Agriculture neglect can hurt Lanka
Rohantha N.A. Athukorala
I had my first experience sitting before the Committee On Public
Enterprise(COPE) as a Board member of a premier Government Corporation
in Parliament. Though I have read about the happenings at such meetings
I had never had the opportunity of being at such a meeting. Coming from
a multinational background it was similar to the quarterly reviews that
we used to have when a regional/global a director visits the local
business.
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A farmer working his paddy field |
They would grill us on our performance and critique the strategy
adopted whilst also making a judgement on how passionate we are in
delivering results.
The line of questioning by the MPs was objective and it opened my
mind to what Sri Lanka needs to do, to the burning issues that are
currently cropping up in different parts of the country.
I appreciated the process and found it very interesting given that it
was non-political in nature and the cross checking that was done was
solely on the objective of developing the economy.
If one looks at the Sri Lankan economy things look very positive. The
stock market is booming with the market cap increasing by a staggering
97 percent. The second quarter GDP growth has surpassed 8.5 percent. The
World Economic Forum has pegged Sri Lanka by 17 places in the global
economic competitiveness rating.
S&P has moved up Lanka's rating upto B+ outlook.
Sri Lanka is being featured in every possible tourism opinion
magazine as a must visit destination. Now the challenge is how we can
work through the bureaucracy and bring in the big ticket investments
into the country.
Closer look -WP
On this positive outlook, if we take a close look at the Western
Province and its dominance and growth in the country's economic
landscapes it can be summarized to the fact that the focused market
reforms that has happened in the 1980's and 1990's and that the Western
Province was geared to exploit this reforms.
This is the key reason that we see today the commanding position of
the Western Province with almost a fifty percent contribution to the
country's GDP.
Some of the key infrastructure that has been focussedly developed are
the port, road network, communication, ICT and the existing
manufacturing bases in the Western Province.
This has enabled the private sector to take advantage of the market
reforms that came to place in the last twenty years and hence one can
hypothesize that the reforms benefitted due to the ground conditions
being right.
This is an important point to keep in mind given that the 2011 Budget
is sure to have some serious radical changes that will come into force
from a sector specific angle.
But if the private sector is to squeeze out the benefits from these
changes the basics must be addressed. Which means that we can start now
on the fundamentals that need to be addressed so that by November at
least, we will know what the basic priorities are that needs to be
addressed so, that with the drastic changes that will be coming in to
play we as a nation can become competitive.
Agriculture policy neglect
If we focus outside the Western Province on the rest of regions that
are lagging behind on growth, it can be hypothesized that it is due to
the absence of reforms namely in the agricultural sector which is the
main stay economic engine that has resulted in the private sector not
been able to exploit the opportunities that these regions.
To be specific, the opportunity that exists in the global market
place in the agricultural sector are tea, rubber, coconut which have
been continuously neglected over time by the policy makers.
It could also be summarized that regions that are lagging behind with
lower GDP growths in the country is due to the sector specific
development plans being a non starter.
This cannot be just attributed to the private sector but more due to
the macro policy reforms not taking off in the area of agriculture and
there by having a ripple effect on the sector.
The best case in point is the tea industry where production has been
hovering around 300 million kilograms nationally whilst in the corporate
sector where the management is essentially privatized contracting of
volumes has happened.
To be specific from a 142 million kilograms of tea to around 124
million in a three year time period. If one analyses the logic, there
seems to be a strong link to the findings of the Tea Research Institute
(TRI) which states that the extent of Old Seedling Tea (OST) in Sri
Lanka, almost 75 percent are in the corporate sector and the majority of
these bushes are above sixty years in age.
Which means that due to an absence of replanting the senility of the
bushes have set in and this has resulted in the declining tea production
in the corporate sector.
The alarming factor is that if 'replanting of tea' is not done within
the next seven years the TRI estimates that corporate sector production
volumes can decline to a level as low as 80 million kilograms. This
means a drop of almost 45 million kilograms of tea from the 2002 output.
In value terms it is equal to 12 billion rupees which is colossal to
a sector of business accounting for around forty billion rupees per
annum.
One can argue that replanting by the corporate sector must be done at
a rate of 2 to 3 percent as per TRI guidelines.
But the reality is that replanting of one hectare acre of tea will
cost over two million rupees.
With a gestation period of seven years and the Internal Rate of
Return (IRR) being just 13.7 percent as per TRI calculations this
investment becomes financially non viable. May be a policy decision
required at this moment is to increase the lease period of the
privatized management contracts to around 66 years so that then even
with a drain on ones profits if replanting is being done the financial
viability can be justified with at least two cycles of productivity runs
on the life of a bush.
The above is only one such recommendation and the essence is that
pointing fingers is not the need of the hour but a national level
solution has to be sought so that we can strategically develop such
industries that fall under the agriculture realm. I once again state the
objective being to prepare the ground so that when the November budget
proposals get activated and the relevant sector reaping the benefits.
Impact to exports
From an export end if analyse the numbers agricultural exports
account for 25 percent of the export contribution to the total export
proceeds of the country. For the first six months of 2010, there is a 27
percent growth in agricultural exports, powered by tea sector riding on
a twenty three percent growth trajectory. What's important to note is
that even though agriculture accounts for only quarter of the export
values, it employs over 2.2 million people across the country. Which
means that unless there is a strategic development of the sector from a
supply side but also on the demand side, there can be serious
ramifications on those employed in this industry and the competitiveness
of the industry.
Its is also important to keep in mind that by developing this sector
Sri Lanka can also reduce its import bill which in turn can help correct
the trade imbalance. The logic being the import accounts only for 30
percent of the agriculture output of Sri Lanka whilst in the case of
Industrial products, almost 70 percent of the input is being imported.
This highlights the importance of investing on this sector for strategic
reasons which are essentially long-term driven as it will help reduce
the trade imbalance of a country.
The link to poverty
We also have to keep in mind that there is a strong link between
poverty and economic growth. The poverty in the agricultural sector is
at a high 45 percent and the estate sector at 73 percent even though the
overall poverty count for the country is below the twelve percent mark
and lately dropping to single digit. Hence we see the devide between
regions where reforms took place and was ready to accept these reforms
as against the sectors that grew exponentially.
It will be also a fair comment to state that agriculture got lost in
this economic template.
Table 2.5 percentage of poor households by major industrial groups of
head of the household and by sector - 2006/07
Heart of the problem
Sri Lanka is known for its protectionist policies like fertilizer
subsidies, land provisioning and protective tariffs which was targeted
to achieve self-sufficiency of rice. However Central Bank data reveal a
different picture with imports of rice registering a 84,000 metric
tonnes and in 2008, it is at 52,000 metric tones in 2009.
This means that the expenditure incurred on all the subsidies
extended have not brought in the desired results. May be its time that
we do a detail analysis so that we understand the learning's and not
repeat it in the years to come.
What Sri Lanka requires is not protectionist strategies but a crash
investment program on removing constraints on land, driving technology
to improve yields and private sector investment to diversify into value
added agricultural products like fruits, vegetables, livestock,spices
and fisheries.
This diversified model may hold ground even in the privatized tea
estates of Sri Lanka.
In fact some Regional Tea Companies who have embarked on this
strategy are already reaping the benefits.
We also need to invest on research and development like new clones of
high yielding tea which was last launched to Sri Lanka as way back 1974.
May be we also need to innovate with modern irrigation methods to drive
productivity and yields with R&D support so that Sri Lanka caters to the
changing consumer basket of food of a typical Sri Lankan household who
has become health conscious and focuses on high roughage food products.
Sri Lanka also needs to implement the land ownership bill so that
farmers can use the land as collateral to raise funds or lease or sell
the land so that it will lead to taking advantage of reform as and when
this happens in the agricultural sector.
Paddy fiasco
If we focus on the hot topic of today, paddy, the overall production
has not increased in relation to the increase in demand even though in
2010 we are experiencing an expanded bumper crop. Imports of rice has
increased by over five hundred percent to 88,000 metric tonnes in 2007,
84,000 in 2008 and 52,000 in 2009 as per the Central Bank annual report.
But it's important to note that there were many issues that this
sector faced like the security situation in the Eastern province and
changes in weather patterns but some areas of concern is that the land
cultivation as a net extent in 2009 has decreased by almost nine percent
which is something that needs analysis.
The good news is that the yield has improved from 4187 kilograms to
4336 kilograms per hectare in 2009 which is encouraging. We need to
understand why this has happened and drive this harder, so that it can
off set the adverse weather conditions that is bound to happen due to
climate change issues is my view.
Global thinking
If I am to pick the key highlights of the global analysis that was
done by global experts like Paul Schulte the chief regional economic
strategist for Lehman Brothers who commented 'Until powerful responses
are seen globally on supplies, the high prices of merchandise will
continue and war on food security will continue".
A statement that caught my attention was from Glien Maguire of
Society General's chief economist who said '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.
Hence we, that Agricultural neglect is not just an issue for Sri
Lanka but it is a global issue.
WTO must act
I feel organizations like the WTO should mandate legislation in each
country, so that there is a total ban on the use of foodstuff like corn
and palm oil in producing ethanol and bio fuel. May be 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 that this blocks free enterprise and profit taking by the more
entrepreneurial private sector but sometimes the world requires
regulation given that resources are scarce and even a small blurb can
drive many into poverty.
Next steps
The fact of the matter is that the availability of food to meet the
needs of every citizen is the ultimate national security of any
government. But what policy planners must take note of is that
agriculture does not drive GDP of a country like how industrial sector
or the service sector could. But the food security in a country
definitely helps governments stay in power. This means that investment
on agriculture should be a fundamental economic policy of any government
if one is interested to be in power in the long.
We must drive in at least a two percent of GDP into research and
development so that we can increase the productivity levels in this
sector that yet practises age old systems like manual irrigation. We
must infuse stronger supply chain management so that the 40 percent
wastage that happens post harvest can be mitigated. We must invest on
branding and sharper marketing so that we drive value addition. The best
example is the tea industry once again.
The state infuses just over one million dollars and the private
sector invests around dollars fifteen million.
The competitors who are driving in a multi origin teas are spending
almost a forty million dollars annually in brand marketing and securing
shelf space in global retail chains.
This gives us ramifications that can happen to a country due to
agriculture neglect. If we do not get this corrected at least now it
will hurt Sri Lanka.
(The author serves the United Nations (UNOPS) as the National
Portfolio Development Head whilst also serving the Government on many
policy making bodies in the area of trade and business. )
Major Sri Lanka Urban Rural Estate
industrial % % % %
groups
Agriculture 45.0 6.4 44.4 73.2
Industry 23.2 28.2 24.4 9.1
Services 31.8 65.3 31.1 17.7
Total 100.00 100.00 100.00 100.00
(Source: Department of Census 2006/07)
Gross Domestic Product (GDP) - 2003-2009 sector wise
Sector GDP in Rs Million (2002 Constant Prices)
2003 2004 2005 2006 2007 2008 2009
Agriculture 237,531 237,536 241,851 257,147 265,870 285,897 294,921
Industry 479,647 505,602 545,981 590,298 635,199 672,790 701,129
Services 1,016,045 1,084,459 1,153,839 1,243,119 1,331,587 1,406,814 1,453,254
GDP 1,733,223 1,827,597 1,941,671 2,090,564 2,232,656 2,365,501 2,449,304
(Source: Central Bank of Sri Lanka (CBSL) |
