Key Determinants of Sri Lanka’s Fertilizer Subsidy: Some Research Findings for Policy Makers

As in many developing countries, fertilizer subsidies represent a major component of agricultural policy in Sri Lanka. This is particularly true of the paddy sector. With rice being the staple food in Sri Lanka, successive governments have provided significant fertilizer subsidies for paddy with the primary aim of increasing the paddy production[1]. Since 2005, the fertilizer subsidy has accounted for 2-2.5% of total government expenditure[ii] and the subsidy is given for all three major fertilizers (Urea, Murate of Potash – MoP, and Triple Super Phosphate – TSP).

 

Over the years, the subsidy has significantly contributed to increasing paddy production, stabilizing the milled rice price[iii], and helped the country attain self-sufficiency in rice[iv]. However, there are questions on the effectiveness and sustainability of the programme because of concerns around the overuse of subsidized fertilizer and its use for crops other than paddy. The excessive use of fertilizer has also raised concerns over soil and water pollution, food safety and the burden on the national budget[v] and[vi].

 

In response to these concerns, especially the burden on the budget, the government of Sri Lanka reduced the fertilizer subsidy by 25% in the 2013 Budget. It further aimed to encourage farmers to adopt organic fertilizer. However, paddy farmers complained to the government that they are not in a position to shift to organic fertilizer within a short time and announced a possible price hike for rice. After the reduction in the fertilizer subsidy and the consequent price hike, paddy production declined as farmers did not cultivate the full extent[vii]. In response, the government revised their decision in 2014 by reducing the subsidy by only 10% instead of the original 25%[viii]. This shows the inconsistency in recent agricultural policies, and calls for better evidence-based policymaking.

 

Paddy – A Mainstay

 

Paddy cultivation is a major source of livelihood in Sri Lanka, providing more than 1.8 million people with employment opportunities. So, in terms of food security and rural employment, the government is under constant pressure to continue with the subsidy scheme. Furthermore, the subsidy has become a politically sensitive issue, since paddy farmers are a high share of the voter base[ix]and[x]. This is very common in most developing countries. However, a sufficient and effective decision on the reduction of the subsidy is not possible without a clear understanding of the factors that determine the demand for fertilizer[xi].

 

A New Study

 

There are several studies in Sri Lanka that have examined the factors that determine the demand for fertilizer in paddy cultivation. However, these have failed to consider recent data that capture the fertilizer subsidy implemented since 2005; they only take into account a handful of variables that determine the demand for fertilizer. Moreover, data on fertilizer use in Sri Lanka needs to be studies considering the two main paddy-harvesting seasons. In order to address these limitations, a new study by IPS uses panel data regressions in fixed and random effects scenarios to investigate the factors that affect fertilizer demand in the major paddy producing areas of Sri Lanka between 1990 and 2011. This study uses fertilizer consumption, prices, and cost of cultivation data published by the Department of Agriculture.

 

Significant Findings

 

Estimation results suggest that the price of fertilizer, price of seed paddy, price of labour, quantity of paddy output, cost of materials, cost of pest management, provision of fertilizer subsidy and the whether the paddy cultivation is commercial or not, all have significant implications on the demand for fertilizer.  However, the use of machinery – which represents the degree of mechanization in paddy farming – does not have a significant impact of the demand for fertilizer.

 

The demand for fertilizer decreased as the price of fertilizer and the price of seed paddy increases. However, the increases are relatively inelastic.  Both fertilizer and seed paddy do not have close substitutes. Even though organic fertilizer can be used in place of chemical fertilizer, it is not widely practiced in Sri Lanka and commercial paddy farming is predominantly based on chemical fertilizers. Therefore, simply reducing the fertilizer subsidy would not encourage farmers to adopt organic fertilizer. Adoption of organic fertilizer in the short run may hinder production unless farmers are compensated for possible yield reductions.

 

The demand for fertilizer increases as the price of labour increases which could possibly be explained by the labour scarcity. An increase in the cost of materials (mainly the cost for weed management) pushes farmers to use more fertilizer while an increase in the cost of pest management reduced the demand for fertilizer. On average, farmers use more fertilizer when the fertilizer subsidy is provided. But the increase in demand, under the subsidy, is significantly smaller.  Finally, the study finds that more fertilizer is demanded by commercial paddy cultivating areas.

 

Policy Recommendations

 

This study proposes several major policy recommendations based on three major outcomes: self-sufficiency in the production of rice; prevention of the overuse of chemical fertilizer; and the gradual removal of the fertilizer subsidy. The relatively inelastic relationship between the price of and demand for fertilizer, the limited availability of organic fertilizer, and the possible yield drops with organic fertilizer use, all create issues in adoption of organic fertilizer among Sri Lankan paddy farmers. Therefore, the objective of promoting organic fertilizer requires farmer support programs to ensure supply of fertilizer as well as possible production cuts.

 

The price of seed paddy has a significant impact in sustaining paddy production in Sri Lanka. While increasing the seed price would reduce the farmers’ incentive to over use fertilizer, this might actually limit farmers’ full production potential. Therefore measures are needed to stabilize prices of seed paddy. This study recommends that in order to reduce the overuse of the fertilizer, the price of labour needs to be stabilized and there should be measures to reduce the cost of weedicides. Labour is becoming scarcer in paddy farming. There is an out-migration of labour and the farm workforce is ageing. Therefore, farmers who depend on hired labour would want to make the best out of what they spend and thus apply more fertilizer when the labour is employed. This could potentially lead to an overuse of fertilizer. Mechanization has the potential to reduce this over use while simultaneously tackling the labour constraint.  Mechanization was significant in reducing the demand for fertilizer until 2005, however, since then the price of labour has become a more significant factor in determining fertilizer demand.

 

Way Forward

 

Undoubtedly, the fertilizer subsidy has greatly influenced the increase in paddy production, and contributed to achieving rice self-sufficiency in Sri Lanka[xii]. However this study recommends the gradual removal of the fertilizer subsidy in the long-run, in a phased manner. The short-run reduction of the fertilizer subsidy can be done for non-commercial paddy producing areas since their fertilizer usage is low. Organic paddy farming is ideal for these areas. While the fertilizer subsidy is more important to commercial paddy producing areas, the amount of subsidy given to them can be reduced in several stages, by gradually introducing organic fertilizer. Yet, for that to happen, farmer awareness and willingness needs to be heightened, while the necessary supply chain is developed as well.  The removal of the fertilizer subsidy in the long run will give room for establishing local fertilizer markets, reduce negative environmental externalities, and reduce the burden on public finances. Additionally, it will encourage the growth of cultivation and consumption of organic foods.

 

[1] Rajapaksa, R. D. D. P., & Karunagoda, K. S. (2009). Factor demand for paddy cultivation in Sri Lanka with special reference to fertilizer subsidy program. Sri Lanka Journal of Agrarian Services, 13 (2), 25-38

[ii] Ministry of Finance and Planning. (2014). Annual Report 2014: Economic perspectives of Sri Lanka. Government of Sri Lanka. Colombo.

[iii] Semasinghe., W., M. 2012. Economics and Social Cost of Fertilizer Subsidy on Paddy Framing in Sri Lanka. International Journal of Science and Research, 3(10), 1261-1267

[iv] Gamawelagedara, W. C., Wickramasinghe, Y. M. & Dissanayake, C. A. K. (2011). Income of rural farmers in Anuradhapura District. The Journal of Agricultural Science, 6(2), 92-99

[v] Weerahewa, J., Kodithuwakku S. S., & Ariyawardana, A. (2010). The fertilizer subsidy programme in Sri Lanka, Case Study No 7-11 of the Program: Food policy for developing countries, The role of government in the global food systems. Cornell University, Ithaca, NY.

[vi] Ministry of Finance and Planning. (2014). Annual Report 2014: Economic perspectives of Sri Lanka. Government of Sri Lanka. Colombo.

[vii] Jayakody., R. 2014. Farmers to Hike Prices Sans Fertilizer Subsidy. Published Article on the Sunday Leader News Paper, Visited Online, 10th September 2014.

[viii] Ministry of Finance and Planning. (2014). Annual Report 2014: Economic perspectives of Sri Lanka. Government of Sri Lanka. Colombo.

[ix] Thenuwara, H. N. (2003). A Policy Rule for the liberalization of agriculture in Sri Lanka. Staff Studies, 33(1), 1-13.

[x] Weerahewa, J., Kodithuwakku S. S., & Ariyawardana, A. (2010). The fertilizer subsidy programme in Sri Lanka, Case Study No 7-11 of the Program: Food policy for developing countries, The role of government in the global food systems. Cornell University, Ithaca, NY.

[xi] Jayne, T. S., & Rashid, S. (2013). Input subsidy programs in Sub-Saharan Africa: A synthesis of recent evidence. Agricultural Economics, 44, 547-562

[xii] Gamawelagedara, W. C., Wickramasinghe, Y. M. & Dissanayake, C. A. K. (2011). Income of rural farmers in Anuradhapura District. The Journal of Agricultural Science, 6(2), 92-99


  • sarath weerasena

    Dear Chatura,
    I wish to comment on your article.
    Rice self-sufficiency is relative to wheat flour imports to SL. Given this equation, the country achieved the elusive self sufficiency in 2004, when rice yield levels broke the 3 t/ha barrier to reach 4 t/ha. This was the year that the government stopped rice imports due to the actual glut achieved since the country gained independence in 1948! As you would note, this achievement was before the commencement of the fertilizer subsidy!
    Therefore, as scientists, we have to analyze how this was practically done without expending the national budget and contributing to the poisoning of our environment. You may therefore, research on how this was practically possible. Dr. P.A. Samaratunga, former researcher at IPS may assist you.
    Best regards.
    Sarath Weerasena
    Retd. DGA.