Sri Lanka's agricultural output and export potential to rise with reforms and modernisation strategies

Sri Lanka’s economy has traditionally been agriculture-based, but several centuries of international trade – and the introduction of tea, rubber and coffee cultivation by the UK – have altered the sector’s makeup significantly. After independence in 1948, the economy remained highly dependent on trade, with tea, rubber and coconut making up the bulk of exports, even while many Sri Lankans continued rice cultivation for domestic consumption using ancient reservoirs and paddy irrigation systems.

Despite its generally strong economic growth since the end of the civil conflict in 2009, challenges remain for the industry. Indeed, cultivation methods and post-harvest losses often result in low yields, productivity and profitability, which threaten to undermine growth and long-term potential.

Structure & Oversight

The sector is overseen by the Ministry of Agriculture (MoA), which coordinates with a wide range of associated boards, departments and secretariats. These include those responsible for fisheries, paddy fields, fertiliser, research policy, insurance, food promotion, export, animal production, irrigation and other agricultural enterprises. Organisations such as the World Bank, the Asian Development Bank (ADB), the International Labour Organisation, the UN Environment Programme and the Food and Agricultural Organisation (FAO) of the UN also play active roles in the sector.

Agriculture Policy

The Sri Lanka Council for Agricultural Research Policy (SLCARP) formulates research policies and priorities, and makes funding recommendations to the MoA. The MoA ensures that agricultural products remain at stable prices by coordinating paddy purchasing and marketing programmes, as well as implementing projects such as the accelerated food production programme and increasing the production of selected crops.

These objectives are in accordance with the government’s Vision 2025 – a plan to attain upper-middle-income status – which includes strategies to minimise food insecurity, develop agri-business, establish large-scale agro-enterprises and introduce high-yield crops. Major initiatives include the National Food Production Programme, strengthening value-chain development and the establishment of agricultural mega-zones. To achieve these goals, the plan promotes public-private partnerships.

Contribution to GDP

According to data from the Department of Census and Statistics, agriculture contributed approximately 7.5% of GDP and employed 25.3% of the workforce as of the third quarter of 2018. In comparison, the services sector contributed 56.8% of GDP and employed 46% of the workforce, while industry contributed 27.4% of GDP and employed 28.7% of the workforce. As the economy has gradually shifted towards a services and consumption-driven growth model, the contribution of agriculture to GDP has declined considerably, from 43.6% in 1950, to 27.2% in 1980, 23.6% in 1990, 14.7% in 2000 and 8% in 2010.

Investment & Land

One of the government’s top priorities is to increase sector productivity, and it has recently begun intensive efforts to achieve long-term rice self-sufficiency. The country’s main crops are rice, which accounts for 40% of total agricultural output; plantation crops such as tea, rubber, coconut, sugar cane and oil palm at 38%; and fruits, vegetables and field crops at 22%.

A deficit of private investment in agriculture can be attributed to fluctuations in policies impacting the sector, such as those related to the use of fertiliser and weedicides, which tend to introduce uncertainty for potential investors. Furthermore, Sri Lanka’s land ownership regulations, which permit individuals and companies to own a maximum of 50 acres of agricultural land, may also deter larger foreign investors. “If you do not own the title to your land, why would you invest in developing it? The statutory 20-ha limit on land ownership impedes investment in modern, large-scale agriculture,” Rohan Pethiyagoda, former chairman of the Sri Lanka Tea Board, told OBG.

In 2016 Sri Lanka had 2.7m ha of agricultural land, according to FAO estimates, of which 1.3m ha was arable land, 1m ha was under permanent crops, and 440,000 ha was permanent meadow and pasture land. Most of the island is flatland, although there are hills in the lowlands and mountains in the south-central area , while the central highlands have a varied landscape with peaks, valleys, and cliffs. The island’s topography affects climatic elements such as wind patterns, seasonal rainfall, temperature, and relative humidity – particularly during the monsoon.

Agricultural Insurance

Since 2016 a scheme administered by the National Insurance Trust Fund has insured every household and small business in Sri Lanka against natural disasters. However, weak environment and disaster management has increased Sri Lanka’s vulnerability to natural disasters such as droughts, floods and landslides.

To better address the consequences of disasters that affect agricultural enterprises, the government proposed allocating LKR3bn ($18.9m) to provide farmers with a weather-indexed insurance scheme in the 2018 budget. In addition, Vision 2025 calls for the establishment of a National Disaster Reserve Fund for financing post-disaster reconstruction, including an insurance scheme for economically important sectors such as agriculture.

Food Security

According to the FAO, approximately 2.3m Sri Lankans, or 10.9% of the population, were undernourished between 2015 and 2017, making food security an important issue for the country, although the overall trend for these indicators is declining. Malnutrition is still especially high on the plantation estates. Food insecurity has also been exacerbated by inconsistent government policies and policy changes on import duties and non-tariff barriers. Sri Lanka’s food import bill takes up a significant portion of national expenditure, totalling about LKR200bn ($1.3bn) annually. Food and beverage imports increased by almost 9% in 2017, and total agriculture, food and beverage imports were $1.8bn that year. Sri Lanka imports corn (maize), lentils, sugar, fruit, milk and milk products, wheat, soy, corn for animal feed, and cotton.

Food Production

Sri Lanka’s rural areas were home to 81.5% of the population in 2017, according to the FAO. Around 28% of the population is directly involved in the primary production of food, and the country produces nearly all the vegetables required for national consumption. A National Food Production Programme ran from 2016 to 2018, with an emphasis on introducing modern farming methods.

In January 2019 plantation employers agreed to raise the daily wage of estate workers to LKR750 ($4.70), after months of protests and strikes by plantation workers, who were demanding a wage raise from LKR530 ($3.30) to LKR1000 ($6.30).

Mechanisation

Currently the only crops that use mechanisation are rice and tea. Around 20% of the tea crop is harvestable by machine, but sales of these machines have seen little growth so far.

The government is eager to increase the adoption of mechanisation to grow high-value cash crops such as flowers, fruit and other exportable crops. “Identifying resilient, high-value crops should be a main focus for the country as recent years have exposed the industry’s vulnerability to extreme weather,” Suresh de Silva, CEO of Silvermill Group, a global food and beverage producer, told OBG.

To address this issue, the MoA, SLCARP and National Committee on Agricultural Mechanisation published a report titled National Priorities in Agricultural Mechanisation 2017-21. The document calls for a national policy to modernise and diversify agriculture to attract youth to the sector and accelerate a transition from agriculture to agri-business.

Smallholder farmers make up the majority of Sri Lanka’s food crop farming, and they generally cultivate their crops on less than 1 ha of land. This small scale makes it difficult to achieve the economies of scale that are necessary to encourage mechanisation: investing in expensive equipment is generally not feasible for farmers.

Vision 2025 encourages plantations to modernise and become globally competitive by promoting value addition in tea for re-export, exploiting niche markets, and pursuing private-sector entrepreneurship in coconut, rubber and sugar production.

For the fisheries industry, the 2018 budget allocated LKR175m ($1.1m) to introduce technology such as refrigerated storage in multi-day boats, with the goal of reducing post-harvest losses. The import of advanced technology equipment was also exempted from the 2% Nation Building Tax. In May 2018 the EU launched a three-year, LKR810m ($5.1m) project to support the modernisation of Sri Lanka’s agriculture sector and promote diversification into high-value agricultural products, with a focus on improving export earnings.

Irrigation

The government supports the sector with free irrigation. In August 2018 a LKR16bn ($100.1m) irrigation project was launched to provide irrigation and potable water to farming communities in the dry lands in the northern provinces using the cascaded tank-village system. This ancient traditional agriculture system composed of a connected series of tanks organised within a micro-catchment –designated as a globally important agricultural heritage system by the FAO – provides water for irrigation, animals and domestic use.

In January 2019 the Kalu Ganga River development project, which is being funded by Saudi Arabia, was launched. The scheme aims to create a strategic reserve for irrigation and drinking water through the construction of three dams on the Kalu Ganga River, which will irrigate 975 ha of agricultural land.

Also in January, the Ceylon Electricity Board and Sri Lanka Air Force signed a memorandum of understanding with the government of Thailand for a project to create artificial rain for hydropower generation, which will help to mitigate farmland drought and increase reservoir irrigation and water supply capacity. Thailand is providing technical expertise for the project. The ADB will also assist the development of new irrigation projects in Sri Lanka, according to media reports in January 2019, although the specific details have not yet been made clear.

Rice

Sri Lanka’s primary food crop, rice, is cultivated during two seasons, Maha, which runs from September to March, and Yala, from May until late August. In 2015, 1.2m ha of land was under rice cultivation. By 2017 the total amount of land under rice cultivation in Maha and Yala was down to almost 792,000 ha.

Of this, over 619,000 ha was harvested, producing 2.4m tonnes of rice – during Yala, there was an average yield of 4291 kg per ha, whereas during Maha season the yield was 4301 kg. The government’s Paddy Marketing Board runs a paddy purchasing programme in order to maintain paddy price stability. For Maha season in 2018/19, there was a guaranteed price of between LKR41 ($0.26) and LKR38 ($0.24) per kg depending on the variety, for a projected harvest of about 2.6m tonnes of rough rice.

Tea

An important source of foreign exchange, tea is cultivated in the central highlands by both smallholders and regional plantation companies (RPCs). Smallholders tend to have fragmented land, and tea production may be a supplementary income-generating activity for them. Many smallholders aspire to leave agriculture in order to work in the service sector, which leads to labour shortages.

A total of 25 RPCs produce one-third of all tea crops in Sri Lanka. The RPCs have 40- to 50-year leases on their lands, which were granted in the early 1990s. This lease system does not provide incentives for the RPCs to invest in enriching the soil or rejuvenating their ageing crops by replanting, which is expensive: it can cost approximately LKR2.5m ($15,700) per ha, and there is a 20-year period before the benefits of replanting are fiscally evident. “The lease model has failed. It cannot succeed because long-term investments on leased property are not being made,” Pethiyagoda told OBG.

Sri Lanka’s main tea export markets are in the Middle East, Russia, North America and China. Its major market competitor is Kenya, whose advantages include flatter terrain, fresher soil, unlimited land ownership, and less-expensive labour – all of which lead to better economies of scale.

A major issue for tea growers currently is a lack of weed control, with developments around the use of glyphosate and fungicides causing market turmoil, soil erosion and crop loss. The situation remains fluid, with a government ban on glyphosate technically lifted, but on-the-ground reports suggest that glyphosate imports have nonetheless not recommenced. However, the pure Ceylon tea brand is trusted and well-known, and the government plans to develop the industry further.

Rubber

The future of the country’s rubber industry from 2017-26 is charted in the Rubber Industry Master Plan (RMP), which determines its strategic worth and the obstacles it may face in terms of capturing global markets. The RMP targets an annual gross industry turnover of $4.4bn by 2025, at a 10% compound annual growth rate. If these targets are achieved, the value created by the rubber industry would account for nearly 2% of GDP in 2025, and its projected share of exports would almost double from the current 8% to around 15% in 2025.

Fisheries

The Ministry of Fisheries and Aquatic Resources Development oversees the country’s fisheries industry, which contributes almost 2% of GDP. Fisheries directly and indirectly employ around 560,000 people, provide livelihood for 2.7m people, generate foreign exchange and produce animal protein. Sri Lanka’s marine resources are located in its 517,000-sq-km Exclusive Economic Zone.

The fisheries industry is of significant value to the economy. In the 2018 budget, the government outlined a range of measures to boost the sector, including establishing a dedicated buffer zone for private sector harvesting and processing of sea cucumbers and the creation of cool rooms and storage facilities. Other measures include the allocation of LKR400m ($2.5m) for buying boats to encourage deep-sea fishing; a LKR1.75bn ($11m) upgrade of anchorages and landing sites; an investment of LKR200m ($1.3m) to develop fishery harbours; LKR450m ($2.8m) to improve fishery villages; LKR100m ($630,000) to establish a milk fish and marine ornamental fish hatchery; and LKR250m ($1.6m) to develop infrastructure facilities at Aquaculture Industrial Park in the coastal city of Batticaloa and establish similar parks in the districts of Mannar and Hambantota.

Value-added Processing

The National Export Strategy (NES) 2018-22 targets key areas of each sector based on their export potential. For agriculture, these areas are spice and concentrates, which has a mature growth trend, and processed food and beverages, which has been identified as an emerging industry. Sri Lanka exports 30,000 tonnes of spices annually, including cinnamon, pepper, cloves, cardamom and nutmeg. Total spice exports reached $273m in 2016. The global spices market is growing at an annual rate of about 5% by value and is projected to exceed $10bn by 2020, with the Asia-Pacific region projected to expand at 7% annually until 2020, driven by increased demand for processed and ready-to-eat foods and the use of spices as natural preservatives.

In Sri Lanka, more than 70% of cultivated land for spices and concentrates is on smallholdings and in home gardens. For the spice segment to continue to add value and accelerate market development, the NES calls for diversification into the production of spice mixes and spice-based sauces in the short term, while in the medium term, quality improvements and increased production volumes are needed, as well as enhanced packaging and labelling. Long term goals include producing organic and fair-trade spices and extracts, and encouraging foreign investment in joint ventures with local enterprises for the development of high-end food and medicinal products. Incentives to increase the production of high-quality planting materials for cinnamon and pepper for 1000 nurseries were also included in the 2018 budget.

Regarding food and beverages, it is one of the fastest growing local industries, with more than 110 manufacturing and marketing companies involved. The industry’s export value was over $250m in 2018, representing about 2.2% of total exports. It employs more than 2m people and comprises approximately 40% of micro, small and medium-sized enterprises.

The processed food export strategy, which runs in parallel with the NES, details the main constraints on this industry. These include outdated sector support frameworks, unsuitable regulations and a lack of modernisation in services, as well as policies focused on agricultural production rather than processing. To support this growing and lucrative industry, the strategy aims to make raw materials more readily available, improve and modernise food safety controls, and reinforce national branding with the goal of becoming a regional food processing hub.

In October 2018 the government announced it would ease restrictions on importing planting materials and fresh produce such as coconuts, fruits and vegetables in order to attract investments and boost processed food exports. In addition, the MoA is expected to amend strict quarantine regulations by 2022 in order to simplify procedures, and introduce and import more productive varieties of raw agricultural products. The Ministry of Industry and Commerce also plans to make similar amendments to the Import for Export Processing scheme by 2022 to further simplify the process. The scheme enables businesses to receive Customs or value-added tax exemption on importing items used to produce goods for export. Such regulatory moves are expected to improve the supply of fruits and vegetables for food processing, especially during off-season periods, when food processors are left with no replacements for their local supply.

In December 2018, a two-year, $1.1m cooperation project was launched by the FAO and China to help boost the production and commercialisation of fruit crops in Sri Lanka. The project includes field-based capacity building to increase the value of fruit crops and develop both domestic and export markets.

Vision 2025 includes plans to assist tea, rubber and non-traditional export smallholders to take advantage of global market opportunities by helping to improve production and processing, enhance productivity and align their products. Short-term price support is also available in the event of a price collapse or a commodity oversupply.

Climate Change Adaptation

Sri Lanka’s agricultural sector has been severely affected by climate change. The country ranked second in the 2019 global climate risk index by environment-focused NGO Germanwatch. President Maithripala Sirisena has called for an international funding mechanism to support countries worst hit by the impacts of climate change and has advocated for more regional cooperation to strengthen sustainable industries. Furthermore, Takehiko Nakao, president of the ADB, agreed to assist in climate change mitigation projects in Sri Lanka, according to press reports after a January 2019 meeting with President Sirisena.

Domestic efforts include prioritising environmental protection and disaster management, as is outlined in Vision 2025. Funding of LKR200m ($1.3m) was allocated in the 2018 budget to upgrade the Department of Meteorology with new technology and capacity training for personnel. The 2018 budget proposed the use of off-grid solar power by providing companies engaged in agriculture and agro-processing, such as drip irrigation, poultry, canning and plantations, with loans at an 8% subsidised interest rate. As of January 2019 this scheme has not yet been implemented. In addition, Vision 2025 made credit facilities available to encourage investment in value addition and the development of milk-based products and the poultry industry.

Outlook

The sector continues to adopt muchneeded reforms to increase exports, add value to raw materials and feed the population, even as it adjusts to the effects of climate change. The government’s drive to engage smallholdings, estates and the private sector in modernisation projects to help the sector to expand – combined with an increased focus on high-value, export-oriented items such as processed food and spices – shows that stakeholders are primed to move into new and niche areas, which the country is well positioned to benefit from.