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Cablegate: Response: Impact of Rising Food Prices - Sri Lanka

VZCZCXRO1895
RR RUEHBI RUEHLMC
DE RUEHLM #0428/01 1211137
ZNR UUUUU ZZH
R 301137Z APR 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8063
INFO RUEHNE/AMEMBASSY NEW DELHI 1995
RUEHCG/AMCONSUL CHENNAI 8462
RUEHBI/AMCONSUL MUMBAI 5927
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000428

SIPDIS

SIPDIS

STATE FOR SCA/INS, SCA/RA LEO GALLAGHER
STATE EEB/TPP/ABT/ATP JANET SPECK
AG FOR FAS CHRIS RIKER
NEW DELHI PASS TO FAS

E.O. 12958: N/A
TAGS: ECON EINV EAGR KMCA PGOV CE
SUBJECT: RESPONSE: IMPACT OF RISING FOOD PRICES - SRI LANKA

REF: A. SECSTATE 39410
B. COLOMBO 370

1. (SBU) SUMMARY: The impact of rising food prices is affecting all
households in Sri Lanka. Recent jumps in prices of rice and other
food commodities have come on top of 20% domestic inflation rates.
In the past year, food commodity prices are up 50-100%, and the
trend is continuing. On average, food prices now account for 47
percent of total consumer expenditure, with poorer households
spending more than 80 percent of their total income on food
commodities. Nutrition levels are declining; only an estimated half
of the country's 20 million people consume the recommended minimum
daily caloric intake. The government's erratic policies in the
agriculture sector and corruption have contributed to the poor
performance of domestic agriculture. End summary.

2. (U) Information in this cable is keyed to questions raised in Ref
A.

--------
Demand
--------

3. (U) Rice is the most important agricultural commodity consumed in
Sri Lanka. Annually, 95-105 kilos of rice are consumed per person.
Wheat is also important to the Sri Lankan diet, at approximately 40
kilos per capita consumed yearly. Statistics of cereal consumption
over the past five decades reveal an increase in wheat consumption
and a reduction in per capita consumption of rice. The country's
entire wheat requirements are met by imports; no wheat is grown
locally. Wheat imports for 2007 were 850,000 tons. The majority of
the rice requirement is locally produced, with shortfalls bridged
through imports. 2007 rice imports were 70,000 tons. However,
torrential rains affected the recently concluded major harvest, and
imports needed to meet demand in 2008 are estimated at 300,000 tons
(Ref B).

4. (U) There has been no shift towards alternate commodities because
(a) rice and wheat are the staple diet of the average Sri Lankan,
and (b) the cost of meat, fish and even vegetables are beyond the
reach of the average consumer as a substitute for rice and wheat.
The Central Bank reports that, although rising food prices
deteriorate everyone's purchasing power, some segments of the
population are hit especially hard. The current high prices are
especially hard on the urban poor and fixed income earners employed
predominantly in manufacturing and services.

-------
Supply
-------

5. (U) There is no indication that domestic agriculture production
is responding to increases in prices. Neither domestic nor foreign
investments in food production have increased. There has been no
marked increase or decrease in land usage for agriculture production
except for a marginal increase in the amount of rice paddy planted.
Although there is considerable unutilized and under-utilized arable
land, archaic legislation and government bureaucracy inhibit the
productive use of these lands.

6. (U) High input costs in the local agricultural sector are a major
factor impacting food prices. Increasing labor, fertilizer, feed,
and energy costs have all affected the agricultural and livestock
sectors. Poultry farmers are particularly affected by high feed
prices. Shortages of food storage and processing facilities, in
addition to poor weather (Ref B) and hoarding, are also partly to
blame for local shortages in Sri Lanka between January and April
2008. The local World Bank Country Director recently stated that
growth of the high-value agricultural sector is hampered by limited
market infrastructure, technology innovation, cold chains, and
market information. Government intervention in agricultural
marketing, which is common in Sri Lanka and which increases when
supplies are disrupted, also does not allow market forces to
determine supply and demand.

7. (U) Even if local production enhanced supply, Dr. Nimal
Sanderatne, an eminent agriculture economist, says there is no
mechanism in place for the market to absorb increased production
beyond normal levels. Sanderatne states that appropriate marketing
infrastructure is needed in order to accommodate the expanded
production needed for demand and supply to balance.


COLOMBO 00000428 002 OF 003


8. (U) There is no local production of commodities for non-food use
(fuels, etc.). There is growing use of agricultural waste, such as
rice husks and coconut shells, for small scale biofuel and other
non-food applications.

-----------------
Political Impact
-----------------

9. (U) There have been no public protests or violence as a result of
rising food costs. There is no immediate effect on the stability of
the government as the country lacks a vibrant opposition to confront
the government on critical issues. Although there have been
numerous newspaper articles and general concern by citizens about
rice prices and because rice is not always immediately available in
some stores, the average consumer is largely a passive casualty of
economic adversity. Nevertheless, if high food prices extend
indefinitely and shortages occur, there could be political
ramifications for the government. The government is partly
responsible for high inflation due to heavy deficit spending, losses
generated by public corporations, high defense expenditure, and
unsustainable subsidies.

----------------
Economic Impact
----------------

10. (U) Sri Lanka's 24% inflation is driven in part by increases in
international food commodity prices. According to the 2007 Central
Bank annual report, the share of food items in the official
inflation index was approximately 48 percent in January 2008.
Imports of most key agricultural commodities increased in 2007 -- in
value terms -- over the previous year's levels. These are, for the
most part, taxable items that contribute to the government's import
tariff revenue, which recorded an increase in 2007. Additionally,
the overall budget deficit narrowed to 7.7 percent of GDP in 2007
from 8 percent the previous year, which suggests there was no great
impact on the general fiscal situation due to high food prices.

11. (U) High food prices could fuel agricultural growth, if markets
are allowed to operate freely. Unfortunately, the government has
stepped in to control prices of rice and other staples, preventing
farmers from realizing the benefits of high prices. Approximately
30 percent of the population -- those involved in agricultural
production -- could benefit from high prices if market forces were
allowed to determine prices.

12. (U) Department of Census and Statistics figures show that rice
prices have increased 102 percent from April 2007 to April 2008.
Similarly, price of wheat flour and bread have increased by 71
percent and 55 percent, respectively, during the same period.
Around 50 percent of households live on less that $150 a month and
are thus severely affected by high prices. According to Dr. Harsha
De Silva, a leading local economist, food security is a serious
concern and poverty in Sri Lanka will increase further due to rising
prices. Some economic analysts cite reduced nutrition levels of the
poor in asserting that rising food prices in 2007/2008 may be
depriving a significant portion of the population of both rice and
wheat.

---------------------
Environmental Impact
---------------------

13. (U) There is no evident environmental impact stemming from
rising food prices.

--------------------------
Government Policy Response
--------------------------

14. (U) The government implemented several measures in response to
high prices. It withdrew a 20 percent import tariff on rice in
March. In April, the government established retail price ceilings
on rice, angering rice millers, traders and farmers. The government
also continues to maintain price controls on chicken, wheat flour
and milk powder. For other commodities, high prices are allowed to
be passed on to consumers. The government continues to subsidize
about 85% of the cost of fertilizer for small farmers -- a subsidy
provided before the recent hikes in agricultural prices. Though
farmers frequently sell the subsidized fertilizer at market prices
rather than apply to crops.

COLOMBO 00000428 003 OF 003

15. (SBU) Dr. De Silva emphasized that government has to curtail
expenditure and impose tight fiscal controls in order to reduce
inflation. He asserts poor fiscal policy is largely to blame for
the current rate of high inflation. To combat inflation
expectations, the Central Bank announced in its 2007 annual report
that it would attempt to meet strict monetary policy targets to
reduce inflation. The Central Bank also recommended that the
government follow a "prudent and sustainable" fiscal management
strategy to achieve low inflation in the medium to long term.
However, the government, which has a history of ignoring sound
economic advice from its own Central Bank, is unlikely to be able to
reduce its fiscal deficit enough to significantly bring down
inflation.

-------------------------
Impact on Post Programs
-------------------------

16. (U) To date there has been no impact on post's programs.

-------------------
Policy Proposals
-------------------

17. (U) The government needs to make a number of policy decisions to
reverse food commodity inflation. In agriculture, encouragement of
increased private sector investment, a gradual phase-out of the
fertilizer subsidy, development of marketing infrastructure
including increased access and direct links to markets,
discontinuation of government intervention in markets, introduction
of new technologies, and modernized agriculture practices are some
of the key areas that need consideration.

18. (U) For the USG, it is recommended that all agencies dealing in
food aid-funded agriculture development direct resources into
public-private partnerships. Private sector involvement in projects
secures markets for farmers, provides sustainability due to the
commercial aspect involved, and demonstrates the viability of
farming as a sustainable income generating activity for rural
youth.

BLAKE

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