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