(Source: Arutha)
(Source: Arutha)
On 17 January, Sri Lanka saw the domestic price of 1 kg of carrot mark a record-breaking price of Rs. 2,500 when, during the festive season of just the previous month, the price of 1 kg of carrot stood at Rs. 500.
There were several reasons for the high prices seen in the market last month, one of which was the weather pattern changes, especially in the upcountry region, while disruptions in the supply chain and increased production costs were other reasons for the price hike.
The demand for vegetables is quite stable in Sri Lanka other than during festive seasons or during adverse weather conditions and the Government tends to reduce import duties of other food products to address the vegetable prices.
However, a recent calculation suggested that Sri Lanka could import vegetables at lower prices even with duties to meet the local demand. Therefore, The Sunday Morning decided to look into the feasibility of the idea and whether Sri Lanka could do it.
Trade protectionism
Speaking to The Sunday Morning, economic researcher Rehana Thowfeek said that Sri Lanka’s trade policy was highly protectionist, where the Government had imposed high duties on imports to artificially raise prices and even in the case of those with duties, it was still cheaper to import than address local market demand via domestic production.
“The high duties are imposed claiming to protect the local industry, but if the local industry is not able to fulfil the domestic demand, then you are holding the consumers to ransom,” she said.
She added that the high demand in the market could be curtailed if vegetable prices were reduced while allowing imports to fill the market gap. For example, she said that to import 1 kg of tomatoes, Rs. 220 was charged as duty, making the import more expensive.
“If the import is only expensive because of that duty, then the domestic supplier is not able to produce at a more competitive price, without the duty making the import more expensive. Then what is the point of domestic production?” she added.
Imported vs. local
The calculation compares the retail prices of a selected basket of goods for which national data was available in Sri Lanka, India, and Pakistan. The period selected was the third week of December 2023 for Sri Lanka and 25 December 2023 for Pakistan and India.
Data for India was obtained from the Department of Consumer Affairs’ Price Monitoring Cell and data for Pakistan was obtained from the Bureau of Statistics, Punjab. Data for Sri Lanka was obtained from the Department of Census and Statistics’ (DCS) weekly retail price bulletin.
All import duties, tariffs, and taxes applicable at the period were applied to the items. Additionally, another 25% was added to cover shipping charges (although this was likely an overestimate of the shipping cost).
The analysis found that even with all import duties, tariffs, and taxes applied along with shipping charges, Sri Lanka can retail all of these items for cheaper than the prevailing domestic market prices, if they are imported from India and Pakistan. This also does not account for the fact that wholesale prices are lower than retail prices, so it is likely to be even cheaper when imported in wholesale quantities.
Some duties and tariffs are quite high, meant to make imports expensive in comparison to local produce as well as to raise revenue for the Government, which relies heavily on indirect taxes.
For example, there is a Rs. 220 duty applied on 1 kg of chicken and a 40% or Rs. 270 cess applied on 1 kg of tomatoes. If these items were removed from the negative lists and tariffs were amended to strip applicable para-tariffs like cess, they can then be sold at even lower prices.
Supply chain difficulties
Thowfeek said that in order to import more perishable vegetables apart from the already imported onions and potatoes, there would be challenges in supply chain management, however noting that “it has been known for years, so it is not a sufficient excuse as to why we can’t import”.
Thowfeek also said that Sri Lanka did not have sufficient storage facilities and warehousing to store vegetables, which led to vegetables being thrown away when there was a bumper harvest. However, she said that since 2019 there had been a massive reduction in the yield of vegetables, which could be a permanent decline if people were moving away from agricultural activities.
She also said that Sri Lanka had not made use of Free Trade Agreements (FTAs) with India and Pakistan as all these food products were on the negative list when most food imports came from those two countries.
According to the Central Bank, India and Pakistan accounted for about 29% of total imports to Sri Lanka in 2022. As of 2023, Sri Lanka uses about $ 350 million annually to import vegetables such as onions and potatoes.
Low-quality seeds
Speaking to The Sunday Morning, Sri Lanka Agriculture Economics Association President Dr. Sumali Dissanayake said that the main reason for the reduction of productivity in Sri Lanka’s vegetable harvest was the lack of high-quality seeds in the market. She said that upcountry vegetables such as carrots, beans, and cabbage which saw recent price hikes were grown mostly from imported seeds.
Dissanayake noted that there were many problems in the seed market between the point of import and the farmers receiving these seeds.
She said that when importers imported seeds, they went through a Government seed verification process before they were released to the market. “But what the farmers say is that since the quality of seeds is low, productivity has also been low,” she said.
However, according to their findings, it was revealed that while importers did import high-quality seeds, retailers had created an artificial demand for the seeds by storing them for a long period and changing their expiry dates.
She said that the farmers were aware of what was happening but did not know to which authority they should refer this to as Government intervention in the process was very low.
“When looking at vegetable yields, we have not achieved full potential yet. There is a huge gap between the actual yield obtained by a farmer and the maximum yield that can be obtained,” she said.
Moreover, she said that even though climatic factors also impacted low productivity, the low quality of the seeds had contributed to about 85% of this low productivity.
Therefore, she said that when farmers were unable to achieve the potential yield for their vegetables, their income reduced, thereby reducing the profit, which forced them to sell at higher prices to cover the cost of production. She added that Government intervention was necessary in this instance to regulate the prices so that consumers would not face higher prices.
According to a survey conducted by Dissanayake, it was revealed that the accessibility of high-quality seeds was at 55% for domestic farmers.
Importing can be expensive
Dissanayake said that Sri Lanka could import exotic vegetables such as broccoli or black radish which were not grown in the country, as importing to substitute domestic production could be expensive.
“Theoretically, something is imported when the opportunity cost is lower, providing a comparative advantage to produce that thing locally,” she said.
For example, she added that Mysore dhal was not produced in Sri Lanka because it was more costly to produce it locally while the same applied to apples. However, she said for potatoes and onions, although there was domestic production, the price of imported potatoes was lower than that of domestic potatoes.
Encourage farmers to grow
Speaking to The Sunday Morning, Essential Food Commodities Importers and Traders Association (EFCITA) Consultant Parakum Abeysekara said that vegetable market prices fluctuated just as other products in the global market, but Sri Lanka could not import vegetables each time the demand picked up artificially, as it would destroy domestic producers.
“The Government is not doing anything to encourage farmers to produce more – it is the farmers and the private sector that are feeding the entire country,” he said.
Moreover, Abeysekara said that since the cost of vegetable production was exploited in Sri Lanka, it would be an injustice to the people who had been cultivating vegetables all these years should the Government decide to import vegetables. “We should not destroy what we have and we should only encourage people, although there are difficulties,” he added.
Further, he said that vegetable and paddy seeds should be imported and distributed by the Government at nominal rates, as private sector companies were earning massive profits by selling the seeds at higher prices.
Abeysekara also noted that the Department of Agriculture should analyse and make the public aware of the cost involved in producing 1 kg of a vegetable and gazette it so that the margins would not increase unusually when there was a supply issue.
Importing impractical: Govt.
Speaking to The Sunday Morning, Ministry of Trade, Commerce, and Food Security Secretary A.M.P.M.B. Atapattu said importing vegetables to curtail the local demand was not practical like in the case of rice.
Further, he said that vegetables could not be imported to Sri Lanka due to the existing quarantine restrictions, although they could be imported as frozen vegetables, albeit to a limited extent.
The Quarantine and Prevention of Diseases Ordinance regulates the landing of goods from aircraft, vessels, or boats either absolutely or conditionally.
Atapattu said that the recent price hike, which was seasonal, was a trend seen every year: “To address this we use other alternatives, such as reducing duties on dhal and potatoes to counter the increase in vegetable prices.”