Although the importance of the agricultural sector has been gradually declining, it continues to play a dominant role in the economy. By 1998, the share of agriculture in GDP had fallen to 17 percent and its share in total employment to 36 percent. Almost 75 percent of the population is still classified as rural, which for all intents and purposes means mainly engaged in agriculture, given the economic linkages generated by agriculture in the rural economy. Accordingly, many of the opportunities and potential for expansion of the economy lie within this sector.
Sri Lanka has traditionally pursued a two-pronged agricultural policy. One was applied to the plantation sector, which grows export crops such as tea, rubber and coconut. The sector benefited from some incentives provided for export expansion and foreign exchange. The other was applied to the non-plantation sector, based on smallholder production of mainly basic foods. The sector, sometimes referred to as "subsistence agricultural sector", was also provided with a fair degree of protection from imports. It was also assisted with subsidized inputs, particularly of fertilizer, seeds and planting material, and through other support measures, such as low interest credit, guaranteed marketing through parastatals and virtually free irrigation water. In large measure, this "supportive" attitude was directed mainly to the food sector, with the dual aim of providing economic benefits to the numerous smallholders, as well as boosting food self-sufficiency.
Sri Lanka embarked on an extensive economic liberalization process in 1977. The first round of reform measures covered most aspects of economic policy, including trade policy. A significant "second wave" of liberalization reforms took place in 1990. As a result, by 1994, when the WTO Agreement was signed, the economic environment was already fairly liberal, with the private sector identified as the main "engine of growth".
Yet, when it comes to agriculture, there are important socio-economic goals that cannot be neglected. High priority continues to be given to "food security" and guaranteeing minimum incomes and purchasing power to the farming community. Increased food production is still considered important for food security in view of the role agriculture plays in the economy. At the same time, it is necessary to minimize foreign exchange outlays on food, as exports of Sri Lanka's main commodities (tea, rubber and coconut) face unstable world markets. With the UR and its disciplines on border and domestic policies, the country faces some challenges in ensuring that the development of the agricultural sector is not undermined.
By 1994, Sri Lanka had already gone through a liberalization process whereby (with some important exceptions noted below) most non-tariff barriers to trade had been removed. It was thus not difficult to comply with this provision of the AoA when it entered into force in 1995.
In the UR, Sri Lanka decided to bind all agricultural tariff lines at the 50 percent level. At the same time, the Government also made a unilateral commitment to progressively reduce and harmonize the tariff towards a single rate. The original plan was to apply a two-pronged tariff of 10 and 20 percent (by 1996) and achieve a uniform 15 percent tariff by 1997 or 1998. However, the plan was set aside for the time being and the current rates for most agricultural commodities are 35 percent, except for tobacco, where tariffs are higher. For specific medicinal crops, the tariffs are at 10 percent (Table 1). In addition, duty has been waived on a number of commodities for cost of living considerations. Imports of all seed and planting materials for agriculture are duty-free and the duty has been waived on machinery and equipment imported for use in the application of new and innovative technologies in agriculture.
Table 1: Applied tariffs on selected agricultural products (percent ad valorem)
Commodity |
Tariff | ||
1986-88 |
1996 |
1999 | |
Rice Wheat Wheat flour Potatoes Chillies Onions-big Onions-small Pulses-lentils Pulses -other Maize Ginger Turmeric Saffron Aniseed Coriander Cumin seed Fennel seed Sugar Milk-full cream Milk-powder Non-animal feed |
25 25 35 100 5 5 5 5 5 5 60 60 60 60 5 5 5 60 60 60 75 |
35 20 35 35 35 35 35 35 35 35 35 35 35 35 10 10 10 35 20 20 75 |
35 20 35 35 35 35 35 35 35 35 35 35 35 35 10 10 10 35 20 20 75 |
Source: Customs Notification.
Thus, compared with the situation in many developing countries, market access terms in Sri Lanka are remarkably liberal. Yet, the transition to a liberal import regime has not been smooth. One major challenge is maintaining and improving competitiveness of domestic production sectors as tariffs are lowered. Where trade liberalization leads to an import surge that threatens to undermine domestic production, the consequence can be severe for a large segment of the rural population. The following commodity-specific experiences illustrate the nature of the problems facing Sri Lanka in the area of market access.
Sri Lanka's main food crop is paddy. Because of its staple nature in the diet of the population, it was given special attention. In recent years, although crop area has increased, yields have tended to stagnate. In addition, production costs have increased significantly, with effects on farm profitability. Given the importance of rice production for both food supply and farm incomes, import policy for rice is of utmost importance and further trade liberalization has to be done very carefully. Moreover, the import regime for wheat and wheat flour also affects the rice sector (see below).
Wheat is another staple in the local diet, but unlike rice it is not domestically produced but wholly imported, in large quantities. Imports are the monopoly of a parastatal - the Cooperative Wholesale Establishment (CWE). Until 1994, flour prices were normally set to cover the full cost of flour production and the CWE continued to make a profit from sales. A major side-effect, however, of the availability of relatively cheap wheat flour has been to discourage rice cultivation, which frequently brought about a revision of policy in order to maintain some kind of price parity. Moreover, the import regime for wheat could not be fully liberalized due to a contractual obligation with a flour mill.
Other major field crops are chillies, onions, maize and horticultural crops such as potatoes. Some of these crops have qualified as "sensitive", both economically and politically, and often difficult policy decisions were required to safeguard the interest of local producers. In recent years, horticultural producers have been facing increased competition from imports. The recent experience with the liberalization of the import regime for chillies and onions has been negative, affecting rural employment considerably (see discussion on food security in section 3.2 below).
Sugar production has been erratic, mirrored by a similar pattern of imports. There are no quantitative restrictions on sugar imports. The importation and distribution of sugar and maintenance of buffer stocks are now mainly in the hands of the private sector, and the CWE plays only a supplementary role. The current tariff of Rs.3.50 per kg aims to provide a partial protection to the industry as well as to raise fiscal revenue. It was one of the notable experiences that the Government was obliged to apply specific tariffs on sugar as a result of sharp price swings in world markets.
The production of milk and milk powder has been declining, resulting in growing imports. The current duty on milk powder and full-cream milk is 20 percent and is apparently intended to increase protection so as "to ensure adequate returns to domestic producers and processors" and "to increase domestic fluid milk consumption and reduce dependence on imported milk powder". There are two main companies involved in milk production, namely, Nestles and Kiriya. Formulating appropriate border policies on milk has also not been easy.
As regards other components of market access, Sri Lanka itself did not open any TRQs and so there are no experiences with their administration. In the case of import markets, no specific TRQ allocations were made for Sri Lanka, the only exception being an allocation by the EU of 2 553 tonnes of bananas to non-ACP countries (including Sri Lanka) at US$75 per tonne. Sri Lanka has not been able to make use of this quota due to the non-availability of quality produce.
Sri Lanka does not have access to special safeguard (SSG) provision of the AoA and so has no experience with this trade instrument, nor with general WTO safeguards. As regards experience in its export markets, the removal of a safeguard measure (high preferential duty) on Sri Lankan desiccated coconut exports to Brazil - following a WTO dispute - should assist in increasing exports of this product to Brazil. However, this opportunity has not been exploited because of supply difficulties.
The bulk of the domestic support to farmers is granted through non-trade-distorting measures such as research, extension and infrastructural development (green box measures). In the UR, Sri Lanka did not report outlays on "trade-distorting" support measures as captured by the AMS, and thus committed itself to limiting the support to 10 percent of the value of production under the de minimis rule. It also did not report outlays on developmental measures (SDT), but has the right to claim this exemption for such measures in the future if necessary.
Sri Lanka has been providing various types of supports to agriculture. Several of these fall under the green box category. These support measures are provided through publicly funded programmes and do not involve transfers from consumers, nor do they have the effect of providing price support to producers. Consequently, they fully conform to the green box criteria and have not been questioned within WTO. They include:
Besides green box support, the Government also provides some input subsidies. These include fertilizer subsidies to paddy farmers who use urea for their production. The subsidy amounted to roughly 1 500 million rupees per annum in recent years. Irrigation subsidies have been estimated to be roughly 12 500 million rupees in recent years, or about 3 percent of the total value added in the paddy sector. As a proportion of the value of paddy production, this percentage would be even lower. Irrigation facilities are constructed and maintained by the Government and are provided to paddy farmers free of charge.
One other category of support to agriculture is crop development fund through cess raised on export crops. Export duties on all plantation crops were abolished in December 1992 as part of the liberalization process, but various surcharges and cess are applied at moderate rates. The proceeds from these cess are ploughed back to the export plantation sector in the form of selective incentives, replanting subsidies, start-up subsidies for new exporters, and expenditure on research, extension and product promotion. Currently, the rate of cess collection for tea is less than 2 percent of the FOB value of exports; the proportion is similar for rubber and coconut. The cess is levied at the point of export and producers of the crops have to contribute to this fund. Production support from cess-funded programmes is provided by the relevant statutory bodies under the Ministry of Agriculture. Table 2 shows how the funds have been used for tea. The Government does not make any contribution to the cess fund, and consequently the funded programmes are exempt from reduction commitments.
Table 2: Allocation of the cess fund from tea in 1994
Allocated to: |
|
Research - Tea Research Board Smallholder Development (Tea Smallholding Development Authority) Factory Development Promotion and Monitoring Work - Sri Lanka Tea Board Total |
0.800 0.825 0.875 2.50 |
Source: Sri Lanka Tea Board. |
In summary, therefore, although the base and current AMS levels have not been computed, it is very unlikely that "trade-distorting" support outlays to Sri Lankan agriculture are large enough to breach WTO commitments. The problem, if any, has been inadequate investment in agriculture, for budgetary reasons.
Lack of detailed estimates of the AMS levels makes it difficult to assess the precise situation. It is important that the Government undertake this assessment in order to determine the extent of compliance with WTO provisions. More importantly, this information is essential for developing a position on new rules on domestic support measures in the new trade negotiations.
2.3 Export Subsidies, Taxes and Restrictions
In the UR, Sri Lanka did not declare any export subsidies in its Schedule as there were none in the base period 1986-88.
The schemes that come closest to an export subsidy are the cess-funded programmes described above. For tea, the subsidies for new planting of tea, re-planting, factory development and factory modernization has been estimated to be roughly 250 million rupees or 1.6 percent of the value of total tea production in 1994. For coconut the subsidies amounted to only 0.44 percent of the value of production.
These programmes are unlikely to breach Sri Lanka's commitments on export subsidies. There is no budgetary contribution and the use of the cess funds is not "contingent upon export", since the funds are used for the development of the plantation sector, the output of which is also consumed domestically. Furthermore, the funds are mostly used for green box types of support; even where they may involve "trade-distorting" subsidies, these are accounted for under the domestic support component of the AoA. The amounts involved are also very small relative to the value of production of these crops.
There are no quantitative restrictions on exports, apart from a licensing requirement on a limited number of minor items on grounds of cultural value and health implications, which are WTO-compatible.
2.4 Other Experiences
Experiences with SPS/TBT Agreements: The phytosanitary requirements are conditioned by requirements under plant quarantine acts of different countries. Sri Lanka has had some experience in this area with respect to the requirements of the EU member States and Japan, the major export markets for horticultural products. The relevant EU regulation is 77/93, which aims to prevent the spread of damaging diseases and pests.
The phytosanitary certificate, with which exporters from outside the EU must guarantee that the product left the country in a healthy condition, is a measure which aims to prevent the spread of damaging diseases and pests in EU countries. The certificate is required for exports to the EU and plants are inspected by the governmental phytosanitary inspection service at the border of the first EU country they enter.
The quality of floricultural products demanded by European traders and consumers is extremely high. The quality standards in EU regulation 316/88 set down minimum requirements for fresh cut flowers. Proper post-harvest care can considerably improve the quality and vase-life of cut flowers. The most important standards and norms to be met by foreign suppliers are those demanded by the Dutch auctions, which are more detailed and specific than those of other EU markets. Standards include assortment, size, uniformity, marking, packaging and presentation. To meet these standards is a highly challenging task for Sri Lanka, failing which its exports are unlikely to grow.
Complying with packaging standards is also vital for exports, e.g. it is important to ensure that the packaging of products complies with the waste management policies in target markets. Packaging is increasingly becoming an important environmental issue in most countries. The overall trend in Europe is towards facilitating re-use and re-cycling of packing through incentives and disincentives, such as subsidies and taxes, and mandatory or voluntary restraints. There is much to be done in this area too.
Currently, the SPS/TBT-related problems have not been acute in view of the relatively low volume of export of the potentially affected items to countries with strict SPS/TBT requirements. But if these requirements are not taken into account, Sri Lankan exports are likely to be negatively affected, in particular for several fruits, vegetables, cashew, processed foods, spices and floriculture products.
Preferential trade relations: The experience of Sri Lanka in this field is limited to trade within the region. Within the South Asian Preferential Trade Agreement (SAPTA), preferential trade can be agreed upon between the participating countries. The classification of developing countries (India, Pakistan and Sri Lanka) and least developed countries (Bangladesh, Bhutan, Nepal and Maldives) within SAPTA has caused certain imbalances in trade. Some of the specific experiences of Sri Lanka relate to the increase in duty levied on betel leaves by Pakistan on imports from Sri Lanka by as much as 265 percent from the Rs. 88 per kg charged earlier. At the same time, Bangladesh benefited from a preferential rate (i.e. a reduction of 14 percent) in the market of Pakistan to the detriment of Sri Lanka. Another example is the preferential duty-free access to sesame seeds from Sri Lanka in the United States market, a preference which is not accorded to Viet Nam.
The traditional agricultural exports of Sri Lanka are tea, rubber, coconut and spices. A number of horticultural and floricultural crops have also been exported more recently, but the traditional products constitute the bulk of agricultural exports. As in many developing countries, food accounts for almost 90 percent of all agricultural imports but less than 20 percent of agricultural exports.
Figure 1 shows the evolution of agricultural trade during 1985-98. Exports fluctuated around US$600 million until 1992 and slumped to below US$400 million in 1994, followed by a sharp surge up to over US$1 000 million in both 1997 and 1998. The overall trend during 1985-94, however, was downward. In 1995, exports surged sharply, by 80 percent, to reach US$672 million and again in 1996 and 1997, by 30 percent and 23 percent, respectively. Reflecting these trends, Sri Lanka's experience with agricultural exports in the post-1995 period has been positive, the average value being 62 percent higher than in 1990-94 and 107 percent above the extrapolated trend value (Table 3).
Table 3: Agricultural trade in 1990-94 and 1995-98 (annual average, in million US$, and percentage change)
Period |
Exports |
Imports |
Net exports |
1990-94 actual (a) 1995-98 actual (b) 1995-98 extrapolated (c) 1
(b) - (a) 2 (b) - (c) 2 |
572 926 448 354 (62%) 478 (107%) |
498 741 578 243 (49%) 163 (28%) |
74 185 -130 112 (153%) 315 (243%) |
1 Extrapolated value based on 1985-94 trend. 2 Numbers in parentheses are percentage changes over (a) and (c), respectively. Source: Computed from FAOSTAT data. Agriculture excludes fishery and forestry products. | |||
Since food accounts for over 80 percent of total agricultural imports, the behaviour of the latter has been similar to that of food imports, discussed below. In contrast to exports, total agricultural imports rose, though modestly, during 1985-94. They surged sharply in 1995 and 1996 and roughly stabilized thereafter. As a result, imports in 1995-98 were on average 49 percent higher than in 1990-94. Since the trend was upward (Figure 1), the rise amounted to 28 percent only on the basis of trend values (Table 3).
Figure 1: Agricultural trade, 1985-98 (in million US$; thick lines are actual values, thin lines are trends for 1985-94 extrapolated to 1998)
Source: FAOSTAT
Net agricultural exports were positive but declined steadily during 1985-94, and even turned negative in both 1993 and 1994 (Figure 1). The surplus rose as from 1995, resulting in an average value of net exports in 1995-98 that was 153 percent higher than in 1990-94. Since the trend was negative, the performance appeared even better when measured against the trend.
Further analysis would be required to identify which commodities or commodity groups - including processed food and agricultural products - were the most dynamic exports in the post-UR period. The identification of such commodities and the factors explaining their success (and the reasons why other exports were less successful) would be an essential input into preparations for WTO negotiations on agriculture.
Such analysis would probably reveal that much of the export success may not be attributable to the AoA. For example, market access terms for most traditional products, which account for a very high share of total agricultural exports, were already fairly liberal prior to the UR. Tea is a good example, as also are coconut and rubber. Similarly, the Persian Gulf countries are among the major export markets for Sri Lankan agricultural products, primarily to cater to the ethnic South and South Asian consumers. Any change in access terms and trade in those markets could not have been due to the UR because most of the countries concerned are not WTO Members. Likewise, the financial crisis in Asia - again unrelated to the UR reforms - had a negative effect on the export of rubber, as Malaysian and Indonesian rubber became relatively cheap in the world market.
On the other hand, exports of non-traditional agricultural products such as spices, floriculture products, seasonal and fresh fruit and vegetables have increased slightly or somewhat more in various export markets. One reason for this growth is believed to be improved market access resulting from the AoA. For example, Japan's post-UR lower tariff for sesame seed oil (reduced from Rs.17/kg to Rs. 14) may have contributed to its increased imports of this oil from Sri Lanka.
Food accounts for almost 90 percent of agricultural imports while food products amount to less than 20 percent of agricultural exports. Food imports have grown steadily, from roughly US$300 million in 1985 to more than double by 1998 (Figure 2). Following an unusual dip in 1994, they rose sharply in each of the next two years and levelled off thereafter. The average annual value of food imports in 1995-98 (US$609 million) was consequently US$180 million (42 percent) higher than in 1990-94. But since the trend in food imports was positive, the increase in 1995-98 was only 24 percent when measured against the extrapolated levels (Table 4).
Table 4: Food trade in 1990-94 and 1995-98 (annual average, in million US$, and percentage change)
Period |
Imports |
Exports |
Net imports |
|
1990-94 actual (a) 1995-98 actual (b) 1995-98 extrapolated (c) 1
(b) - (a) 2 (b) - (c) 2 |
429 609 490 180 (42%) 119 (24%) |
105 163 91 58 (73%) 72 (56%) |
324 446 400 122 (38%) 46 (12%) |
|
1 See note 1 to Table 3. 2 Numbers in parentheses are percentage changes over (a) and (c) respectively. Source: Computed from FAOSTAT data. Food excludes fishery products. | |||
Food exports were small and relatively stable during most of the 1985-94 period, with unusual dips in both 1993 and 1994. Exports surged in 1995-97 and remained high in 1998. As a result, the average annual value of exports in 1995-98 was 58 percent (US$58 million) higher than in 1990-94.
Figure 2: Food trade, 1985-98 (in million US$; thick lines are actual values, thin lines are trends for 1985-94 extrapolated to 1998)
Source: FAOSTAT
Although there were annual fluctuations and food exports increased sharply after 1994, there was a clear upward trend in net food imports in the 1990s, dominated by the rising trend in gross food imports. Thus, the average annual value of net food imports in 1995-98 was 38 percent (US$122 million) higher than in 1990-94. However, measured against the rising trend, the increase was only 12 percent (US$46 million).
In final analysis, what can be said of the experience with food imports relative to agricultural exports? Figure 3 shows the evolution of this relationship. In 1985-87, food imports amounted to 46 percent of agricultural exports. The proportion rose sharply thereafter to reach 90 percent in both 1993 and 1994, declining to about 60 percent in 1997 and 1998. As a result, the average value of the ratio in 1995-98 (66 percent) was considerably lower than in 1990-94 (75 percent). These outcomes were strongly influenced by two unusual years in both periods - very high ratios in 1993 and 1994 and very low ratios in 1997 and 1998, i.e. the experience was very uneven. Further analysis of the trade data is required to explain this pattern of behaviour.
It is generally accepted that the elimination of all NTBs and the setting of applied tariffs at 35 percent on all agricultural commodities not only were a cause of the surge in imports but also had an adverse impact on crop area and production. The sudden surge in imports since 1996 may well be the reason why there was a decline in area cultivated and in production in 1997 and 1998, which preliminary data indicate continued in 1999. There is not yet a sufficient number of crop seasons for which these data are available to establish a statistically significant relationship between these variables, but the situation clearly requires close monitoring.
Ratio
Figure 3: Ratio of food imports to total agricultural exports, 1985-98
Source: FAOSTAT
The challenge facing the agricultural sector is compounded for other reasons. As noted above, the cumulative effect of lack of technologies and of failure to improve management practices has contributed to the stagnation of crop yields and the erosion of export competitiveness. In several cases, notably vegetables but also some other crops, Sri Lanka appears to be in a weak competitive position vis-à-vis India, the major supplier of the food products in question (Table 5).
Table 5: Relative cost of production of chillies, onions and potatoes in Sri Lanka and India (Rs per kg)
Crop |
Sri Lanka |
India |
Chillies Onions Potatoes |
72.0 9.8 25.0 |
20.0 2.5 2.3 |
Source: Department of Agriculture, Government of Sri Lanka.
Consequences for food security: On the whole, the impact on food security of the surge in imports of relatively cheaper food products, following the tariffication process, seems to have been adverse, but it is difficult to measure the impact in precise terms.
It does not appear that the rice sector was much affected, but the picture is unclear because of the enormous amounts of wheat flour imported every year. While these contributed to the food security of the urban and rural poor, the rice sector has always been vulnerable to lower prices of wheat flour.
With regard to other major food items, notably chillies, onions and potatoes, the situation seems precarious, as reflected in the significant drop in areas and production and the rise in imports.
The risk of high dependence on imported food items such as onions became obvious in 1998 when India imposed a ban on onion exports, resulting in more than a quadrupling of retail prices of onions in Sri Lanka, to almost 80-100 rupees per kg. Moreover, local production fell to 17 000 tons as the area cultivated was reduced significantly, with unfavourable consequences for both the onion farmers and consumers.
In the light of this situation it is evident that strategies need to be drawn up for the development of a more secure food production strategy in the medium term. Sri Lanka does receive special consideration in this respect from its trading partners in regional trading arrangements and some bilateral ones, such as SAPTA and the Indo-Sri Lanka Free Trade Agreement. These agricultural commodities have been classified under the "sensitive list", which essentially means that they are not subject to further trade concessions. But without much MFN tariff protection, Sri Lanka faces problems in its multilateral trade.
Impact on rural employment: Since the export sector in the developing countries generally specializes in labour-intensive products, an improvement in market access as a result of trade liberalization may be expected to have beneficial effects on employment. In Sri Lanka, this effect is yet to be seen because the AoA has not as yet opened up markets in major developed countries.
In the country's import-competing sectors, the experience has not been favourable. Apart from rice, which has often suffered on account of imports and wheat flour pricing policies, there is clear evidence of an unfavourable impact of imports on domestic output of vegetables, notably onions and potatoes. The resulting decline in the cultivated area of these crops has affected approximately 300 000 persons involved in their production and marketing. The immediate possibilities for affected farmers to turn to other crops are limited. Consequently, the economic effects of import liberalization in this sector have been significant.
Further reduction of bound tariffs
Sri Lanka bound all its agricultural tariffs at 50 percent but, as noted above, current applied rates on most agriculture commodities are 35 percent. Given the surge in imports in recent years, any further reduction of the bound tariffs is likely to create difficulties. The scope for increasing the applied rates up to the bound rates is limited. Also, the experience of the past five years has been that domestic agricultural sectors have suffered from competitive imports. Alternative employment opportunities in agriculture or elsewhere are limited.
While tariff reductions may be welfare-increasing in the short run, as gains by consumers may more than offset losses by producers, the longer-run effects can be perverse in welfare terms, through the virtual elimination of domestic output, notably of onions and potatoes in Sri Lanka.
A national debate has consequently been going on for some time about the appropriate level of border protection. The Presidential Task Force on Trade and Tariffs (1998) expounded these issues as follows:
"At low levels of import duty such as 35/30%, it would be difficult to effectively protect domestic agricultural producers and their products due to the widely fluctuating export prices of such products throughout the year in different sources of supply. At the very low export prices that prevail especially at times of gluts due to good harvests, a duty incidence such as 35/30% affords no protection at all to the domestic producers. It is for this reason that many countries have adopted the device of imposing `specific duties' per unit of weight or some such quantitative unit. For example, Switzerland has a host of specific duties on agricultural products. Japan imposes a specific duty on sugar imports which is equivalent to an ad valorem duty of almost 90 percent."
Although the AoA is not clear as to whether specific duties can be applied if they are not included in the country's Schedule, there seems to be no legal objection to their application as long as the resulting border protection remains within the bound tariff.
Having observed the average c.i.f. prices of recent consignments of rice, onions, potatoes and dried chillies, and taking note of government-guaranteed prices, the Commission went on to state:
"The Commission compared the above prices and calculated the `uplift' over the average CIF prices which would enable the domestic producers to sell their produce at a reasonable `mark-up' and also looked at the retail prices prevailing over the major part of the year in our market.
The Commission then fixed an ad valorem duty to protect the domestic producer throughout the year while at the same time preventing very high price increase to the consumers between harvests or when there is a shortfall in domestic production. There has essentially to be a `trade-off' between the interests of the producer and the consumer. There is also the dire need for an `automatic' system of protection instead of the prevailing `waiver' or duty change by RPO system which depends on bureaucratic/political reaction and so is not very efficient as seen by the recent experience with dried chillies."
Based on these considerations, the Commission decided to recommend an ad valorem duty of 50 percent to be maintained for a period of two years and reduced to 40 percent thereafter for rice and for chillies, brown onion, potatoes, maize, green gram, cowpea, tur dall, ground nut and red onion. For these items, guaranteed producer prices were announced for 1998.
Contingency protection
In view of the above, it is in the interest of Sri Lanka to negotiate also for a simpler safeguard instrument for at least a selected number of sensitive commodities. Among the set of current instruments, the special safeguard (SSG) provision of the AoA appears to be most suitable for this purpose and more so than for many other developing countries, since bound tariffs are already relatively low and any further reduction would most likely render the domestic sectors more vulnerable to external shocks.
Support to domestic agriculture
In view of the adverse impact of the reforms on the domestic agricultural sector, further support is required in the short and medium term. Also, the non-availability of subsidies for fertilizer and of low-interest credit etc. will in the short term have adverse effects on the farming community. The social cost, i.e. in terms of employment, of not doing more is extremely high. The country also needs to reconsider minimum agricultural price schemes.
While the Government is not advocating the establishment of new "parastatals" for marketing agricultural produce, it seems necessary to reconsider marketing support and price-fixing arrangements for farmers, backed by an effective public agency.
Sri Lanka did not submit AMS levels in the Uruguay Round and consequently its support for agriculture may not exceed the de minimis level of 10 percent. There is need for reexamining the status of the AMS - namely whether current flexibility in the AoA rules is adequate. If it proves not to be so, Sri Lanka should negotiate for additional flexibility to provide price and non-price support to farmers.
Technical and financial assistance
Sri Lanka also needs to raise the issue of technical and financial assistance in future negotiations, since current provisions in this respect in the various WTO Agreements have yet to be implemented effectively.
1 Based on a background study prepared for the FAO Commodities and Trade Division by Nimal Ranaweera, Colombo.
2 Food, as defined in this subsection, excludes fishery products.
