Sunday Times 2
Leveraging on agri-food sector for post-Covid revival of Lankan economy
The COVID-19 pandemic’s impact on Sri Lanka’s economy will be complex to predict in terms of magnitude, but directions are predictable.
Being a trade dependent island nation, Sri Lanka will likely suffer from the expected recession, in addition to the disruptions in global and domestic supply chains. Notwithstanding these effects, our research shows that the overall impacts on agri-food supply chains in Sri Lanka may not be the slayer that one would expect it to be, barring the prolonged disruptions and adverse policy stances in other countries.
Every crisis invariably nests an opportunity. As the rebuilding and the revival of the economy occur, this article proposes three pivotal heads of interventions to make capital of the agri-food chains to shepherd the revival of the Sri Lankan economy post-COVID-19 — i.e. after the storm.
Target increased export earnings
During the 2008 food price crisis, Cambodia was a sole torch bearer of trade openness (not impeding exports of rice) amid the reign of soaring prices. It experienced very significant export earnings. The nature of the crisis is different now, but human and policy tendencies would likely remain the same — i.e. to look inward.
With import substitution likely in vogue it is important to appeal to the Lerner Symmetry theorem, a powerful trade economics idea, according to which, an import tax is an export tax. Taking this crisis as an opportunity, Sri Lanka should be redoubling efforts to increase exports sans COVID. In the height of the COVID emergency, the continuance of agri-supply chains, including exports, engenders hope on agriculture leading from the front in revival. Towards this, the following steps can be suggested.
1 Remove restrictions on raw material and input imports. With raw materials taxed, the effective protection to the domestic producers falls. One of the principal reasons, because of which Bangladesh now has the most mechanised agriculture in South Asia, is the liberal policies on agriculture machinery. Indeed, Sri Lanka too has policies to giving exemption from Customs duty, import cess and VAT to selected agricultural equipment and machinery. However, the eligibility verification process is cumbersome and highly time consuming limiting the uptake. The recovery drive after COVID-19 offers a great opportunity for improving ease of business that would make availing these concessions easier.
2 Conditional on available fiscal space, provide tax concession or compensation with a predetermined tenure and targeting as temporary stimulus to export industries.
3 Post COVID-19, international trade is likely to be different with inherent tendencies towards erecting barriers. To confront the new reality, Sri Lanka should proactively and preemptively try to strengthen trade links. It should strive for the extensive margin — i.e. new products, new markets, new varieties, and prices. History indicates that all goodly expansion of trade and its resilience have been achieved through extensive margin adjustments, like China, South Korea, or Chile or even in coping with sanctions, like in the case of Myanmar. In accessing expansion on the extensive margin, new exporters comprising Small and Medium Enterprises (SMEs) will play an important role. Here again, there is a need and opportunity for ease of doing business. The three-tiered registration process involving the Export Development Board (EDB), the Internal Revenue Department (IRD) and Sri Lanka Customs (SLC) has been onerous and introduces fixed costs disadvantaging SMEs. The ease of doing business that determines time and cost to trade needs to be taken up on a priority basis.
Rationalise public expenditure in agriculture value chains
With COVID-19, the thin line between crisis response and structural change often gets blurred. Sri Lanka has gainfully been the exception in South Asia in terms of openness and being less interventionist in food markets. Towards this, during a crisis, intervention involving procurement and the involvement of state agencies could be soft-pedalled as soon as possible.
In the rebuilding period, all governments would face resource constraints, the pre-existing free distribution of fertilisers might need to be reweighed in favour of the erstwhile cash grant scheme. On the domestic market side, there is a dawn of a rationale for targeting food subsidies. A generalised apportionment through maximum retail prices of rice, dhal and tinned fish is not the most cost-effective way of social protection while Sri Lanka recaptures the high-income growth trajectory after the post-2009 anatomic break.
While targeting, revisions in the list of beneficiaries for Samurdhi programme and tapering off distribution of subsidised seeds and planting material for home-gardening projects need consideration. In the nutrition programmes, there is a recognised need for better targeting to create the fiscal space, this might be the moment to target only the neediest pregnant women. There should be move to identify the new COVID-induced vulnerable (urban poor, recipients of school meal programmes, people suffering from NCDS, factory workers, communities in remote locations) and make them eligible to receive relief.
Recalibrate domestic food availability and realise gains of innovations in supply chain compression
It is possible that imports might be constrained for some time. As a protective measure, Sri Lanka should use the crisis-driven opportunity to mitigate the constraints on domestic availability wherever applicable. There should be a drive to ensure raw materials (seeds, fertilisers, pesticides, packaging materials etc.) to begin local production and processing.
COVID-19 also offers an opportunity to foster some long overdue structural changes like relaxing restrictions on cultivation of crops other than paddy in lowlands. From the value chain perspective, focal areas would be investment on cold storage facilities and revitalising the extension service.
To make the markets competitive, market information system based on government agencies should be widely available. COVID-19 also has brought forth many elements of direct sales to the consumers. As the recovery takes place, there is a basis to keep the momentum, incentivise firms which enter online marketing tools in food distribution.
COVID-19 also brings to the forefront the importance attributes like food safety, biosecurity, and animal health in agricultural value chains. Hence as a path to recovery, government should provide incentives to connect farmers to markets, engage in value addition and marketing while creating a reward system for healthy agricultural practices.
(Jeevika Weerahewa is the Professor of Agricultural Economics attached to the Department of Agricultural Economics and Business Management, Faculty of Agriculture, University of Peradeniya, Sri Lanka. Devesh Roy is attached to International Food Policy Research Institute (IFPRI), which is one of the CGIAR (Consultative Group for International Agricultural Research) institutes (https://www.ifpri.org/about). It is headquartered in Washington DC, and has a branch in New Delhi.)