Sri Lanka heading for an agricultural issue in 2017?

A labour force of almost 2.6 million serves the agricultural sector in Sri Lanka 

2016 performance – 4% GDP

Let’s accept it, the performance of Sri Lanka in 2016 was rather mediocre in the midst of a global economic meltdown and the slowing down of the local economy. The GDP grew by just 4% in the first nine months of 2016 which means that from an average island economic perspective a typical Sri Lankan household would not have had any positive impact to their lives. 

Let’s not point fingers but ask ourselves how we can make sure that 2017 can be made different with a collective effort. End of the day, Sri Lanka voted the current leadership and now it is up to us support and drive the country to a 6-7% GDP growth. It is a challenge, given that the World Bank predicts a mere 5% growth trajectory.

Issue – Agriculture at -2.5% in 2016

The cumulative nine month performance as per the Central Bank economic report is that the Services sector grew by 5.7% whilst Industry picked up by a 4.8% which is moderate in performance. The issue is that the agricultural sector at -2.5% contraction will sure create many issues for the country. I guess the current agitation we see with protest campaign are some of the indications of the issue at hand.

The agriculture sector which is 30% odd of the economy and 2.6 million of the labour force of the country, one can just imagine the political significance even though some balancing is been done socially by the performance of the service sector elements like tourism and IT/BPO. The issue at hand is that in an election year like 2017 provincially, the political ramifications can be high given the impending rice shortage and the tea industry struggling at -13.4% decline at 262 million kilograms as at end November 2016. 

Agriculture neglect?

A point to note is that whilst the agriculture share is high, the percentage to the total GDP has been dropping over a period of time without any course correction. Way back in 2005 the agricultural GDP share was 17.2% but in 2012 it has dropped to 11.1% and we know the 2016 performance will sure be lower.

If we carefully analyse the historical information, we see the Western Province GDP 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 that came to play by the then policy makers. This to my mind is the reason that we see today’s commanding position of the Western Province at 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 and thus the contribution of 48% to the total GDP of the country.

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. 

The best indicator of the lagging regions is the «poverty» in the agricultural sector being higher in the lagging regions 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. Hence we cannot just point the finger to the current administration for the -2.5% contraction of the Agriculture sector in 2016 hinged on the severe drought and the flash floods experienced during the year. 

Paddy? 

Let›s accept it, Sri Lanka is known for its protectionist policies like fertiliser subsidies, land provisioning and protective tariffs, which were essentially targeted to achieve self-sufficiency of rice. The results were coming out right. 

Way back in 2012, paddy imports came down to just 36,000 MT from the 2009 volume of 126,000MT, whilst the exports of rice picked up to 29,000 MT from 7000 MT in 2009. But then with weather issues and neglect of managing the physical stocks the country will have to import almost a 250,000 MT in 2017 if we are to practice food security in the country.

I guess it›s time to 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, so that we can really see how we can unleash the agricultural economy of Sri Lanka in the years to come provided the weather gods become favourable to 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 – 5,000 acres? 

Whilst Sri Lanka grapples with the development bill outvoted in every province, the key industry of the agricultural sector, tea, continues with the ageing stock and the productivity numbers declining whilst in key markets we continue to lose share due to the nonexistence of a cohesive marketing strategy. 

There is confusion right now in the market if the RPCs will cease to exist given the 5,000 acre business model announced in the last Budget. This must be clarified as it will have ramifications on replanting, fertiliser application and any development work that the RPCs were planning to do in 2017.

I strongly feel that given the private sector thinking of the Cabinet Subcommittee on Economic Development headed by the Prime Minister, the tea industry of Sri Lanka must have a dedicated ministry to address the 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 which includes the tea hub concept that was finally at least mentioned in Budget 2017.

Global disruptions on innovation

The latest 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. For instance 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 which means the competitors in the beverage market like Coke, flavoured water or the coffee house trend that is getting popular in Sri Lanka lately. This is the reality that the tea industry must face and operationalise the tea hub proposition as it has now made it to the 2017 National Budget.

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 like what we saw on the outburst on paddy, which did not take the country forward.

(The thoughts are strictly the author’s views and do not reflect the organisations he serves in Sri Lanka. The author wishes his readers a Happy New Year. He  could be reached via [email protected]