Beyond profit margins and scandals

By Dhananath Fernando

Originally appeared on the Morning

Blaming imports and importers has long been ingrained in Sri Lankan culture, often seen as a root cause of the country’s economic issues. This perspective not only overlooks the fact that many importers are also exporters, but also fails to recognise that imports and exports are fundamentally interconnected components of the global trade system.

Despite this, it is crucial to acknowledge that not all imports are conducted ethically or transparently. Recent scandals, such as the sugar scam, misinvoicing, bribery, and procedural irregularities at Customs, highlight the darker aspects of importation. However, casting imports in a universally negative light and fostering resentment based on ideological reasons could prove to be more harmful than beneficial.

Recent investigative reports have revealed staggering profits made by importers on essential commodities like green gram, B-onions, and potatoes. Some profit margins have been reported as high as 280% when comparing the Cost, Insurance, and Freight (CIF) value to the market prices of these goods.

Before rushing to judgement on these profit margins, it is essential to delve deeper into the circumstances surrounding these imports. For example, the importation of green gram has been severely restricted since the onset of the Covid-19 pandemic, requiring special approval from the Ministry of Agriculture. As a result, the quantity of green gram imported in 2023 has been minimal.

Thus, comparing the CIF value at the port to market prices can be misleading, as it does not accurately reflect the profits made by importers. This situation raises questions about the high market prices for green gram, pointing to inefficiencies in local production rather than exorbitant profits by importers.

The scenario with undu, a staple food item, is similar. With a Rs. 300 import tariff, the market price for 1 kg of undu ranges between Rs. 1,500-1,700. This high cost is partly because importers cannot bring in undu without approval from the Ministry of Agriculture, despite the imposition of tariffs.

Allowing imports could potentially reduce the price of undu to around Rs. 700 per kg, even after tariffs. The restriction on undu imports exacerbates price inflation, making it unaffordable for many, particularly those in estate regions and the northeast, leading to food insecurity among vulnerable populations.

During the recent economic crisis and the consequent shortage of foreign exchange, many imports were facilitated through informal payment channels and ‘open papers’ in undiyal markets. This practice, aimed at evading high tariffs and taxes through under-invoicing, underscores the complexity of Sri Lanka’s tariff structure and the urgent need for its simplification.

The report by the Ways and Means Committee suggests that focusing solely on the cost of goods at the port does not provide a complete picture of the import value, especially considering the prevalence of informal payments. This approach to calculating profits, based solely on declared document values, overlooks additional costs borne by importers, thus distorting the perception of their profit margins.

Moreover, the perishability of essential food items, along with the significant costs associated with storage, wastage, and the impact of rising fuel and electricity prices, further complicates the economic landscape. These factors, combined with high inflation rates, have significantly influenced the cost structure of both the wholesale and retail markets, affecting pricing and profit margins.

The impact of export controls on certain commodities, such as B-onions by India, has also played a role in inflating global prices, illustrating the complex interplay of international trade policies and local market dynamics.

This situation underscores the phenomenon of unintended consequences in economic policy, where well-intentioned policies can lead to outcomes that are diametrically opposed to their original goals. Sri Lanka’s intricate tariff structure and monetary instability have inadvertently encouraged informal payment methods on one hand and escalated costs on the other, placing the poorest members of society in an increasingly precarious position.

While it is undeniable that practices like misinvoicing represent clear violations of the law and must be addressed through appropriate legal channels, attributing the entirety of Sri Lanka’s economic challenges to importers overlooks the broader systemic issues at play. Simplifying the tariff structure, as this column has long advocated, could lead to increased Government revenue and minimise systemic leakages, offering a more sustainable solution to the economic challenges faced by importers and consumers alike.

In conclusion, while illicit practices within the import sector must be rigorously tackled, the solution to Sri Lanka’s economic dilemmas lies not in vilifying importers but in addressing the complex policy and structural issues that underpin the nation’s trade dynamics. A comprehensive approach, focusing on policy reform, tariff simplification, and enhancing local production efficiencies, is essential for creating a more stable and equitable economic environment.

The myth: Self-sufficiency guarantees food security

Covered in the Daily Mirror, Ada derana and Colombo Telegraph

By Sathya Karunarathne

The novel coronavirus which drove cities and countries into lockdown has now sparked anxiety over a possible food crisis given the increase in export and import bans and disruption of global food supply chains. 

This uncertainty has left the Sri Lankan government to question whether these disruptions would affect food security in the near future and if ensuring self-sufficiency is the absolute and undisputed solution to this conundrum. In this attempt to achieve self-sufficiency in food the government has resorted to import substitution to strengthen domestic production.

Keeping in line with these protectionist policies the government has indefinitely extended import controls that were initially introduced on the 22nd of May for three months “to be in effect till further notice”. Import controls in this degree and nature have not been seen since the 1970s and this has led policymakers and public debate to be heavily inclined towards the possibility of revisiting and reconsidering the socialist policies adopted by the Bandaranaike government.

How credible is the popular narrative?

The renewed vigor attached to closed economic policies and food protectionism through public discourse is perhaps understandable. Amidst a foreign exchange crisis in April, the government imposed import restrictions on 156 categories of products including essential food items such as rice, flour, and sugar. 

Although import restrictions on most of the essential food items have been removed, temporary restrictions have been extended indefinitely on grains, stainless steel tankers and bowsers needed for the distribution of milk and blast freezers needed for preserving poultry meat. While these restrictions have been put in place with the motive of protecting the depreciating rupee it carries a massive potential to further harm the domestic distribution and storage of food which is already in a fragile state.  

Moreover, the latest Climate and Food Security Monitoring bulletin of WFP (United Nations World Food Programme) raises concerns of food security among vulnerable parts in Sri Lanka as a result of the impact and control response of the COVID-19 outbreak. The report further elaborated that weather-related shocks combined with poor hygienic and sanitation conditions could result in an increase of acute malnutrition in the island.  

In response to these growing anxieties in the wake of the COVID 19 pandemic, the government put in place programs and policies to ensure self-sufficiency in food within the island. On the 28th of May, the government approved the importation of 2,500 dairy cows from Australia. The motive behind this decision as stated by the cabinet spokesman is to ensure Sri Lanka’s self-sufficiency in milk by 2025, even though this measure failed just over a year ago with the death of 500 imported heifers that were ill-suited to Sri Lanka’s climate.

Furthermore, restrictions on maize imports that were imposed with the intention of strengthening domestic production has resulted in a lack of maize as feed for chicken. Available alternative feed is not as nutritious for poultry and has affected the quality and production of eggs. Egg production has fallen from 200-300 eggs per year from chicken to 200-240 eggs per year.  With the fall of production, prices have picked up.

On the 3rd of July, Senaka Samarasinghe, Managing Director of Harischandra Mills PLC stated to Ada Derana that import restrictions imposed on agricultural products such as ulundu, black-eyed pea, big onion, red onion, green gram, peanut, corn, and dried chili have affected manufacturers adversely resulting in a massive drop of production. 

These import restrictions have severely affected manufacturers who rely on ulundu as a raw material to produce products such as papadam, flour, thosai, wadai and dhal. Given the lack of raw materials, Harischandra Mills PLC has had to reduce their production by a staggering 90 per cent. Sri Lanka’s domestic ulundu requirement per year is about 12,000 metric tonnes (mt). The production of ulundu domestically has reduced to 5000 mt due to the drought. External factors that affect the domestic supply of food such as these calls for imports to fill the output gap. 

These import restrictions have adversely affected Sri Lanka’s already fragile export sector as well, as manufacturers have failed to meet the demand of international markets for products such as thosai mix. Harischandra PLC exports 15 per cent of its thosai mix to markets in Europe, North America, Asia, and Australia. These protectionist policies that aim to protect the domestic producer and to strengthen their production, have resulted in achieving the very opposite of its intentions as small scale producers of ulundu have opted to close down resulting in reduced shop sales. Moreover, the ban has affected the production of kurakkan flour with producers resorting to completely stopping or reducing production. This fibre-rich alternative to wheat flour is widely consumed by diabetic patients and is an important part of their medically recommended diet. 

It is no doubt that the pandemic has brought to light the extreme vulnerability of Sri Lanka’s domestic food supply to external shocks. These policies have a demonstrated history of achieving quite the opposite of their intentions. The ’70s “produce or perish” economy is an excruciating reminder of this fact as bug-infested flour, hardly edible bread, and stone infiltrated rice was every Sri Lankan’s staple. Therefore the popular narrative that promotes restrictive policies has zero credibility as it will only tighten the already constrained food supply by repeating the mistakes of the past. Long term policy solutions to the crisis, therefore,  should focus on the sustainability and practicality of isolating the island from global trade and food supply chains and producing the bulk of our dietary needs domestically.

Sustainable approach to attaining food security: Lessons from Singapore

The Global Food Security Index (GFSI)  ranks countries’ food security based on food affordability, availability,  quality as well as an adjustment for natural resources and resilience.  Singapore was able to secure the title as the most food-secure nation for two consecutive years, with a high rank in all three core pillars. 

Singapore’s success is attributed to the government’s continued commitment to stay connected to global food supply chains and to strengthen local production. Singapore diversified its food import sources from 140 countries in 2004 to more than 170 countries and regions in 2019  making the country’s food supply chain more resilient and has set a “30 by 30” goal to produce 30 per cent of the country’s nutritional needs by 2030. Diversifying food imports and making the country’s food supply chain more resilient are two sustainable policy solutions through which Sri Lanka can ensure long term food security. 

The Food and Agriculture Association of the United Nations (FAO) states that the crisis we are facing is a global problem that requires a global response.  This calls for governments to collaborate to avoid further disruptions to food supply chains. Import diversification in the context of food security refers to increasing the number of countries from which we import food. 
This ensures an undisrupted inflow of food supply into the country ensuring both physical availability and choice of food in crisis situations. Import diversification is effective even in ordinary situations as loss in the harvest of one exporting country will not threaten the availability or supply of that particular product/produce for the importing country. Singapore imports over 90 per cent of their consumption needs with only 13 per cent of vegetables and 9 per cent of fish being produced locally.  

Moreover, in order to avoid disruptions to the supply chain that may occur by depending on a single major import supplier Singapore has resorted to promoting frozen and powdered product alternatives. Sri Lanka cannot resort to these options by restricting the importation of freezers, tankers, and bowsers that are necessary for such alternatives.

The world is highly globalized and so are food supply chains. Isolating from this interconnected food supply chain will only exacerbate Sri Lanka’s food insecurity. This was evident in the 2007-2008 global food price crisis when export restrictions put in place by exporting countries to increase food security domestically led to serious disturbance in the world food market resulting in price spikes and increased price volatility. In a more local context, this was evident when the government banned the importation of turmeric along with other non-essential goods which led to a scarcity and the available being sold for an exorbitant price ranging from Rs 300-350/- per 100 g despite a maximum retail price of Rs.75 per 100 g. 

Eradicating weaknesses and inefficiencies in the domestic food supply chain is essential to ensuring food security within a country. This is referred to as building a resilient food system domestically. The Food and Agriculture Organisation of the United Nations (FAO) defines food security as follows: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences ”.  The abrupt lockdown and curfew COVID-19 brought revealed that our domestic food supply chain does not offer economic or physical access to nutritious food. This was painfully apparent when people desperate to eat set off a stampede during a cash handout held in celebration of Eid, leaving eight injured and three killed. 

This is an obvious cautionary alarm to the government to fix the inefficiencies of the domestic food system and to enhance emergency food assistance to the vulnerable communities, who most often end up bearing the brunt of such inefficiencies. Every crisis presents an opportunity to focus on rebuilding through a novel lens. This presents an opportunity for Sri Lanka to rethink its approach to food security and to branch out our policy solutions to more sustainable and timely options.

Solution 

This crisis has proved that import restrictions and heavy gravitation towards self-sufficiency cannot solve the myriad of issues plaguing the country’s food supply system. Closed economic policies to achieve self-sufficiency, do not guarantee all citizen’s economic and physical access to nutritious food nor do they guarantee a resilient domestic food supply chain. 

Investing in cold storages and strengthened logistics networks, shifting towards climate-smart agriculture, ensuring the supply of raw materials and agricultural equipment by making the eligibility verification process for tax exemptions less complicated and improving ease of doing business, removing import restrictions on veterinary medicine, chemical fertilizer, and other inputs,  relaxing restrictions on the cultivation of crops, strengthening emergency food assistance to vulnerable communities with linkages to local and provincial governments can be stated as policy priorities that can address the inefficiencies of the domestic food supply chain.

The way forward to ensuring the island’s food security is in improving internal inefficiencies while recognizing the extreme and timely importance of staying connected to global food supply chains through relaxing import restrictions and multiplying our food and raw material import sources. 

Sathya Karunarathne is a Research Executive at the Advocata Institute and can be contacted at sathya@advocata.org or @SathyaKarunara1 on twitter. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Resilient food supply: By command or through markets?

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The COVID crisis

It is when something breaks that we notice. The curfews imposed at short notice to flatten the curve of COVID-19 infections damaged the food supply chains that Sri Lankan consumers had taken for granted since the demise of ration books that were central to our existence until the 1980s.

Since 2006, LIRNEasia has been studying fruit and vegetable supply chains in Sri Lanka centred on Sri Lanka’s largest wholesale market in Dambulla which was recently shut down by the Government along with several other wholesale markets. 

The closures were preceded by scenes of massive oversupply, frustrated farmers throwing away unsold produce in large quantities, claims that the traditional traders were exploitative “middlemen,” and counterclaims that politicians were seeking to replace them with their own middlemen, and so on. 

At the other end, consumers confined to their homes were complaining not only of difficulties in obtaining supplies but also in some cases of low quality and high prices. The Government’s response included short-term efforts to purchase unsaleable produce directly from farmers and to distribute through government channels. Understandably, it has been difficult to build supply chains from scratch in these strained circumstances. 

Reports of shortages and delivery delays emanating from the United States, home to some of the most complex and advanced food-supply chains, suggest it is unrealistic to expect food supply to be completely unaffected by shocks of this magnitude. Despite the stretching of food-supply chains over longer distances and across borders because of efficient logistics, the system did not collapse. It is reported that locked-down Indian coastal states found international supply chains for edible oils to be working better than domestic ones.

The COVID-19 shock may have impacted food-supply chains in various ways, including difficulties in delivering to homes due to lack of efficient warehouse facilities and logistics; lowered demand in specific segments (for example, the sudden elimination of demand for premium produce from tourist hotels and restaurants); general reduction of demand caused by frugality resulting from concerns about finances; failures in e-commerce, and especially in the form of difficulties in the discovery function wherein consumers locate retailers with desired price-quality bundles and in placing orders; and breakdowns in the producer-end of the supply chain, caused by staff shortages, transport problems and input shortages and delays.

Things were not that great before COVID-19. Growers were poor; supply fluctuated wildly as did prices; waste was pervasive across the supply chains; the jobs of those who work for the intermediaries were uncertain and poorly paid, and consumers were perennially unhappy. All political parties recognise the problem and have proposed solutions within various points in the planning-market spectrum. We should see a lot more promises on food security when the 2020 manifestoes come out.

Command solution

Around 10 years ago, the President’s Office was persuaded of a State-centric solution that rested on village-level officials collecting information on what crops were being grown and harvested for collation in a centrally administered database. When crops were being grown in excess of what the officials deemed adequate, they would command farmers to grow something else or deprive them of planting material, thereby balancing supply and demand. 

Despite many efforts including the development of IT systems, this approach appears to have failed to yield the expected results as evidenced by frequent reports of gluts and unhappy growers. Yet, the notion that the State can “discourage overproduction of certain vegetables” persists, as indicated by a joint letter to the President from the deans of eight agriculture faculties dated 14 April 2020.

The failure of the command model was preordained. It was tried for decades in the former Soviet Union and in China and failed miserably. It produced shortages and occasional gluts and left growers and consumers unhappy. Whenever the command model was relaxed, production went up. Nobel Laureate Friedrich von Hayek made the theoretical case against the command model as long ago as 1935.

For the command model to work, what crops farmers grow and harvest (and the losses they suffer in between) must be reported by officials or by the farmers. These activities are not supported by incentives for accuracy; indeed, the incentives are for the reporting of whatever causes the least trouble with the lowest transaction cost. There may even be incentives for under or over-reporting. 

Unlike in stock markets where all transactions occur on electronic platforms, price data from agricultural wholesale markets in Sri Lanka are manually collected and are open to error and manipulation. Even if the data is accurate, the processing is too complex, as shown by the debates between Hayek and Oskar Lange and colleagues in the 1930s. 

Market solution

Claims have been made at the highest levels that the current difficulties in food supplies indicate market failure. An information problem exists for sure, but not necessarily a market failure. 

The grower must decide what to grow in May based on the price the crop is likely to fetch in, say, August. That price will be determined by the law of supply and demand. How much of a particular crop is grown in May and how much demand there will be for that vegetable in August need to be known. How can a grower estimate demand in the future? She has to go by past patterns, such as prices fetched last August. This knowledge is not exclusive to one grower. If too many growers make planting decisions based on these kinds of common knowledge, a glut can be guaranteed in August. 

But if information on what others are planting is known, growers can make better decisions. Forward contracts is the best way of getting information. Here, a specialist with skin in the game collects and processes the information on supply and demand and offers forward contracts for August. If the data are incomplete or the processing is flawed, he will lose money, having to pay more than spot-market price. That is skin in the game. As more forward contracts are entered into, the buyer will see that supply is trending toward glut. The prices on forward contracts will decrease, prompting growers to consider other crops. 

Supply will be aligned with demand, with no coercion of the grower. Risk is managed by those best equipped to handle it. Additional elements such as insurance and futures exchanges will be needed for optimal results. Forward contracts have other benefits. They can be used as collateral for agricultural credit, allowing the phasing out of the present informal and dysfunctional credit mechanisms. 

Our efforts to interest private investors in establishing the necessary market solutions failed to take off several years ago due to concerns about contract enforceability in Sri Lanka, among other reasons. Government interference in the functioning of India’s incipient agricultural commodities futures exchange at that time may also have contributed. 

Information gaps

Another reason may have been the undeveloped nature of market information systems. Our research showed massive information gaps in the markets for agricultural produce. We found that sustainably filling these gaps with data on what was being cultivated when and on quality and market prices to be challenging in the absence of information-hungry futures and forward traders.

Crop (what is grown, when, how much), harvest and price data are needed for the market approach. Information on forward contracts being signed is also needed in real-time. Those selling such contracts need to know what farmers are planning to grow, while there is still a chance their behaviour can be nudged by incentives. 

One reason the existing data are of uneven quality is the absence of proper planning mechanisms or functioning forward contracts and futures exchanges. Because of the lack of consistent demand for data, sustainable data collection and analysis systems do not exist. Difficulties of capturing the returns of investment in data products caused piecemeal private efforts such as those that LIRNEasia was associated with being bundled into other products. 

Whichever path we take to build robust food supply chains, the data gaps and contract-enforcement problems need to be addressed. These are the productive interventions that will ensure food security; not the repetition of efforts to build a command model. 

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Food security and self sufficiency

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

Food supply chains are strained or broken, domestically as well as internationally. It is natural and necessary in such circumstances to think about food security. But it is important to think intelligently and in ways informed by evidence.

All rankings and indexes have flaws, either in the data that form their basis or in their design. But they provide a useful starting point for an evidence-based discussion. The Global Food Security Index comprises three components: affordability, availability, and quality and safety. A new component on natural resources and resilience was added in 2019. 

The fact that Singapore, a city-state with over 5 million people and no access to farmland and therefore to locally grown produce, is ranked first in the baseline index signals that this index is based on an approach to food security that goes beyond common sense. Singapore drops 11 places when natural resources and resiliency are accounted for. It is vulnerable to sea level rises, ocean eutrophication and food import dependency. But even in 11th place, it performs better than all South Asian countries.

I have been studying critical infrastructures for more than twenty years. Sri Lanka’s accession to the Tampere Convention on the Provision of Telecommunication Resources for Disaster Mitigation and Relief Operations and preparations for the Y2K problem were the immediate reasons. We have also been studying agricultural supply chains for over a decade.

Resilience-cost trade-off

There is always a trade-off between resilience and cost. If cost is of no concern, one can have extraordinary resilience, with 100% redundant facilities further backed up. Sometimes when the stakes are very high and the environment highly risky, one does have multiple back-ups. For example, in the worst days of the war when the LTTE was attacking Colombo and CEB engineers were striking at the drop of a hat, I was told about battery backup for mobile base stations, that were further backed up by diesel generators. But all this costs money.

It is the same with food security. One may believe that relying on locally produced potatoes reduces risks. But it is well known that the local production costs of potatoes are significantly higher than that of imported potatoes. Domestic producers are kept afloat by slapping special commodity levies on imported potatoes. What this means is that domestic consumers are paying more for inefficiently produced local potatoes and paying indirect taxes to the government for the imported potatoes they consume. 

Protectionist duties add up, making food more expensive for all. As a result, the cost of labour is higher in Sri Lanka. Therefore, many industries that must compete globally are hobbled by high labour costs.

Sourcing from inefficient domestic producers does not necessarily reduce risk. Agriculture is inherently risky. Floods, drought, insects, and disease can devastate crops. Truly resilient supply chains would not rely on a single area (such as Welimada for potatoes), or even a single country. In the same way that one would not be totally dependent on, say, Viet Nam, for all the rice the country needs, it may not be a good idea to think of self-sufficiency in rice as an absolute policy objective. 

In the face of COVID-19 and disruptions in global supply chains, Viet Nam has imposed some limits on rice exports which would give legitimate cause for concern among its customers. But on the other hand, relying totally on local production is also risky, as was seen in 2016-17 when drought reduced production to 1,474 MT from 2,903 MT in 2015-16. 

So, the real answer for food security is not the simplistic striving for self-sufficiency, but the balancing of cost and risk management through diversifying sources and ensuring that supply chains are robust. Preventing the emergence of monopolies that control choke points is an important part of the response. It is these complex trade-offs and balances that the Global Food Security Index attempts to capture through the weighted combination of 34 different indicators.

Sri Lanka’s food security assessed 

Sri Lanka was ranked 66th out of 113 countries in 2019. It was scored high in nutritional standards, change in average food costs, the proportion of population under global poverty line, food safety, food loss, urban absorption capacity, the volatility of agricultural production, and access to financing for farmers. Its score was pulled down by factors such as public expenditure on agricultural R&D, per capita GDP based on purchasing power parity, protein quality and political stability (biggest decline between 2018 and 2019). 

Sri Lanka’s overall score was slightly below the average, and quite a bit lower on quality and safety. It was ahead of its peers in South Asia, but behind peers such as Indonesia and the Philippines in South East Asia. India was ranked 72nd, with Pakistan (78th) and Nepal (79th) even lower. As usual, Sri Lanka was not too bad but could be much better.

When the natural resources and resiliency is added to the mix, Sri Lanka falls back one place to 67th out of 113. The impact of resilience associated factors is greater in some countries. For example, Australia and New Zealand show wide swings. Australia, which is 12th in the baseline index, drops to 16th place when natural resources and resilience are factored in, whereas New Zealand overtakes Australia by advancing five places to 14th place.

Resilience that is sensitive to cost

The response to COVID-19 and the resultant damage caused to food supply chains calls for a thorough re-examination of the entire agricultural system. The fragility of the current system has been laid bare. But the response should be nuanced and based on a sober consideration of evidence, giving due regard to the need for value for money in food. Instead of prohibiting imports and imposing taxes on consumers to protect inefficient producers, the state should ensure that supply chains are resilient because they are diversified both domestically and internationally. The best way to do this is by preventing the monopolisation of links in supply chains. 

Simplistic retreat to slogans such as self-sufficiency will not suffice. Sri Lanka has experience with those policies from the 1970s. Then they gave rise to black markets for the affluent and malnutrition for the poor. What was implemented in a much simpler time cannot be made to work in today’s more complex economy where consumer preferences cannot be satisfied by ration shops. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.