Fertiliser subsidy

One of the largest subsidies given in Sri Lanka is for fertiliser, which has seen some interesting changes of policy over the last few years and gives a viewpoint on the dos and don’ts of rolling out subsidies in a local context.

The fertiliser subsidy, which is about Rs. 15 billion in value, had been allocated each year to give farmers, especially rice farmers, fertiliser at a reduced cost. Arguably one of the most popular subsidies, after tax-payer funded education and healthcare, the subsidy became a norm with farmers using it as a crutch to maintain their meagre profit margins. The previous practice was for the Government to pay fertiliser importers directly, with fertiliser then distributed countrywide, but this opened the door to allegations of corruption with complaints of substandard fertiliser imports becoming the norm.

When the Government came to power in 2015 they changed the fertiliser subsidy into a cash transfer system, which on the surface seemed to be a positive step. However, what policymakers did not fully grasp was the inherent complications and issues in converting the entire subsidy into a countrywide cash transfer system.

Initially the Government announced that all farmers should open state bank accounts to get the money, but this ran into controversy after farmers protested the move as being too complicated. The Government then backtracked and said any bank account would do but this in itself was difficult because of the comparatively less educated nature of the sector and the fact that family elders traditionally held land, even though their sons or other relatives actually worked the land. Even after the cash was finally transferred they were unable to find fertiliser at that price in the market. Then in a final twist of fate, there was a severe fertiliser shortage last year just when the rice crop desperately needed it. All this came on top of the worst drought in 40 years. It was simply too much.

Even though agriculture makes up only 7% of Sri Lanka’s GDP, as much as 28% of the workforce is employed in the sector. Agriculture is also deeply linked to the industries and services sector, making it an important cog in the economy. Weather woes and other challenges resulted in agriculture recording negative growth for the first three quarters of 2017 and ultimately dragged overall growth to just 3.1%. Angered by what they saw as government incompetence and faulty policymaking, key agriculture areas voted overwhelmingly for the Pohottuwa party or the Sri Lanka Podujana Peramuna (SLPP) backed by former President Mahinda Rajapaksa at the Local Government elections.

It appears the Government has at long last seen the impact of the fertiliser subsidy change but rather than attempting to understand where it went wrong, engage with stakeholders and manage public funds responsibly, it seems to be simply reversing its decision on cash transfers. 

The Cabinet has decided to provide 50 kg bags of fertiliser at Rs. 500 to farmers with less than five acres and at Rs. 1,500 to tea, coconut and other crop growers. It is absolutely important to assist farmers but the Government must also avoid stopgap measures aimed at bolstering its popularity at the cost of public finance accountability.

Subsidies are provided with public funds and the Government must formulate responsible and sustainable measures with which to dispense them. Ad hoc changes of policy at this point could open the door to corruption and leave space for a repeat mess in the next planting season.