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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Saturday, April 30, 2005

Long term sustenance of the agribusiness sector in Sri Lanka

Daily Mirror: "29/04/2005 By D.M.Nihal Devagiri : Business Analyst, National Agribusiness Council

"History is repeating, "One lady has committed suicide", reported by "Lankadeepa" on April 18th Monday 2005. Thanks to the agricultural setup in Sri Lanka and farmer communities engage in it, and the "sacred", politicians; let them be mixed socialists or mixed capitalists, capable of exploiting the consensus of communities effectively, even though they may be ineffective in getting into the core of the rural problems and finding suitable solutions. Politicians give thousands of false promises exploiting the consensus of the poor, attending the programs aimed in improving the welfare of the people. The burning question is whether these programs have been able to reach to the target audience. It is not, that is why some poor farmers commit suicide and continuing to live in misery.

Following table illustrates the ground reality. The magnitude of the poverty is much higher in rural areas when compare with the urban areas. It is about four times higher in rural areas than in urban. Majority of these people in rural areas are still dependent on subsistence farming and share of the paddy dominant less dynamic agricultural economy.

Table 1 Poverty Head Count Ratio National and by Sector (%)

Sector Survey Period
Sector 1990-91(%) 1995-96 (%) 2002 (%)
National 26.1 28.8 22.7
Urban 16.3 14.0 7.9
Rural 29.4 30.9 24.7
Estate 20.5 38.4 30.0
Source: Dept. of Census & Statistics

The burning question is, are we allowing the fate of those affected to be decided by the subsistence agriculture alone or else what should be our long term plan to address the grievances and uplift the standard of living of rural farmers.

Agriculture engages nearly 80% of the population and is a principle contributor to Sri Lanka's economic growth, with an output of Rs 131 billion in 2000, accounting for nearly 20% of GDP (at constant prices basis 1980-2000). The sector is vast in its coverage, consisting of food grains/ cereals, fruits, vegetables and several commercial crops like Tea, Rubber, Coconut, foliage & flowers, spices, sugar cane, and tobacco. However, a large share of the production comes from small and marginal holdings, and goes for direct consumption. For example domestic consumption of spices, fruit has been estimated at 70, 90 percent from the total production, respectively. As a result, there is not a high commercial surplus from several segments of agriculture. However, with the introduction of private enterprises in food processing and with increased international trade opportunities, this situation is changing.

Agri-business Sector: Present Status and Future Prospects

Agribusiness sector include all activities in the production, manufacturing, distribution, wholesale and retail sales of agriculture commodities. If we properly utilized the country's potential in production and processing of the agro-based products we can develop an internationally competitive agribusiness sector here in Sri Lanka but unfortunately agricultural trade has rarely been considered to be an engine for economic development and it has usually been regarded as an unprofitable sector. Hence there is a low intervention and facilitation by the government to develop this sector. But this notion is changing since opportunities in the international arena are widely unfolding.

Agribusiness sector plays an important role in Sri Lanka as Its capacity to generate employment and equitable income growth throughout the economy is significant since agriculture still stands as the main employer in the country (Chart 1). Diversification into suitable agribusiness ventures and developing food processing industry would boost rural income.

Sri Lanka had maintained an 8% (FAO, 2002) annual growth rate in agricultural exports for all agricultural products, which is higher than that India where the same has been estimated at 6.8 percent for the period considered 1992-2001. Sri Lanka is net exporter in Agricultural goods because Average Annual Growth rate in agriculture imports for the same period has been estimated at 5.4 % for the agriculture products, is slightly lower than that of exports.

Even though the potential for rural development, utilizing the benefits created through value addition and sector focused investments are well understood, country is not well geared to get the full benefits despite of the fact that the sector's potential in bringing positive impact on rural development, creating employment opportunities and increased income.

For instance production of fruits are growing at compound annual rate of 3 % over the past decade and amazingly only 1 % of the production is commercially processed, in contrast to 83% in Malaysia, 78 % in Philippine and 30 % in Thailand. Wastage is estimated to be high as 40%, is the highest among the South Asian countries.

Value addition is constrained by the long value chain with too many intermediaries. Scale efficiency is minimized. Agriculture could be diversified and the food processing industry developed, which would give strong boost to rural incomes and have major multiplier effects on employment and equitable income growth through the economy. Value addition in this sector is constrained due to many factors. Such as inadequate infrastructure, inappropriate technology, lack of quality products, low level of support from the Research & Development and coordination among the governmental and private sector organizations. These factors discourage the level of investments and also are key areas that has been affecting to the level of value added in this sector. For example during the year 1992, 2001 Sri Lanka had shown -1.6 % and -2.9 % negative growth in the agriculture industry value addition, only in 2002 this sector has shown around 1 % growth (FAO).

Problems & Opportunities in the Agribusiness sector

While Sri Lanka is producing several agricultural commodities, productivity in almost all crops is far behind the world averages, despite decades of concerted and regulated agricultural reforms. Average Annual Growth rate of GDP in agriculture has been below 1.9 % (at constant 1996 prices, Central Bank), barely coping with the population growth.

Table 02: Productivity of the Major crops in the Asia Pacific Region

Country Rice Maize Potato Onion Sugarcane Chilies (dry) & pepp.
Sri Lanka 3.8 1.1 13.6 7.8 57.1 2.8
India 2.9 1.7 17 12.5 68 9.2
Thiland 2.6 3.7 12 14.1 73.4 14
Malysia 3 3 0 0 75.1 0
Vietnam 4.6 2.9 11.8 2.9 53 0
China 6.3 5.1 14.8 20.3 66.3 19.1
Philipines 3.3 1.8 12.4 8.2 66.2 3.5
World 3.6 4.3 16.1 17.5 65.8 13.8
(Source: FAO-2002)

Sri Lanka still depends heavily on rain-fed agriculture: only 33 % of agriculture lands, concentrated in a few districts, are irrigated. The dependence on monsoons has caused wide fluctuations in the agriculture growth in past years. Post-harvest losses leading to enormous wastage of agricultural produce is another major constraint in Sri Lanka: primary wastage is estimated to be more than 40% of the output of fruit and vegetables, and more than 20% in other sectors due to the absence of an adequate post harvest management programme, and cold chains on a national scale.

Fluctuations in the Production system - Effect of Seasonality

Agriculture has shown severe fluctuations in growth in the past few years, a result of excessive dependence on monsoons given that nearly 70% of the agriculture acreages are not irrigated; 2002-03 saw the worst monsoons in over hundred years, leading to a 3.1% decline in agriculture output.

Table 03: Growth Rates; National and Agriculture

1998-99 1990-00 2001 2002 2003

Sector growth 6.6% 5.1% 1.5% -- 1.5%

GDP Growth 4.3% 6.0% -1.4% 3.0% 5.9%

The future growth trend of agriculture output is likely to see similar fluctuations, even as the sector's share of GDP is reducing, from % in 5.1 to less than 1.5% in 1990-2003.

But this trend should be rectified since majority of rural people will be at risk because the proportion depend on agriculture are large.

However, the future growth of agriculture requires Sri Lanka to generate commercial surpluses for international markets, which require interventions in productivity improvements and identifying thrust areas that should be promoted for export agriculture.

In this context it's worthwhile to analyze the present situation in the agribusiness sector: Its potential, the issues and remedial measures that could be undertaken on devising an export oriented competitive agribusiness sector benefiting largely the rural poor.

Existence of a quality infrastructure plays an important role because it helps producers to send products to market in time in the best quality condition and at the other end receive inputs efficiently. Even at the existing level of production a substantial amount of produce is being wasted every year due to lack of proper harvesting, transportation, storage, processing and marketing facilities and low demand of processed foods due to high costs in comparison to the fresh produce. 80 % of the land mass is owned by the government and proper use of land is the need of the day.

Land use for commercial crop production has been constrained mainly due to the existing rules and regulations in the country. Diversification of paddy lands contained by the No 46 of the Agrarian Services Development Act of 2000 thus favoring cultivation of traditional crops at the expenses of government subsidies. This has been a severe blow to the commercialization of the agriculture. Measures should be taken to allocate lands to promote investment in large scale in agribusiness and also should take necessary steps to make land allocation easy. Even though lands are available in remote areas they are also not accessible due to lack of irrigation, electricity, roads and markets. Not only that physical infrastructure is vital but also lack of availability and access to high quality seeds, other planting material and quality animal stocks are also difficult.

Country's public sector agriculture research, extension system is not well geared and trade oriented and they are limited to traditional crop production areas. Agriculture research and extension system and production of produce is presently are supply driven and are restricted to only traditional areas of research and extension. There is a lack of coordination between agribusiness companies and research stations as to what they should focus on the other hand private sector is not prepared to undertake or invest in research and development not only due to a high investment expenditure such as system require but also lack of private sector initiative. It is high time to encourage agribusiness research focused on innovation with suitable incentive scheme to motivate the private and government research groups and creating meaningful and market driven National R & D Policy with inputs from the stake holders.

Lack of access and availability of storage is another problem. Cold chain facilities are inadequate and in some cases not existing(in provinces and main towns) to meet the growing production and storage of perishables such as milk, fruits and vegetables, poultry, fisheries for domestic and export markets. Priority should be given to establish and maintenance of Cold chains in the private / public sector and should be treated as a continuing process in the industries and investment by facilitating and providing fiscal incentives to encourage the establishment of cold chains, which are capital intensive and have long gestation periods and credit by banks and financial institutions at reasonable lending rates. Cold storage facilities should be developed at international airport in the country and farmers should be directed and to sell their products directly to the cold storage companies. Prioritization of expenditure on rural infrastructure, storing and transportation facilities to Town, an increasing emphasis on private trade necessitates that storage systems are developed at the farm level. If not very high levels of wastage and value loss of horticultural produce due to lack of investments in storage will continue. Poor infrastructure for handling export of perishable foods agri-exports and floricultural products will limit the capacities of the agribusiness sector in export participation and government should device measures to contain this problem forth with.

Financial Services Available

The level of private sector investment will be determined not only by the factors mentioned above. Availability and access to the low cost finance also a major factor to the new players to the industry and to the expansion of the existing enterprises in the sector. There is no national level finance institution to fund the agribusiness projects. Investment in Agribusiness is discouraged because lending rates of existing commercial and private sector banks are exorbitantly high and discourage investment in agribusiness.

Credits are not available at a concessionary rates and the current system of institutional credit to the industry suffers from numerous problems and financing agribusiness has been curtailed due to industry/ farmer unfriendly procedure, formalities that have to be met and lack of collateral.

The other factors such as, lack of credit to the agri-industry/farmer at the appropriate rate of interest and delay in credit delivery to the farmer and the industry, imbalances in credit delivery which make farmers/industry resort to non-institutional sources of credit at high effective rates of interest will results in low investment culture in agri-business sector. Policies should be drawn to facilitate concessional finance at low interest rates to the industry and an effective financial package could be designed focused on Agri-business with liberalized and improved terms and conditions. On the other hand allowing agri-resources to be surety for working capital loans, effective crop and stock Insurance schemes to reduce the risk hence improve the investments, formulation of an effective Micro Finance Policy specifically for the agribusiness sector will improve the private sector attractiveness and could place agribusiness sector in a high profile.

Creating an Internationally Competitive Agribusiness Sector In Sri Lanka

Sri Lanka could reap the benefit from evolving trends in international trade. Demands for spices, herbal products, fruits and vegetables, floriculture and for organic products in the international market is increasing.

Processing in to high value addition, and exploring new areas like organic and more quality products in agriculture are the keys to the future. When accounts for varied agro-climatic zones we have, the nation blessed with all the right ingredients for success in agriculture.

Agriculture could be diversified and the food processing industry developed, which would give a strong boost to rural income and have major multiplier effect on employment and equitable income growth through the economy. Strong and dynamic food processing industry can play a vital role in diversification and commercialization of agriculture, ensure value addition to agriculture produces and create surplus for export processed products.

Upon finding solutions for the above mentioned problems agribusiness could play a significant role on the rural economic development and agro entrepreneurial sector and become a major source for rural non-farm employment with high income in the future.

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