Sri Lanka’s agriculture sector is suffering from the effects of the global financial crisis but industry experts and economists say the global economic meltdown could be converted into a benefit; if authorities took a bold step and allowed the rupee to depreciate.

This would help all our exports, although the focus here is on the plantation sector.

Tea, and rubber; the big three crops, with coconut, that propelled the country’s export driven economy before garments took an unprecedented lead in the ‘70s, are now facing a decline that could threaten the very existence of the industries built around these crops.

The global financial crisis and years of neglect have led the country to this situation.

Economics Director of the Government Peace Secretariat, Rohantha Athukorale, told the Island Financial Review that the government and private sector must both work together to build a bail out package to save our export crops.

"What Sri Lanka needs now, and cannot do without, is a financial bail out package but both the government and the private sector must fund this package," he said.

Athukorale told a recent seminar that the plantation industry could face severe repercussions in the near future unless public-private partnerships addressed the agricultural crisis that is brewing in the tea, rubber and coconut industry.

"It is not only the small holding sector that will be affected by the crisis but the corporate sector too. The Signs of the crisis is beginning to show as companies compute their Profit and loss statements for November where the costs are more than the net sales average," he said.

He said the rest of the country was lagging behind the Western Province on growth because of the absence of reforms in the agricultural sector.

"This has resulted in the private sector not being able to exploit the opportunities that the global market offered, especially in the areas of commercial agriculture and agro business."

He said the best indicator of the lagging regions is poverty in the agricultural sector, which is at 40 percent, while the overall poverty count for the country is at 15.2 percent.

"We see the divide between regions where reforms took place and the sectors that grew exponentially while agriculture got lost in the economic template of the country."

With the profitability of plantations sector on the decline, the threat to the livelihoods of the plantation communities, the tea pluckers and rubber tappers on whose sweat the country had gained so much from but given back so little, is another factor that needs attention before all else.

Athukorale said that Sri Lanka required something more than a protectionist strategy; a crash investment programme on removing constraints on land, driving technology to improve yields and private sector investment to diversify into value added agricultural products like fruits, vegetables, livestock and fisheries.

"We also need to invest on research and development like new clones of high yielding agricultural produce with innovative modern irrigation methods to cater to the changing consumer who has become more health conscious," he said.

Some economists argue that the government is not in a position to dole out bailout packages as it has no policy space to do so with subsidies, salaries and interest payments being on the top on its list of priority expenses.

However, both the industry and academics argue there is probably space to provide some kind of relief in terms of subsidized rates for utility payments and special interest rates on loans for working capital.

Many say that reviewing the exchange rate is probably the best option, if developing an export oriented economy was what the country wanted in the long run.

The Chairman of Hayleys Group, N. G. Wickremeratne said the rubber industry, as is tea and all other exports, is facing a grim time as inflation and a static exchange rate threatens the competitiveness of Sri Lankan exports in the world market.

"Inflation has put pressure on wages over the last 2-3 years and this in turn has increased the cost base of labour intensive plantations and a static exchange rate has meant these increases are now overtaking the prices we obtain in dollar terms exacerbating the situation," he told the Island Financial Review.

Wickremeratne said that with demand for rubber falling in industrial countries due to the global financial downturn, most plantations are contending with lower prices while domestic production costs have risen by 15 to 20 percent.

The Central Bank’s tight monetary stance to curb inflation drove up interest rates making it expensive for industries to fund their working capital requirements.

Earlier this year Wickremeratne told the Sri Lanka Economic Summit that the private sector could help the Central Bank in its balancing act to manage its Balance of Payments problem.

"Do not allow the rupee to appreciate," he warned adding that over the last several years, companies have been losing competitiveness in the order of about 3 percent each year as a result of inflation and no adjustment in the exchange rate.

"Things would get very serious over a period of time," he said in August, and with the global financial crisis that period, it seems, is certainly with us now.

He said the Central Bank should manage the trade deficit by devaluing the rupee which would reduce imports whilst increasing local value addition by driving exports.

"The export sector could then create more employment opportunities and we would not be depending so much on remittances and borrowing as we are doing today," Wickremeratne said.

Dr. Srimal Abeyratne, senior lecturer in Economics, University of Colombo, said the macro economic environment of Sri Lanka is going to be a challenging one next year.

"Only time will tell whether we ought to depreciate the rupee or keep depleting our foreign reserves," he said.

Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies, said last week that now was the opportune time to allow the rupee to depreciate with inflation on the decline and world commodity prices at low levels.

"One can argue that depreciating the rupee could cause inflation but with inflation in a declining trend and with world commodity prices at low levels now is the best time for policy makers to allow the rupee to depreciate and give a boost to Sri Lanka’s exports," he said.

At a time when Sri Lanka is grappling with depleting foreign reserves, the Chairperson of the Exporters Association of Sri Lanka, Ms. Nirmalie Samaratunga, said that long term policy measures are required to develop the export sector as it is a source of foreign reserves and employment generation.

Addressing a post budget seminar last month she said that with falling global commodity prices, it may be the opportune time for authorities to depreciate the rupee further.

Depreciating the rupee is not as easy as it sounds. As reported earlier, about 80 percent of the revenues collected by the government are spent on salaries and wages (5.6 percent of GDP), interest payments (5 percent GDP) and transfer and subsidies (3.8 percent of GDP).

If the exchange was depreciated some of these expenditure items could shoot up and create a foreign reserve crisis.

Also, depreciating the rupee could shoot up inflation as the country depends on imports for many essential items as well.