Tariff hikes on onions and potatoes: Farmers protected, poor forgotten

By Dhananath Fernando

Originally appeared on the Morning

Over the last few weeks, while the Government and Opposition sparred over political theatre, ‘crossing the Rubicon’ as they call it, a decision with far more impact on ordinary people went largely unnoticed. The import tariffs on big onions and potatoes were increased to Rs. 50 and Rs. 80 per kilo, respectively.

The Minister claims that earlier the Special Commodity Levy (SCL) was Rs. 10 for big onions and Rs. 60 for potatoes. The justification? Protecting farmers.

Yes, farmers matter. But protecting them at this cost by placing the full burden on consumers is unacceptable. Sri Lanka is still reeling from its economic crisis. According to a LIRNEasia survey, four million people fell into poverty during the crisis, raising the total to seven million.

World Bank data suggests nearly 25% of Sri Lankans now live below the poverty line. The Department of Census and Statistics (DCS) estimates that one needs around Rs. 17,000 per month just to stay above it. In this context, how do we justify a Rs. 80 and Rs. 50 tariff on two of the poorest man’s dry rations?

When ‘protection’ means higher prices

These tariffs are not unique to onions and potatoes. Similar duties apply to many day-to-day essentials. Take onions: the DCS notes that the retail price is about Rs. 140 per kilo. With the revised SCL, the price will likely hit Rs. 170–180. That means nearly one-third of the price is simply a tax disguised as ‘farmer protection.’

Potatoes tell the same story. At Rs. 300 a kilo, the extra Rs. 20 levy pushes the price to Rs. 310–320. Roughly a quarter of the price is tax. Supermarket shelves already show potatoes at Rs. 340 and onions between Rs. 190 and Rs. 230.

So should we not protect farmers? Of course we must. But let’s remember: farmers already receive fertiliser subsidies, seed subsidies, and other support. If further protection is needed, the better way is direct cash support linked to output. That way, the cost does not cascade to millions of poor consumers who have no escape. After all, the number of onion and potato farmers is tiny compared to the number of people who eat them.

A breeding ground for corruption

Tariffs that change overnight also open space for corruption. Anyone with inside information can import just before the revision and pocket huge windfalls after the levy kicks in. With commodities like onions and potatoes, which last more than a month in storage, the temptation is obvious.

We have been here before. Remember the sugar levy hike years ago? That saga exposed how easy it is to game the system with commodities that have long shelf lives. Garlic, rice, and other essentials are also caught in this cycle of discretionary tariff tinkering.

The vicious cycle

High food tariffs ripple through the entire economy. When essentials become expensive, workers from estate labourers to factory staff inevitably demand higher wages. Over time, these wage pressures erode competitiveness and trap the country in a vicious cycle of high costs and low productivity.

Even the International Monetary Fund’s (IMF) Governance Diagnostic has flagged this issue, urging Sri Lanka to remove discretionary powers over tariffs and taxes. Reforms to the Strategic Development Projects Act are meant to address exactly this kind of arbitrary policymaking.

Who really drowns in the Rubicon?

At a time when taxpayers are already stretched thin, paying some of the highest personal taxes in the region and facing steep border taxes on everything from food to vehicles, an SCL of Rs. 80 on potatoes and Rs. 50 on onions is simply unfair. If farmers are to be supported, it should be done directly, with incentives for productivity, not by inflating the grocery bill of every struggling household.

Politicians may talk about crossing the Rubicon. But for the poorest of the poor, the Rubicon is not crossed; it is drowned in. And they drown in it under the weight of a rising cost of living.

High tariffs on basic food items: A blow to the struggling masses

By Dhananath Fernando

Originally appeared on the Morning

Last week it was reported that the Government has again imposed high tariffs (Special Commodity Levy) on some food items such as cowpea, finger millet, undu, maize, and a few others. At a time when seven million people are below the poverty line, tariffs on food items are a crime. Imposing tariffs on such food items is not done just to increase Government revenue.

The tariff on undu has increased to Rs. 300 from Rs. 200 per kg. For finger millet and other items, it has increased from Rs. 70 to Rs. 300. How much can a Government earn from a population of 22 million by imposing a Rs. 300 tariff on finger millet and cowpea?

According to the Ministry of Agriculture, the per annum demand for cowpea in Sri Lanka is 15,000 MT, while the demand for finger millet stands at 10,000 MT. Even if we import the entire demand for finger millet and cowpea, the amount the Government can earn as tariff is about Rs. 7.5 billion for the entire year.

This is a negligible amount compared to our expenditure. The expenditure for the President is about Rs. 5.8 billion as per the Budget estimate for 2024. It is clear that the increase of the Special Commodity Levy (SCL) for food items will have an impact beyond taxes, because at this tariff rate no one will import finger millet or cowpea.

However, it means that the consumer will lose the opportunity to purchase cowpea, undu, and finger millet for Rs. 300 less than what is available in the market. How can we justify people paying an additional Rs. 300 when seven million people – one-third of our country – live in poverty?

This general justification is that this tariff is imposed to protect local manufacturing of finger millet, cowpea, and maize. Even if this is true, what is the justification in terms of consumers when they no longer have access to affordable food items?

Given existing lifestyle changes, products such as undu, cowpea, and finger millet are mainly consumed not by the wealthiest section of the society but the poorest. Diabetes patients, pregnant mothers, estate workers, people in the north and east are the primary consumers of these food items.

It doesn’t stop there. High prices on maize will impact the entire food supply chain as maize is one of the main expenditures of the poultry industry. About 40% of the cost of poultry is on food, primarily driven by maize. This indicates that the cost of main protein sources such as chicken and eggs will increase.

The cost of chicken and eggs in turn impacts the costs of the bakery industry and all food items at restaurants and eateries.

Accordingly, the net impact on the entire food supply chain due to this ad hoc Special Commodity Levy is much greater than what we see at the surface level. Although it is not ideal, if the Government really wishes to protect finger millet, cowpea, and maize farmers, it can give a direct subsidy of Rs. 7.5 billion, based on the productivity and efficiency of farms.

This would mean that at least those who push for better cultivation methods receive an incentive to ensure a better harvest, rather than asking consumers to shoulder a flat price hike for all food items at a time when they are struggling to put three meals on the table per day. People are facing excessive burdens due to inflation and the high tax rate in order to pay for the mistakes of our policymakers.

The second argument against the high SCL on imported food items concerns saving foreign exchange. Firstly, we cannot save foreign exchange through higher tariffs because the demand for imports is determined by the money supply within the economy. People buy forex to import by spending the rupees they earn. When they buy forex in rupees, they have to reduce their consumption by some other means.

If we can save forex simply through higher tariffs and import controls, we have to question how we ran out of forex when import controls, in place since Covid, existed until very recently.

We even controlled some of our pharmaceutical imports but we were still unable to save forex. Foreign exchange cannot be saved by import controls or high tariffs.

Secondly, 40% of our imports is fuel. If we really want to cut down on our imports, we must reduce fuel imports, which this column has recommended multiple times, suggesting a market system for public transport. By imposing a Special Commodity Levy on food, we are simply asking the poorest of the poor to face starvation while providing the opportunity for rent-seeking behaviour of a few crony elites.

Whether in socialism or in capitalism or with the argument of saving foreign exchange, how can we justify a Special Commodity Levy of Rs. 300 on basic food items when one out of every three fellow Sri Lankans are forced to skip a meal due to poverty?