with effect from 1st April 2002. Specific surcharge of Rs 5 per kg on coconut oil was withdrawn with effect from 26 th September 2002. In the wake of increasing coconut oil prices in the domestic market, the government reduced the surcharge on the import of edible oil from Rs.20 per kg to Rs.5 per kg with effect from 1 April 2002. The government intended to introduce a cess on imported edible oil to strengthen the coconut cess fund. The introduction of regional fresh coconut auctions helped coconut growers to receive remunerative prices for their produce. The export cess for DC was increased to Rs. 2,000 per metric ton from Rs. 1,000 per metric ton with effect from 1 April 2005. Legislation was introduced to prevent excessive fragmentation of coconut land. Machinery and equipment imported for the modernisation of coconut processing factories were exempted from VAT and customs duties. With effect from 1 August 2007, import duty on importation of copra was removed until 29 February 2008. Under this, the government allowed importation of 30,000 tons of copra up to end February 2008 from countries recommended by the Coconut Research Institute. A temporary ban was imposed on fresh coconut exports and duty waiver on coconut oil imports was granted to ease the rising prices of coconut and coconut oil. The import duty on edible oils, which was maintained at a higher rate of 28 per cent, was reduced temporarily to 10 per cent. With effect from July 2008, the duty waiver granted on importation of palm oil and coconut oil was reduced from 23 per cent to 13 percent. With effect from December 2008, duty waiver on palm oil and coconut oil was removed thereby applying 28 percent duty on importation of palm oil and coconut oil.
The above facts indicate that the coconut sector has higher potential in reaping the benefits of current market development but the sector is overwhelmed with various risks and uncertainties.
6.2.2 Marketing Channel
The existing marketing system for coconuts shows wider gaps between the producer and consumer prices in a given year. The farm gate price, which is not profitable to the producers, cuts back investment on coconut cultivation. This situation results lower productivity of coconut lands and diversion of coconut lands for alternative purposes. Two distinct marketing channels exist for small holders and large estates. The small 66
2009
holders have lengthy marketing channel: village level collectors, other middlemen, desiccated coconut/copra millers, exporters, brokers and retailers. Number of middlemen consist in the channel is vary from 1-2 to 8-10. The middle dealers are the key players in the channel, in handling, delivering, and distributing coconuts into the marketing system. There are several categories of middlemen in the coconut marketing system; primary collectors, brokers, wholesalers, retailers, and exporters. The average transport cost for middle dealers varies from Rs. 0.35 to 0.50 per nut. Retailers, brokers and the wholesalers extract a higher profit margin per nut than the primary collectors and other intermediate buyers. The retailers margin is above Rs. 3 per nut. Coconut producers get about 67% of the consumer price for a coconut and about one third of the price goes to the middlemen. A majority of estate owners directly sells the produce directly to processors of desiccated coconuts or copra. The millers usually enter into forward contract with suppliers of coconuts. Middlemen and estate owners are the major suppliers of de-husked coconut to processors (Samarajeewa and Fenando, 2004). The products that are available from coconut are numerous (activated carbon, copra, coconut, coconut biscuit, coconut chips, coconut chutney, coconut powder, coconut honey, coconut husk, coconut husk handicrafts, coconut jiggery, coconut jam, coconut milk and cream, coconut milk powder (spray dried), coconut oil (medicated, virgin and solvent extracted), coconut oilcake, coconut shell, coconut shell charcoal, coconut shell, cutlery, coconut shell handicrafts, coconut shell cups, coconut shell powder, vinegar, coconut water, coconut wood handicrafts, coir pith bricks, coir products). The uses and processes of major coconut products are summarized in Table 35.
Table 35 End uses and process of coconuts

Coconut Activated carbon End Uses Shell based activated carbon used in the process of refining and bleaching of vegetable oils and chemical solution, water purification, recovery of solvents, recovery of gold etc. It is used in gas marks and a wide range of filters for war gases and nuclear falls out. Produced from matured coconuts and the coconut meat is granulated into the various desired sizes and often used as a substitute to grated coconut in food preparations such as curries, cakes, sweets and chutneys. Confectionery and bakery units are the main consumers of desiccated coconut. Process Coconut shell is converted into shell charcoal by carbonization process in mud pits, brick kilns and metallic portable kilns or coconut shell charcoal is activated by reaction with steam at temperature of 900 C- 1100 C under control atmosphere in a rotary kiln. The fresh matured coconuts are dehusked and deshelled manually using hand tools. The kernel is then ground into a fine mass using hammer or pin mills. The ground mass is blanched with live steam for about 20 minutes to bring down the microbiological counts. The blanched mass is then dried in hot air drier at a temperature of 80-90oC for about 10 hours so as to bring down the moisture content to below 3 per cent. The dried mass is tested for moisture, free fatty acid and microbiological counts. Well dried copra with a moisture content not exceeding 6 per cent is cleaned well from any foreign matter. Then cut into small chips in a copra cutter. The chips are
Desiccated coconut
Coconut oil
Coconut oil is extracted from the kernel or meat of matured coconut. Coconut oil has a unique role in the diet as an important physiologically functional food. A review of
67
2009
the diet/heart disease literature relevant to coconut oil clearly indicates that coconut oil is at worst neutral with respect to atherogenicity of fats and oils and, in fact, is likely to be beneficial oil for prevention and treatment of some heart disease.
fed into steam jacketed kettles and cooked mildly at a temperature of 70oC for 30 minutes. After proper cooking, the cooked material is fed into the expeller continuously and pressed twice. The combined oil from the first and the second pressing is collected in a tank provided separately. This oil is filtered by means of a filter press and stored in tanks. Virgin coconut oil is made from the milk extracted from raw kernel. Coconut milk is fermented and water is separated from oil by a mechanical process. The virgin coconut oil is free from trans fatty acid, high in medium chain fats known as lauric acid, which is identical to special group of fats found human breast milk and also rich in vitamin-E. The shell charcoal is manufactured by burning shells of fully matured nuts in limited supply of air sufficient only for carbonization, but not for complete destruction. Extracted from coconut husk, provide bio degradable raw materials obtained during the extraction of coir fiber
Virgin coconut oil
High quality of this oil makes it ideal for skin and hair applications.
Coconut shell charcoal
Shell charcoal is used widely as domestic and industrial fuel. It also used by blacksmiths and gold smiths and in laundries. Rope, mattress, rugs, brushes, Soil conditioner, surface mulch/ rooting medium and desiccant, composted coir pith is an excellent organic manure for horticulture crops, medium for planting Use in plywood and laminated board industry as a phenolic extruder and as a filler in synthetic resin glues, mosquito coils and agarbathis. Food, medicine, Bio-fuel Food Preservative and flavoring agent in pickles, salads, sauces and many other condiments. shell cups, glasses, ladles, forks, show pieces, shell buttons, jewelry, etc. Nutritious wholesome beverage Distinct grain characteristics is ideal for making wall panels, furniture, doors and windows, show pieces, etc.
Coir Coir dust
Pulverized coconut shell
Manufactured from matured coconut shells
Alcohol Honey/Juggery Vinegar
Distillation of fermented coconut toddy Form coconut sap Made from the sap of the coconut tree and also made from coconut water, which is being wasted in copra and DC industry.
Handicrafts Water of tender coconut Coconut wood
6.2.3 Export market
Kernel Products (oil, copra, desiccated coconut) fiber products, shell products, fiber finished products are the main exports generated from coconut industry. Non kernel based industries have shown a rapid growth in the recent past surpassing the export earnings from kernel products in the recent years (Figure 59). The value of the coconut industry in Sri Lanka is approximately Rs. 70 billion the value of domestic consumption of fresh nuts, coconut oil and coir fiber products is approximately Rs. 51 billion while export earnings is Rs. 19 billion in 2008 (CBSL). The strengthening of integration with the international markets has lead to improvement in the value addition of the products in line with the international standards (eg. EU Food Standards) and other WTO-based 68
2009
sanitary and phyto-sanitary measures. It will inevitably strengthen the possibilities for integrating with the international markets while offering niche, natural, health and organic products from the coconut industry.
Figure 58 Export value of kernel and non-kernel (other) coconut products Source: CBSL
6.2.4 Main Issues of the coconut sector indicated by stakeholders Rising cost of production due to high prices of inputs such as fertilizer Low fertility of coconut lands due to continuous cultivation and lack of implementation of soil conservation measures. Indiscriminate fragmentation of productive coconut lands. Recurrent droughts experienced in main coconut-growing areas. Yield losses due to pests and diseases (mite, coconut wilt disease, coconut leaf rot disease, etc). Declining supply of raw materials for processing industries. Difficulties in retaining skilled labor. High energy cost for irrigation and processing industries. Increasing coconut production to cater to the dietary needs of the increasing population and supply of adequate raw Scarcity of material to coconut-based industries (To reach a minimum target of 3,500 Mn Nuts per annum) Increasing coconut production and land productivity by planting high yielding coconut cultivars and promoting appropriate Technology adoption High productive varieties
6. 2.5 Recommended Interventions
The outcome of the stakeholder meeting related to interventions for the development of the coconut sector is summarized in Table 36.
69
2009
Table 36 Recommended interventions to develop the coconut sector

Key areas of change Improved productivity through promotion of high yielding varieties Institutional set up Extension services, private sector and NGOs. Development of rural financial instruments to satisfy the long gestation period by CDA/CCB and financial institutions. Group mobilization and capacity building on processing, provision of market information, technical supports by CDA/CCB or by NGOs
Development of on farm value addition of various products through group formation and creation of business linkages with major processing mills to facilitate better integration of value chain. Improvement of fertility of coconut lands and lowering cost of production through the use of organic manure through integration with dairy production Improving supply of raw materials to processing industries from non-traditional areas Genetic improvement of coconut to increase adoptability to different climatic conditions and productivity. Investments on low cost irrigation techniques such as solar power Quality processing Improve the income of coconut growers by crop diversification and integrated coconut-livestock production Improve marketing efficiency of coconut to make profitable coconut cultivation and promote long term investments
Group mobilization and training on dairy management by DAPH and provision of incentives for the use of organic manure by CDA/CCB. Increasing the crop extent in non- traditional areas and link coconut growers in non- traditional areas with processing industries by CBA/CCB/NGOs Strengthening the breeding program of CRI and exchange of germplasm form other countries
Incentives to adopt low cost irrigation techniques by CCB/CDA Promotions of techniques byCCB/CDA/NGOs DAPH and CCB/CDA
Group mobilization by CCB/CDA and link the group with coconut auctions to reduce large number of intermediaries in small holder coconut sector
70
2009
Coconut Spray dried coconut powder acetobacter aceti subspecies Xylinium formed coconut milk Ingredient in food products, ice cream, fruit cocktails, etc.
Vinegar Mechanical centrifuge Drying ground/shredded coconut kernel Well dried copra 6% moisture Drying and removal of shell Dehydrated shredded flesh/DC /Coconut cream Tender Coconut water
Virgin Coconut oil
Steam jacked kettles-70 C Coconut shell Matured coconut shell
Confectionary and Bakery units Solvent extraction plant
Coconut oil Shell charcoal and activated carbon
Curries, Cakes, Sweets, Chutney Refined oil
-Oil cake - Cosmetic - Engine lubricant
Pulverize
Tranesterification Soap stock Bio-diesel+ glycerin.
-Resin glue -Mosquito coils -Bark powder -Furfurol
Coconut shell powder
Figure 59 Coconut Value Chain
71
2009
Figure 60 Coconut marketing channel
Estates Small holder growers
Primary collectors/ Village level collector
Coconut husk Middle level dealers
Coir (fiber)
Coir dust Brokers
Retailers Wholesalers
Fresh coconut Copra producers Desiccated coconut producers
Local and Foreign markets
72
2009
6.3 Fruits and Vegetables 6. 3. 1 Vegetables
The vegetable sector occupies a prominent place in the Sri Lankan economy. Its contribution to agricultural GDP is around 18% (CBSL, 2007). Approximately 300,000 farm families depend either directly or indirectly on vegetables for their livelihood on the vegetable sector. Sri Lankas vegetable sector is dominated with about 40 species of vegetables produced on about 100,000 ha annually. Average Sri Lankan household spends about 8-9 percent of income on vegetables (HIES, 2006/07). Per capita consumption of vegetables is about 100g per day and this is much lower than the recommended values of the Medical Research Institute (200 g) (Table 37). Sri Lanka possesses about 46 diverse agro-ecological regions and this diversity provides suitable environment for cultivation of diverse group of vegetables. The vegetables that are grown in Sri Lanka are basically classified into two groups, namely upcountry vegetables and low-country vegetables. The upcountry vegetables generally grown at higher elevations as these vegetables normally grow well under cooler climate. The low-country vegetables are traditional vegetables and generally grown at lower elevations (Table 38). In 2008, vegetable production was about 7,21,000 mt. The figure does not include all vegetables produced in Sri Lanka and thus the real values should be much higher than the official statistics available.
Table 37 Vegetables: Production, Import, Export, Availability and Expenditure: 2006/07 Type Production Per Capita Monthly expenditure(Share of monthly (000 mt) Availability expenditure) g/day Sri Lanka Urban Rural Estate Vegetables 751 102 674 (8.3%) 720 (6.8%) 671(8.7%) 594 (8.7%) Source: Food Balance Sheet, DCS, 2006. HIES,DCS, 2006/07.
Table 38 Main Vegetables Grown in Sri Lanka Upcountry Vegetables (higher altitude Low-country Vegetables (Lower altitude vegetables) vegetables) Bean, tomato, carrot, leek, cabbage, Eggplant, okra, bitter gourd, snake gourd, capsicum, radish, knol-khol, beetroot, luffa, pumpkin, cucumber, ash-plantain, cauliflower, potato leafy vegetables, mushroom, long bean, sweet potato, onion, indigenous root and tubers
Total area under vegetable cultivation and production of vegetables show an increasing trend during the period of 1996 to 2007 (Figure 61). The production levels of upcountry vegetables show an increasing trend and this is attributed to increase in both area and productivity (Figure 73
2009
63). The change also indicates the changes in the direction of demand. The area under low country vegetables shows a declining trend while the output follows the same trend towards early 2000s (Figure 62). Production shows an increasing trend after 2001 and this trend is mainly attributed to the increase in productivity levels. The characteristics of Sri Lankas vegetable sector are summarized in Table 39 and policy options for interventions are summarized in Table 40.
Figure 61 Total Extent and Production of Vegetables: Source: DCS
Low country vegetables

35 30 25
Area (000'ha)
350
70
300
600
Production (000'mt)
60
Production( 000'mt)
500 400 300
250 200 150 100 50
20 15 10 5 0 1981 1985 extent 1989 1993 1997 2001 production 2005
Area (000' ha)
50 40 30 20 10 0
200 100 0 1981 1985 1989 1993 1997 2001 2005
Extent
Production
Figure 63 Total Extents and Production of

up-country Vegetables
Source: DCS
Figure 62 Extent and Production of Lowcountry Vegetables

Source: DCS
74
2009
Table 39 Characteristics of Vegetable sector

Criteria Employment and Income Government Policy
Characteristics
Vegetables have higher income and employment generating potential than those of rice and other field crops. Increase in output, particularly the off-seasonal production, value addition and product differentiation, reduction of post harvest losses, improvement marketing facilities, develop rural infrastructure, promotion of sustainable farming systems, fertilizer subsidy during yala season when water is not sufficient for paddy cultivation, subsidized credit facilities (for cultivation 12% per annum, processors are eligible soft loans at 14% per annum interest rate). Cultivation loans and purchasing loans at subsidized interest rates (12% per annum) for farmers and buyers engage in forward sale contacting system. However, participatory financial institutions have to provide funds and the Government provides the interest rate difference (Market rate subsidized rate announced by the CBSL). The public sector involvement is limited to facilitative role such as dissemination of price information, maintenance of markets, provision of infrastructural facilities, research and development. Facilitative functions need to be improved in order to improve the market efficiency and the competitiveness of the market. There are considerable barriers to enter the market. Overall investments in maintenance of agricultural markets are poor. The investments on infrastructural facilities of vegetable markets are not sufficient. Various government organizations (DOA, DAS, DOCo-oP) and private sector involve in the facilitative functions. Seed market, which was a government monopoly, was liberalized in 2000. Farmers have access to exotic hybrid varieties. Wholesale markets are established by (Dedicated Economic Centers) for fruits and vegetables. Dambulla DES handles about 60% of vegetables produce in Sri Lanka. However, most regional DECs act as supplying center for Dambulla DECs and transparency in price determination is lacking in many DECs. Nuwara Eliya, Badulla, Anuradhapura, Moneragala, Kandy, Matale, Ratnapura, Hambantota, and Jaffna are the main vegetable growing districts of Sri Lanka. The incidence of poverty also relatively higher in these districts. Seasonal, because of the bimodal rainfall pattern. Vegetable production is high during the period February - March and September October, and the supply is low during June - July and November - December. Seeds and planting materials are mainly provided by the DOA. Imported hybrid vegetable seeds are provided solely by the private sector. Chemical fertilizers are provided by public and private sector organizations. Provision of organic fertilizers (poultry manure and cow dung) is done by private sector unorganized suppliers. Increasing trend in production and this is attributed to increase in both area and productivity Large gaps exits between yields of adaptive research and farmers yield and it indicates the potential to increase productivity. Inefficient resource management by farmers, inadequate availability of good quality seeds of new plant varieties, imbalanced fertilizer-use, improper pesticide use, high degree of dependence on rain-fed system, inadequate use of modern irrigation techniques, seasonality of production, high percentage of post-harvest losses due to inappropriate handling, storage and transportation. Commission agents operate in wholesale centers (DECs) and they charge price based commission or 10% of wholesale price , Wholesale sellers provide financial assistance to needy farmers. Provision production and consumption credit to farmers would help farmers to be independent in decision making.
Institutional set up
Economic status of Producers Production Pattern
Input supply
Trends in Production Potential for productivity improvement
Markets
75
2009
Producers in remote areas are poorly connected with markets. Intermediaries gain arbitrage opportunities due to lack of market information. Marketing efficiencies have to improve through market extension activities, which is not developed in Sri Lanka. Rural producers receive lower price due to lower critical mass, poor infrastructure (road), weaker bargaining position, and lengthy marketing channels. Rapid changes in market structure (super markets, market chains) could be seen in Sri Lanka and linking producers with these markets in a sustainable way would help to overcome the constraint of higher market margins and low producer price. Market and distribution of vegetables works satisfactorily in many areas. However, there are various systems operate with different modes of actions. In order to overcome such differences regulatory mechanisms could be introduced. Overall investments in maintenance of agricultural markets are poor. There are considerable barriers to enter the market. Physical efficiency of marketing is poor, mainly because of small scale production, lack of quality related price formation and poor infrastructural facilities at markets as well as in main vegetable producing areas. Market margins are increasing due to increase in transport cost and margins of intermediaries. The quality of vegetables purchased by retailers is evident only when the retailer unpacks purchases. Thus, the mark-up reflects the postharvest losses and transit losses. Therefore, the volume retailed is less than (20-30% below) the purchased volume from the wholesale market. The real marketing margins are less than the nominal marketing margin. A considerable economic benefit could be obtained by investments on post-harvest loss reduction measures. Some super markets have developed contract grower system for vegetables. Farmers get price advantage is about 18-20% higher than the normal wholesale market price. Some super markets maintain minimum price policy during the period of gluts and the minimum price is based on the cost of cultivation. Collecting centers maintain quality standards and grading systems. The grading system is generally based on visual observations and no standards have been documented. Limited quantities of vegetables are being exported and a marked reduction of exports could be observed after 2003. Gherkin, leek, tomatoes, capsicum are the main vegetables exports. The value of vegetables exported in 2007 amounted to Rs. 996 millions. When compared to total volume, this is about 1% of the total production. Potential for vegetables exports is very high. Quality, quantity available, seasonal supply and high transport cost are the main constraints to increase fruits and vegetables exports (Figure 65). High price uncertainty, seasonality adds a high degree of price uncertainty. Need investment in research and extension efforts on off-season vegetable cultivation. High level of post harvest losses. Share of value added products of fruits and vegetables is very low. Jam, chutney, chilli and tomato sauce, pickled and dehydrated vegetables are popular products. Lack of continuous supply in adequate amounts is the major problem. The changes in trade policy facilitated these processors to use low cost imported inputs (eg. tomato puree, etc.). Niche export markets are available for dehydrated, organic, processed, etc. of tropical vegetables. Medium and small scale processors find difficulty in obtaining and maintaining of quality standards certification mainly due to limitations in capital and it reduces the power of market penetration. The limited capital availability makes the majority of small scale processors to limit processing capacities.
Market margins
Super markets
Exports and Imports
Risks
Processing
76
2009
Non-availability of suitable commercial varieties for processing (eg. tomato), insufficient supply of vegetables at affordable prices to meet production target, higher spoilage due to improper post-harvest handling, lack of suitable machineries to meet quality standards demanded by modern trade are other constraints.
Bittergourd Potato Chilli Red onion Tomato Bean

Carrot
Capsicum Cabbage Brinjal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cost (Rs/kg) Wholesaler's charge
Transport 1 Transport2
Producer's Margin Retailer's margin
(a)
250 200
150
Retailer's margin Transport2
100 50 0
Wholesaler's charge Producer's Margin Transport 1 Cost (Rs/kg)
(b)
Figure 64 Distribution of costs and benefits among producers and marketing agents:
a) Share of costs and benefits b) Distribution of Costs/Benefits per kg of produce
Data Source: SEPC, DOA, HARTI
Note: Cost= Cost of production including farmer owned inputs (family labor), Transport 1= from farm to whole sale center, producers margin=(Wholesale price-Transport cost-Wholesalers commission), Transport 2= From wholesale market (Dambulla) to Colombo market, Retailers margin= Retail price-all other costs mentioned above. Production areas: Bitter gourd- Hambantota, Potato-Badulla, ChilliAnuradhapura, Red onion-Puttalama, Tomato-Matale, Bean-matale, Carrot-Nuwaraeliya. Capsicum-Kurunegala, Cabage-Nuwaraeliya, Brinjal (egg plant)-Anuradhapura
77
2009
Figure 65 Quantity and Value of Vegetables Exports: 2000-2007

Source: Sri Lanka Customs
Table 40 Policy Options for Development of Vegetable Sector

Issues Poor Institutional development Policy Options Facilitative functions, investments in dissemination of price information (inter and intra market information network), maintenance of markets, research and development related to post harvest handling of vegetables, processing need to be improved in order to improve the marketing efficiency. Investments in market infrastructural facilities, interventions to reduce barriers to entry, investments on expansion of wholesale and periodic markets to facilitate transparent price formation and reduction of marketing margins (reduce unnecessary marketing cost such as transport), strengthening of the farmer organizations and provision of market information to improve the bargaining power of weaker participants of the marketing process. Provision of market oriented extension. Promotion of competitive involvement of cooperatives directly at wholesale level, farm level and retail level of vegetable marketing can effectively reduce monopolistic rent appropriation by the organized traders. Improvement of availability of good quality seeds and planting materials, capacity building on balanced fertilizer-use and proper pesticide use. Credit facilities for investments on modern irrigation techniques; facilitate investments on post-harvest handling, storage and transportation. Introduction of regulatory mechanisms for wholesale of vegetables. Improving physical efficiency of marketing by provision of quality related price formation and development of infrastructural facilities at markets as well as in main vegetable producing areas. Introduction of grading system would help farmers to increase their income by catering to specialized local and export markets. Investments on post-harvest loss reduction measures and efficient means of transportations. Development of direct links of producer and the market Development of rural finance for independent decision making of producers. Development of rural infrastructure, roads. Organization of farmers and link them with established agribusinesses. Promotion of extension services on marketing. Institutional development to assure quality, quantity available, off-seasonal supply and investments on low cost transportation. Need long term credit program to support small and medium processors to purchase modern machineries. Sri Lankan processors do not receive any subsidies. The changes in trade policy also badly influence the competitiveness of the processors and it made the local processors to compete under uneven incentive schemes. Promotion of suitable commercial varieties for processing. Promotion of crop zoning to ensure sufficient amount of supply of vegetables at right quality and affordable prices to meet processing targets. Credit facilities for small and medium processors to purchase machineries:
Low Productivity
Various mode of operation of markets
High market margins Poor Market linkages Exports Low level of Processing
78
2009
6.3.2 Fruits value chain

6.3.2.1 Introduction Sri Lanka possesses diverse agro-ecological regions that provides, a suitable environment for cultivation of a variety of fruits including exotic ones which are being imported. Fruit sectors contribution to agricultural GDP is around 1 per cent. There are about 35 species of fruits produced and the area under fruit cultivation is about 98,000 ha ( DCS, 2008). Small farm and home garden production predominate with a very small extent of fruits managed as orchards or groves. Fruit sector can be named as one of
the potential sectors for future development due to a number of reasons.

Sri Lankas climate condition is much favored for cultivation of many tropical, sub-tropical and temperate varieties of fruit. The differences in climate facilitate year round production of many fruits. Fruits provide a good source of income for farmers as investments in fruit cultivation bring income for several years and fruit cultivation can be introduced effectively to reduce rural poverty. Fruits can be processed into many forms such as jam, juice, soft drinks, dehydrated products, etc. Since raw and processed forms have a good demand, promotion of fruit production, marketing and processing would have a favorable impact on employment and income. Fruits are a nutritionally rich source of vitamins and minerals and some fruits claim certain medicinal values. Promotion of fruit production for better availability, affordability and accessibility is therefore essential for the improvement of nutritional status of the population.
Production of fruit is mainly under rain-fed conditions. Irrigated fruit production in the Dry Zone has been increasing during the past few years. Small scale commercial fruit orchards can be seen for pineapple, papaya, rambutan, mango, and guava. A good part of fruit crop production area comes under home gardens. The area under commercial fruit crops is about 97,800 ha and banana and mango represent about 50 percent and 25 percent of area respectively (DCS, 2008). The annual production of major fruits is about 552,000 mt and the post-harvest losses of fruit is considered to be very high (30-40 %) (IPHT,2005). The annual per-capita availability of fresh fruit is about 27 kg whereas per-capita requirement of fruits based on nutritional needs is 40 kg (MRI). Therefore, there is ample scope for expansion of this sector. The market economy and globalization have changed the traditional fruit sector activities and opportunities as well as threats have arisen due to the changes in the economy. The share of exports remains negligible. The main constraints for exports are a higher cost of production, lower quality, seasonality of supply and lack of organized production. The development of the fruit sector could bring about considerate benefits to Sri Lanka through improvement of nutrition of the populace, farm income, employment and foreign exchange (DOA, 2006). Although fruit sector possesses a high potential for development, the performance of fruit production and marketing is not very impressive. The lack of policy attention, poor development of infrastructure, import competition, unavailability of quality planting materials, higher prices of fresh fruits and value added fruit products mainly affect the performance of the sector. The demand for fruit increases with higher income levels. The shortage of supply and inefficiency in the marketing system has increased the prices of fruits. In addition, a higher fluctuation of prices increases
79
2009
the risk of production and marketing. The consumption of fruits in Sri Lanka remains at a lower level. In 2006, per capita consumption of fruits was 39 g/day, which is about half of the recommended value of 80 g/day (Food Balance Sheet, 2007). Among different sectors, the lowest was in the estate sector (Table 41).
Table 41 Fruits: Production, Import, Export, Availability and Expenditure: 2006 Production Export Import Per Capita Monthly expenditure (Rs) (Share of (000 mt) (000mt) (000mt) Availability monthly expenditure) g/day Sri Lanka Urban Rural Estate 265 6.65 31.72 39.27 310 485 292 124 (3.8%) (4.6%) (3.7%) (1.8%)
Type
Fruits
Source: Food Balance Sheet, DCS, 2006. HIES, 2006/07.
Among the tropical fruits, banana, mango, pineapple, papaya, lime, passion fruit, avocado, orange, wood apple, rambutan, guava, melon, durian are considered as commercial fruits. There are many underutilized fruit crops (sapotilla, custard apple, pumelo, jackfruit, uguressa, nelli, waxed apple, nan-nan, etc.) with promising commercial and medicinal properties. Apple, orange, mandarin and grapes are mainly imported. The quantities of main commercial fruits produced show a slight improvement during the past decade. Banana, mango, papaya, lime, passion fruit, pineapple, rambutan, avocado, and orange are the main commercial fruits (Table 42). Total area under these crops shows a slight improvement during the past five-year period (Figure 66).
Figure 66 Fruits: Area and Production Note: The figure gives the total of banana, mango, papaya, lime, passion fruit, pineapple and orange only.
Data source: DCS
Crop Banana Lime Mango Orange Papaya Passion fruit
Table 42 Extent and Production of Fruit Crops (2007) Extent (ha) Production Crop Extent (ha) (mt) 49,420 389,028 Pineapple 4,777 9,319 5,048 Rambutan 3,666 25,289 70,075 Avocado 1,325 4,578 3,989 Mandarin 381 6,579 21,876 Pomegranate 830 358 485 Watermelon 209
Production (mt) 44,421 19,874 3,394 296 3,692 6,461
Source: DCS 2008, SEPC,DOA, 2008
80
2009
6.3.2.2 Economics of Fruit Production

The returns on investments on fruit production generate reasonable returns (Table 43). However, potential investors are faced with constraints such as unavailability of land, inadequate extension support, credit and institutional incentives such as trade policy, tax policy, extension services, etc.
Table 43 Economics of Fruit Production Cost (Rs/ha) Benefit (Rs/ha) 990,369 2460671 895894 1595236 703,581 754,263 682,436 1202367 342,873 627,933 1580750 5553793 884605 1144983
Crop Orange Lime Banana Passion fruit Pineapple Rambutan Papaya Source: SEPC, DOA, 2005
Benefit/Cost ratio 2.48 1.78 1.07 1.76 1.83 3.51 1.29
The characteristics of fruit production system, distribution of area, seasonality of production, marketing, exports and imports are briefly discussed below (Table 44). Table 44 Characteristics of fruit production system
Fruit Banana Mango Status The most widely cultivated and consumed fruit in Sri Lanka and it is an attractive perennial fruit crop for small farmers. Mango has become well established as a fresh fruit and processed product in the global market. World demand for mango is increasing, particularly in temperate countries, where mango is rapidly gaining in popularity. Main markets for Sri Lankan mango are Maldives, EU and the Middle East About 90 percent of pineapple in the country is grown intercropped with coconut. Pineapple extent and production has been steadily increasing over time. Now it is more targeted towards the export market. Maldive Islands and Middle Eastern Countries are the main export destinations. With the development of better cultivars and post harvest technologies, papaya has gained recent popularity in the fruit market. The extent and production of passion fruit have declined drastically during the past two decades and this is mainly attributed to lower producer prices. Fresh fruits, juices, cordial and jam are popular value added products of passion fruit. The current agricultural policy intends to reduce the import of fruit and programs have been prepared to expand domestic production of oranges and mandarin. Commercial level cultivation of citrus fruits are now emerging and the area under cultivation of oranges show an increasing trend
Pineapple
Papaya Passion fruit
Citrus( Orange/mandarin)
81
2009
Avocado
Rambutan
Avocado is one of the popular fruit crops grown and consumed in Sri Lanka. It is also a commonly grown fruit in home gardens of the wet zone of the country. It has an excellent adaptability to the climate conditions of the wet zone, tolerance to rainfall and only a few pest and disease problems. Rambutan cultivation in Sri Lanka is mainly confined to the Western Province of Sri Lanka and it yields high returns to investment. High potential exists for off-seasonal production and export market. Durian grows well in mid country and has a very high potential to promote these crops for local market as well as for foreign markets. Mangosteen grows well in low country wet zone and mid country wet zone areas and has very high potential to promote for local and export markets Besides major fruit crops, there is a large number of under-utilized fruit crops grown in various parts of the country. These fruit species include, jackfruit, (Artocarpus heterophyllus) tamarind, wood apple (Limonia acidissima), beli (Aegle mermelos), guava, annona, mangosteen, durian, biling (Averrhoa bilimbi), gaduguda (Baccaurea motleyana), uguressa (Flacourtia indica), lovi (Flacourtia inermis) and sapodilla (Manilkara zapota). Many of the under-utilized species have known medicinal properties and have been used by Sri Lankans. These fruits are grown in various parts of the island over a wide range of ecologies. As a consequence of deforestation, expansion of agricultural lands and clearing for construction purposes, many of these species have become rare and thus fetch higher prices. High potential crop and cultivation is limited to few places.
Durian Mangosteen Other fruits
Grapes
Source: Karunagoda (2007) ,Fruits and Vegetable Markets and Distribution System of Sri Lanka. Pushpakumara et al, Under Utilized Fruit crops in Sri Lanka, 2007, Fruit Sector Development Report (Unpublished), DOA, Sri Lanka
6.3.2.3 Value Chain Operators a) Planting material production Both public and private nurseries are involved in the production of planting materials. Public distribution system has two distinct categories; government farms operated by Seed and Planting Material Development Center of the Department of Agriculture, and private nurseries certified by the DOA. Seed
and Planting Material Development Center of the Department of Agriculture (DOA) is the largest supplier of seeds and planting materials of fruits. Most common propagation method is
budding and grafting. Private nurseries are operated at small scale. The Department of Agriculture launched a crop zoning project and planting material of fruits crops are distributed at a discount price. b) Other Input supply Small orchards are operated by family labor. Commercial cultivations are becoming popular and they relies mainly on hired labor. Maintaining land and protecting fruits from pests (birds, monkeys, bats, squirrels) occupy good part of labor employed in orchards. Fertilizers represent a major input and recommendations are given by the DOA. Usage of fertilizers (organic and inorganic) in small scale level is very low. Research and development activities are mainly done by Horticultural Research and Development Institute of DOA. Regional research stations are involved in R&D activities relevant to the crops cultivated in different regions. Extension assistance is provided by the public sector (DOA) and private sector agrochemical companies.
c) Production 82
2009
The area under fruit crops shows an increasing trend during the past decade. This is mainly attributed to the higher prices and development assistant programme (eg. Perennial crop development project). Commercial fruit cultivation has taken place in some districts but the majority is small holders. Much of the small scale producers are not intended for commercial purposes. Production is scattered throughout the producing districts and supply is fragmented and irregular. Most production is rain-fed and only a few commercial cultivators are adopting modern irrigation practices to increase productivity and also to synchronize off-seasonal fruit production. The differences in productivity are associated with the access to extension and technology. The post harvest losses are estimated to around 20-25%. Local companies
have started their own plantations aiming at export and domestic markets. d) Marketing of Fruits
The market for fruits is not very well organized except for banana and pineapple in some regions. A dominant role in fruit marketing is played by visiting collectors/wholesalers. Farmer-collector-visiting wholesaler-retailer and consumer is the dominant marketing channel. Some exporters and processors directly buy fruits from farmers. Small percentage is channeled through the farmer, commission agent or farmer, collectors, commission agent. Collectors supply fruits to them and pass it to retailers or another group of wholesalers, institutional buyers. The commission agent charges 10% of the value of transaction plus unloading charges from suppliers and loading charges from buyers. Visiting wholesalers transport fruits to different parts of the island and directly distribute to the doorstep of other wholesalers and retailers. Market imperfection in these areas causes losses mainly to producers and the bargaining power of farmers in these areas are weak due to lack of market information. The visiting collectors and regional collectors also bear price risk as they make cash payment to farmers upon receipt of fruits. Farmers usually take good care of produce but visiting collectors do not pay much attention on post-harvest handling. Overloaded transportation is one of the major causes of post harvest losses at retailer level. The retailers sell fruits to consumers on weight or per fruit basis. They face risk of loss due to the highly unstable price. Retailers bear the cost of wastage which ranges from 10-25%. This also contributes to higher margin at retailers level.
e) Marketing Margins
Retailers marketing margin is quite high and farmers share of retail price is low (Figure 67). Improvement in the marketing system cannot be seen for all fruits, except oranges. This situation indicates the inefficiencies in fruit marketing which require intervention. Retailers keep higher margins due to higher wastage, small scale operations, and higher price fluctuations.
83
2009
Figure 67 Marketing margins: Fruits

Source: Calculated using data obtained from HARTI
f) Exports
Limited quantities of fruits are being exported and the major customers of Sri Lankan fruits are Maldives and Middle East and EU countries In 2007, the value of fresh fruits exported amounted to Rs. 620mn (Figure 68) (DCS, 2008). When compared to total volume, this is less than 3% of the total production. Quality, quantity availability, seasonal supply and high transport cost, higher prices of fruits and lack of suitable varieties are the main constraints to increase fruits exports. Some multinational companies have entered into local production through contracts with local companies for production of fruit for the export market (eg. Dole-CIC for banana cultivation). Exporters and other institutional buyers (hotels, supermarkets, etc.) buy fruits mainly from commission agents at urban markets. Forward sale contacts between exporters and institutional buyers are now emerging. The main constraints faced by exporters are non-availability of demanded varieties in specified quality and quantity, higher price or higher price fluctuation in local market and higher cost of air freight.
84
2009
Figure 68 Exports of Fruits

Source: Sri Lanka Customs
g) Imports
Sri Lanka imports fresh fruits and fruit juices. Among fresh fruits, apple, orange and grapes are the main imports which show an increasing trend. The total volume (value) of imports is about 32,000 mt (Rs. 1,350mn) in 2007 (DSC, 2008) (Table 45). A cess on fruit imports was introduced in 2007 and the funds generated from this tax are expected to be ploughed back into development of the fruit sector. Imported fruit juices (orange, apple, combinations of juices etc.) are less expensive than locally produced juices. Thus, there is a higher tendency for processors to substitute imported products to local products. However, fruit juice imports show a declining trend due to the increase in tariffs. This indicates the potential of the fruit sector for processing and value addition.
Table 45 Fresh Fruit Imports
2001 Qty (mt) 10129 822 1942 9469 2716 21 14211 Value Rs. mn 180 22 110 193 248 1 532 2002 Qty (mt) 12258 1006 2064 10812 3364 19 18469 Value Rs. mn 200 30 107 271 318 1 751 2003 Qty (mt) 9498 1265 1967 8563 3871 360 22508 Value Rs. mn 145 36 84 232 329 8 865 2004 Qty (mt) 449 964 1755 7218 3479 2529 17130 Value Rs. mn 9 27 80 198 317 549 615 2005 Qty (mt) 807 1386 3606 3037 17462 Value Rs. mn 22 53 137 261 547 2006 Qty (mt) 216 0 1822 4881 3493 6084 16573 Value Rs. mn 3 0 75 186 307 128 538 2007 Qty (mt) 485 741 1786 3347 3430 3674 18026 Value Rs. mn 13 23 79 159 327 91 626
Fruit Dates Pears Grapes (Dry) Oranges Grapes Mandarin Apples
Source: DSC
85
2009
2.3.2.4 Issues of fruit sector and necessary intervention The main issues of fruit sector are summarized in the Table 46
Issues Unavailability of quality planting material
Table 46 Key issues of fruit sector and necessary intervention Description Intervention Shortage of quality planting Increased availability of improved seeds material, disease-free (banana) and planting materials with suitable planting materials, Suitable commercial traits form local and foreign commercial varieties. Majority of markets. private sector nurseries do not offer fruit plants for sale because of Provision of mother plants for private inability to obtain quality planting nurseries by DOA. material and unavailability of certified mother plants. Weather is the main determinant of supply levels of fruits. Use of regional differences in fruiting seasons to produce year round production. R&D investments on off seasonal fruit production. Investments in irrigation facilities (agrowells, micro irrigation systems), promotion of off-seasonal fruits production would enable to stabilize the supply of fruits. Reduce information gap through dissemination of price information. Promotion of crop zoning.
Seasonality production
of
Rain-fed system,
Low productivity due low fruiting
Inefficient channels
marketing
Poor facilities
marketing
Small scale production associated with various inefficiencies such as higher transport cost, involvement of many intermediaries, low bargaining power, etc Marketing facilities for many fruits are not developed well.
Higher losses
post
harvest
Higher postharvest losses results higher marketing margins.
Low Seasonal prices at farm gate Limited value addition
Seasonality reduces returns producers due to seasonal gluts
to
Transport is the common value addition. Fresh fruit juices, jam, processed juices, chutney, dehydrated products, etc. can be promoted linking producer groups.
Infrastructure development for marketing of fruits and development of mechanisms for price stability and dissemination of price information. Capacity building of agents of value chain, facilitation of post harvest handling, transportation. Investments on suitable transportation vehicles (refrigerated or non-refrigerated) and packaging materials. Development of fruit production targeted extension services and market oriented extension. Strong government policy and institutional support to promote local fruit production and processing sector. Increase investments in research and development. Assistance in obtaining maintaining quality standards certificates for small and medium processors. Capacity building of extension officers on fruit production and farmer training on
Poor technology dissemination
poor tree management, fertilizer application, pests and diseases
86
2009
Limited export
Long gestation period
control (fruit fly) Seasonality in production and higher cost due to higher wastage (poor handling in collection, transportation and storage, lack of storage facilities, inadequacy of improved technologies on processing and value addition. Low return to investments for fruit crops that have long gestation period (durian, mangosteen, etc.) Species have known medicinal properties and have been used by Sri Lankans. These fruits are grown in various parts of the island over a wide range of ecologies. As a consequence of deforestation, expansion of agricultural lands and clearing for construction purposes, many of these species have become rare (wood apple, beli, annona etc.) are processed by small entrepreneurs into jam, cordial, jelly, fruit juices. Quality related standards are lacking in the system for organic products, and processed products (HACCP, SLS, ISO, etc.)
proper management practices Promotion of crop zoning and organized commercial scale cultivations or orchards. forward sales contracts with suitable credit facilities for both buyer and seller. Promote inter cropping of fruit crops with other crops. Promotion of dwarf early maturing plant types. Soft loans with a grace period to match with gestation period. Promote direct selling by farmers. Conservation and promotion of these fruit species. Promotion of value added products.
Under utilized fruits (species with potential for contributing to food security)
Lack of standards
Institutional development related to certification that is affordable to many small/medium producers.
Source: Karunagoda (2007) , Fruits and Vegetable Markets and Distribution System of Sri Lanka, 2005. Pushpakumara et al, Under Utilized Fruit crops in Sri Lanka, 2007, Fruit Sector Development Report (Unpublished), DOA, Sri Lanka
87
2009
References Aberathene Bandara, W. M. (1997): Rural Poverty in Sri Lanka, Mimeo, Ministry of Youth Affaires, Sports and Rural Development, Colombo. Abesekara, Terrence (2002), Sri Lanka A Review of Public Expenditure in Agriculture, 1980-2000, The World Bank, and 2):7-13. Peoples Bank of Sri Lanka, Colombo. Anderson, K. and W. Martin eds., (2009) Distortions to Agricultural Incentives in Asia, The World Bank, Washington, D.C. Athukorala, P and S. Kelegama (1996): The Uruguay Round Agreement on Agriculture: Implication for Sri Lanka, Research Studies, Agricultural Policy Service, No 4, Institute of Policy Studies, Colombo, Sri Lanka Bhagwati, J and T.N. Sirinivasan (1999), Outward Orientaion and Development: Are Revisions Right, Yale University Economic Growth Center Discussion Papper Np 806. Blackhurst, R., A. Enders and J.F. Francois (1996), The Uruguay Round and Market Access: Opportunities and Challenges for Developing Countries, in Martin, W. and L.A. Winters (eds.), The Uruguay Round and the Developing Countries, Cambridge University Press, Cambridge. CBSL (1998) Economic Progress of Independent Sri Lanka, Central Bank of Sri Lanka,. CBSL (2000) Annual Report, Central Bank of Sri Lanka,. CBSL (2004) Annual Report, Central Bank of Sri Lanka,. CBSL (Central Bank of Sri Lanka), Annual Report (Annual), Various Years Census of Agriculture 2002 (2003), Department of Census and Statistics Consumer Finance and Socio Economic Survey 2003/04, Central Bank of Sri Lanka DAPH ( Department of Animal Production and Health), Annual Reports (various years) DCS (Department of Census and Statistics), Statistical Abstracts (Various Years) Department of Agriculture (DOA) (2005), Crop Enterprise Budget, Socio-economic and Planning Center. DOA (2006) .Fruit Sector Development Report (Unpublished mimeo), DOA, Sri Lanka Dornbusch, R. (1991): Exchange Rate and Inflation, The MIT Press, Cambridge, Massachusetts, London, England, pp:6-59 Dunham, David and Chris Edwards (1997): Rural Poverty and an Agrarian Crisis in Sri Lanka, 1985-95: Making Sense of the Picture, Research Studies, Poverty and Income Distribution, Institute of Policy Studies, Colombo, Sri Lanka. Edwards, S (1989): Exchange rate Misalignment in Developing Countries, World Bank Research Observer, 4(1), pp 3-22. FAOSTAT, FAO of the United Nations Food Balance Sheet, 2007 Department of Census and Statistics Gunetilleke, N (2000): Review of Literature Linking Macroeconomic Policies to Household Welfare in Sri Lanka, Institute of Policy Studies, Colombo, Sri Lanka.
88
2009
Gunewardena, Dileni, 2000, "Consumption Poverty in Sri Lanka, 1985-1996: A profile of poverty based on household survey data". Paper prepared for the Policy Framework for Poverty Alleviation in Sri Lanka, commissioned by the External Resources Division, Ministry of Finance. Mimeo. Herath, Anura (2001), Cost Compliance of Sanitary and Phytosanitary Requirements in Beverages and Spices in Sri Lanka, Economic Reaserch Unit, Department of Export Agriculture, Peradeniya, Sri Lanka. HIES (Household Income and Expenditure Survey, 2006/07, Preliminary Report, Department of Census and Statistics, Sri Lanka. October 2007. Ibrahim M.N.M. (2000), Dairy Production in Sri Lanka, Faculty of Agriculture, University of Peradeniya. Jayawardena, J., 1992. Crop Diversification in the Mahaweli Projects. Economic Review 18(1 Jayaweera, S., P. Alailima,C., Rodrigo and R.A. Jayatissa (1988): Structural Adjustment and Women- The Sri Lankan Experience, Center for Womens Research (CENWOR), Colombo. Jayaweera, S., P. Alailima,C., Rodrigo and R.A. Jayatissa (1988): Structural Adjustment and Women- The Sri Lankan Experience, Center for Womens Research (CENWOR), Colombo. Johnson, D. Gale (1993): Role of Agriculture in Economic Development Revisited. Agricultural Economics. Elsevier Science Publishers B.V., Amsterdam,8, pp.421-434 Karunagoda, Kamal (2007), Fruits and Vegetable Markets and Distribution System of Sri Lanka, Socioeconomics and Planning Center, Department of Agriculture, Sri Lanka Krueger, A., M. Schiff and A. Valdes (1988): Agricultural Incentives in Developing Countries: Measuring the Effects of Sectoral and Economy-wide Policies, The World Bank Economic Review, 2, pp.255-271. Lakshman, W.D (1994): Market Oriented Policies and Poverty in Sri Lanka, Sri Lanka Journal of Social Sciences, 17, pp.41-49. Lakshman, W.D., S.S. Vidanagama and S.M.P. Senanayake (1994): Self Employment within Framework of Structural Adjustment: A Study in the Light of Social Mobilization Program Experiences in the Matara District, Mimeo, Sri Lanka Association of Economist, Colombo MADAS (Ministry of Agricultural Development and Agrarian Services) (2007) National Program for Food Security, Battaramulla. Mamingi, N. (1997): The Impact of Prices and Macroeconomic Policies on Agricultural Supply: A Synthesis of Available Results, Agricultural Economics,16, pp.17-34. MDG (Mellinium Development Goal) (2005) Country Report, National Council for Economic Development (NCED), http://www.mdg.lk Meerman, Jacob (1997): Reforming Agriculture, The World Bank Goes to Market, A World Bank Operations Evaluation Study, World Bank, Washington, D.C. MPI (Ministry of Plantation Industry), 2006, National Plantation Industry Policy (NPIP) Framework Report 2006 Mundlak, Yair2000): Agriculture and Economic Growth: Theory and Measurement, Harvard University Press. Myers, N. (1990). The Biodiversity Challenge Expanded Hot-Spots Analysis. The Environmentalist, 10, 243-256. Pushpakumara et al, Under Utilized Fruit crops in Sri Lanka, 2007, Rodrigo Chandra (1994): Structural Reforms and Labor Market, 1977-92: Sri Lanka Case Study, in Sadoulet, E and A de Janvry (1995): Quantitaive Development Policy Analysis, The Johns Hopkins University Press, London.
89
2009
Samarajeewa, S.R., M.T.N. Fernando (2004) The Physical Performance and Functional Efficiency of the Coconut Marketing System in Sri Lanka, Coconut Research Institute, Lunuwila, Sri Lanka. Sanderatna Nimal (2007), Financial Viability and Sustainability of Micro Finance; Financial Systems Approach, in Financial Inclusion-An Imperative Need for Sustained Economic Growth, Association of Professional Bankers-Sri Lanka. Shan David (1987): Changes in Living Standards of the Poor in Sri Lanka During a Period of Macro Economic Restructuring, World Development, Volume 15(6), pp-809-803. Sharma Ramesh and James Morrison (2009), Trade Policy for Development and Food Security, Reflection from Asia, Paper for Asia-Pacifc Trade Economists Conference on Trade-Led Growth in Times of Crisis, Trade and Markets Division, Food and Agriculture Organization Somaratne, W.G (2000): Greening the Sri Lankan Trade: Tariff Policy Liberalization in Non-Plantation Agriculture and the Environment: Sri Lankan Journal of Agricultural Economics, 3, pp. 93 - 122. Stads Gert-Jan, Herath P.M. Gunasena and Walter Herath (2005), Agricultural Science and Technology Indicators, Sri Lanka, ASTI Countri Brief No 31November 2005 Timmer, C.P (1988): The Agricultural Transformation. In Hollis B. Cheney and T.N. Srinivasan, eds., Handbook of Development Economics, Vol. 1. Amsterdam: North-Holland. Wikramasinghe, Y.M., M.B. Agalawatte, K.S. Karunagoda and N.F.C. Ranaweera (1994): The Economics of Resource Use in farm Activities in Relation to Off-farm Employment: Technical and Price efficiency aspects. A paper presented at the final workshop of the Rural Diversification Project, Department of Agriculture, Sri Lanka. Wilson,. J.S. (2002), Liberalizing Trade in Agriculture, Developing Countries in Asia and the Post-Doha Agenda, Policy Research Working Paper 2804, Development Research Group (Trade), The World Bank. World Bank (1995): Sri Lanka Poverty Assessment, World Bank Report No. 13431-CE, World Bank. Washington, D.C. World Bank 2004, Trade Policies in South Asia An Overview, Poverty Reduction and Economic Management Unit, South Asia World Bank (2004 b), Trade Policies in South Asia: An Overview(Volume II) Report No. 299949. World Bank 2003, Promoting Agricultural and Rural Non-farm Sector Growth, Vol 1 & II February 2003, Report No. 25387-CE, Rural Development Unit, South Asia Region , The World Bank. World Bank 2009: Sri Lanka Agricultural Commercialization, Report No. 48968-LK WTO World Trade Organization, www.wto.org (February 2009).
90

AATPfinal

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

AATPfinal

Enviado por

Direitos autorais:

Formatos disponíveis

Articulating Appropriate Trade Policy

Kamal karunagoda 10/12/2009

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

ARTICULATING APPROPRIATE AGRICULTURAL TRADE POLICY

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

1000 800 600 400 200 0

Figure 2 Growth of different sectors of the economy: 1997-2008

Articulating Appropriate Trade Policy

Figure 3 Regional Share of GDP 2007

Table 1 Agricultures share in regional GDP economy 1995-2008

Articulating Appropriate Trade Policy

80 60 40 20 0 Services Industry Agric

Figure 4 Share of components of GDP 2007

Table 2 Gross Domestic Product of Agricultural Sector : 2007

2.2 Income and Expenditure

Articulating Appropriate Trade Policy

Table 3 Percentage share of different sources of income in agricultural households 1999/2000

Source: World Bank, 2003 (Sri Lanka Integrated Survey, 1999/2000)

Articulating Appropriate Trade Policy

Table 4 Income and Income Distribution:

All Urban Rural Estate

Articulating Appropriate Trade Policy

Table 5 Percentage distribution of average monthly household expenditure

2.4 Rural Poverty

Table 6 Prevalence of Poverty in Sri Lanka 1985-2007

Articulating Appropriate Trade Policy

Table 7 Percentage of Poor Households based on Official Poverty Line

Source: Dept of Census & Statistics

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

2.6 Workforce and Wages

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

Real Wage Rate Index

120 100 80 60 40 20 0 Export Ag Industry

Figure 5 Agriculture Real Wage Rates of (Index 1985=100)

2.7 Agricultural Policy

Articulating Appropriate Trade Policy

Articulating Appropriate Trade Policy

Table 12 Agricultural Policy Changes - Major Events after 1977

1994 2001 1977

1995 1996 1997 1998 1999 1999 2000

Articulating Appropriate Trade Policy

Trade and Marketing

1977 1988 1989 1990 1991 1992 1995 1996

Articulating Appropriate Trade Policy

2001 2004 2005 2006 2007 2008

Source: Annual Reports, CBSL

2.8 Research and Development Investments

Articulating Appropriate Trade Policy

Figure 6 Research Intensity

2.9 Trade Policy

Articulating Appropriate Trade Policy

Figure 7 Average import duty collection rate: 1985-2008

Articulating Appropriate Trade Policy

Figure 8 Average import duty collection rate (%): Consumer goods

Articulating Appropriate Trade Policy

Rice and wheat