Fertile subsidies

THE Government is embroiled in a fertiliser shortage brought on by the decision to give cash directly to farmers rather than importers. Traders responded by stockpiling fertiliser to create an artificial shortage and drive up prices.  

The decision to give money directly to farmers is a positive one as it reduced corruption and created financial inclusiveness with about 1.5 million new bank accounts created. But the Government appears to be unable or unwilling to tackle illegal stockpiling, creating a crisis. The president and Prime minister are expected to hold talks today and reports indicate the Cabinet has given permission for a temporary reversal of the process. But how much does Sri Lanka’s heavy subsidy bill really impact the poor? Recent data suggests it is the most ineffective of a myriad of subsidies. 

By international standards, social assistance is less generous in Sri Lanka than in many other comparable countries. The World Bank in a recent a benchmarking exercise that examines the generosity and targeting of social assistance programs across 40 lower middle-income countries found that contribution to the lowest of Sri Lanka’s poor or those who live on about Rs. 120 a day is merely 6.6%, significantly below Pakistan, the Philippines, and even Bolivia.

Not only are Sri Lanka’s social assistance programs small, but the budget devoted to social transfers has also fallen in recent years. Spending on social transfers, with the exception of fertiliser subsidies, has declined in real terms. For example the fall in the real value of Samurdhi transfers slowed poverty reduction by 9.6% between 2002 and 2012/13. Because of the decline in spending, by 2012/13, six key programs including handouts for disabled and elderly combined amounted to only over 3% of total household consumption for the bottom consumption quintile.

Samurdhi has, therefore, had a minor and decreasing impact on poverty reduction. Samurdhi transfers are too small to make a large impact on poor households’ budgets, as they contributed only 1.7% to household consumption of the poorest 20% of the population in 2012/13, according to the World Bank study. In other words subtracting the Samurdhi benefit from household consumption would increase the national poverty rate by 2.1% points in 2002. But in 2012/13, the comparable figure had declined to merely 0.6% points.

The poverty reduction impacts of other social assistance programs are even smaller. These programs include the school food program, fertiliser subsidies, the Thriposha program, disability and relief, elderly payment, scholarship, health and medical aids, food and other commendation, and disaster relief assistance. Combined, their impact on poverty is almost negligible at 0.5% points.

The report goes onto say among Sri Lanka’s social transfer programs, Samurdhi and the school lunch program are better targeted than fertiliser subsidies. Samurdhi and school lunch programs transfer roughly 55% of benefits go to the bottom 40%. The fertiliser subsidies are the least well targeted transfer, with only 45% of the benefit being devoted to the bottom 40%.

Samurdhi’s targeting performance has slightly worsened in recent years. In 2002, 42% of all transfers reached the bottom quintile and 70% reached the bottom 40%. But by 2012-13, this had fallen to 39% and 65%, respectively. Reforming the social assistance programs, including the Samurdhi, to reduce leakage and improve coverage of the disadvantaged can make it more helpful for the poor. 

Given this data, a massive change has to happen with both the public and the Government. For starters the Government must invest in mores studies to gather data and understand dynamics before crafting policies rather than rolling out handouts to broker more votes. The public must also understand the difference between quality and quantity, so that their representatives use public revenue to formulate and implement poverty alleviation methods that actually work or it will continue to be a lost journey of the blind leading the blind.