Financial Times

Government withdraws fertilizer subsidies from private sector
New blow to Lankan tea industry
Sri Lanka’s tea industry was dealt a severe blow earlier this month when the government withdrew the fertilizer subsidy – which the industry has enjoyed for over two decades – on all agriculture produce except paddy.

The Ministry of Agriculture Development in an April 6 letter to fertilizer importers said the subsidy would henceforth be confined only to the paddy sector. “The provision of fertilizer at subsidised prices to the paddy sector and distribution will come under the purview of the two state fertilizer companies with immediate effect,” the letter said.

This means that tea, rubber, coconut and vegetables will not enjoy the subsidy given since the 1980s. The paddy sector consumes 65% of the subsidised fertilizer, with 20% taken by tea and the balance shared by the other sectors.

The April 6 decision also means private sector fertilizer importers – CIC, McLarens, Baurs, ETA Lanka, Hayleys and Agstar – get shut out of the paddy sector unless some “rich” farmers are prepared to buy unsubsidized urea which has gone up to around Rs 36,000 per tonne from a subsidized Rs 10,500.
“We appealed to Treasury Secretary Dr. P.B. Jayasundera at a meeting but he said the government cannot anymore subsidize the private sector,” said Malin Gunatillake, Secretary-General of the Planters Association.

“In all tea producing countries, and Europe and the US, subsidies are provided to agriculture whether state or private enterprises,” he said, noting that the policy was out of line with other agriculture producing countries. Senior treasury officials were not immediately available for contact.

Gamini Munasinghe, Director at the National Fertilizer Secretariat, which together with state-owned Colombo Commercial Fertilizer Ltd will handle the paddy sector in future, confirmed the new policy decision. He said the two institutions would import fertilizer and continue to sell it at subsidised rates to paddy farmers.

While the tea sector is enjoying good prices in recent months, the fertilizer blow comes on top of other added costs to producers like the removal of the VAT exemption last year and rising electricity and transportation costs. Negotiation of a fresh collective agreement on wages is also due in June with unions and would add to the costs of plantation companies.

The Sunday Times FT was unable to reach tea smallholder associations for comment on the withdrawal of the subsidy. But it learnt that small producers are worried over the impact and have complained to local parliamentarians for relief on this issue. Some 65 percent of Sri Lanka’s tea comes from low and mid-grown smallholders, with the balance coming from plantation companies.
Private fertilizer importers, dismayed by the decision, said that more than 75 percent of the imports have been handled by the private sector due to the inefficiencies of the state sector agencies. They said the government also owes the six importers some one billion rupees in subsidy payments for the last Maha season and a state audit of their stocks was underway for payments to be made.

The Impact

* Production costs seen going go up by 70-80 %.
* Fertilizer bill to companies expected to rise by between Rs 60 to Rs 100 million.
* Yields could drop if fertilizer use is reduced to cut on costs.
* Leaf quality could be affected.
* Plantation companies are paying Rs 40-50 million more this year due to the removal of the VAT exemption in 2005.
* Plantation companies having both tea and rubber will be cushioned by the blow as rubber is enjoyed record price levels.
* Rising electricity and fuel prices would raise COP.

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