Agriculture: The bedrock of Sri Lanka’s economy

Wednesday, 24 July 2013 00:00 -     - {{hitsCtrl.values.hits}}

When a sector is 33% of the economy and 2.6 million of the labour force of the country, one can just imagine the political significance even though the hype is on the service sector like tourism and the IT/BPO industry – especially in an election year like 2013 in three provinces and the share of voice high that 2014/15 will be presidential elections. A point to note is that whilst the agriculture share is high, the percentage to the total GDP has been dropping, due to the mentioned reason, below the expansion of the service sector. In 2005 the agricultural GDP share was 17.2% but in 2012 it has dropped to 11.1%, which is actually a healthy sign from a macro development perspective. However, the drop is growth in the last two quarters of 2012 has been the drought in the second quarter and the subsequent heavy rains in the last two quarters of 2012. Agriculture neglect? If we carefully analyse the historical information, we see that the Western Province has been showing strongly due to the focused market reforms done in the 1980s and 1990s and the Western Province was geared to exploit these reforms. This to my mind is the reason that we see today’s commanding position of the Western Province with nearly half the GDP contribution. The key infrastructure that had been already developed like the port, road network, communication, ICT and the existing manufacturing bases in the Western Province enabled the private sector to take advantage of the market reforms that came into place. On the other hand, if we take the rest of the country which is lagging behind on growth, it can be hypothesised that the absence of reforms in the agricultural sector resulted in the private sector not being able to exploit the opportunities that the global market offered, especially in the areas of commercial agriculture and agro business that we see the reality today with all these regions lagging behind with a GDP growth of 4-10% to the country. The best indicator of the lagging regions is poverty in the agricultural sector being higher than the poverty count for the country. Hence we see the divide between regions where reforms took place and the sectors that grew exponentially while agriculture got lost in the economic template of the country at that time. However, in the recent past the sprucing up of the investment in the Northern Province with the investment in bridges and highways like the A9 will see the positive outcome in the near future. Paddy – Good news Let’s face it, Sri Lanka is known for its protectionist policies like fertiliser subsidies, land provisioning and protective tariffs, which were targeted to achieve self sufficiency of rice. I feel the results are finally coming out right. In 2012, paddy imports have come down to just 36,000 MT from the 2009 volume of 126,000MT, whilst the exports of rice have picked up to 29,000 MT from 7000 MT in 2009. If we can sharpen the investment program and remove constraints on land, driving technology to improve yields and private sector investment to diversify into value-added agricultural products like fruits, vegetables, livestock and fisheries, we can really see how we can unleash the agricultural economy of Sri Lanka. This will include investing in research and development, like new clones of high yielding tea which was last launched to Sri Lanka as way back as 1974, and introduce innovative and modern irrigation methods which will further support the drive to consolidate the agricultural sector. Tea – Issues persist Whilst we see the good news on paddy, the issues on tea continue with the ageing stock of tea and the productivity numbers declining and in key markets like Iraq the quality of tea exported being very poor. A recent revelation was that even in developing markets like Chile we see the complaints increasing of stones, rodents and bad quality teas that have been exported. I strongly feel that the tea industry must have a dedicated ministry given the sector specific issues at play and the focused thinking that is required to spruce up the industry. This includes the demand chain development driven decision making that is required. New thinking – Global response Some data emerging on the agricultural industry from global experts is that ‘until powerful responses are seen globally by the super power countries on supplies, the high prices of merchandise will continue and war on food security will continue’. Some even make statements that unless agricultural subsidies in countries like the US, Europe and Japan are taken off, production elsewhere becomes not profitable or cheaper, which is so true given the law of comparative advantage that works at a reverse end. Maybe the proposed rice cartel by Thailand is something that we need to give some serious thought to. In the tea industry we must seriously think of the fast fading fashion on single origin teas and now drive blending and value added/flavoured tea, which means that we will be targeting share of throat. Competitors will include any beverage player. This is the reality and maybe we must revisit the proposal of the tea hub. WTO It’s time that organisations like the WTO mandate legislation in each country so that there is a total ban on the use of food stuff like corn and palm oil in producing ethanol and biofuel. Maybe there should be also a ban on the use of commodities as financial instruments as it can exert undue pressure on the price mechanism of food products. The argument is that this blocks free enterprise and profit taking by the more entrepreneurial private sector but sometimes the world requires regulation given that resources are scare and even a small blip can drive many into poverty. I also witnessed in the recent past that some governments resorted to panic behaviour by banning exports of basic food so that there would be no supply issues. This is only a short term measure because basic economics happens due to a result of demand and supply. If the market has a glut in supplies, then it reduces prices and thereby creates a disinvestment for farmers to continue producing that item. This actually negates the original objective that the state had in introducing the ban. Sri Lanka needs to take a cue from this experience for the future, rather than getting trapped in a catch 22 situation. Political economy It is a fact that availability of food to meet the needs of every citizen is the ultimate national security of any government. Hence any decision making on agriculture will have ramifications on the political economy. But what policy planners must be cognisant of is that agriculture does not drive GDP of a country like the industrial or service sector could, but food security in a country definitely helps governments stay in power, be it the United States, Kenya, Bangladesh or even a country like Singapore. This means that investment on agriculture should be a fundamental economic policy of any government, if it is interested in being in power in the long term and not just be a reaction mode to survive in today’s entrenched competitive landscape of a political economy. (The thoughts are strictly the author’s views and do not reflect the organisations he serves in Sri Lanka or internationally. He is a member of the Sovereign Rating Committee of the Central Bank for 2013.)

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