The paddy problem is more than a price problem

By Dhananath Fernando

Originally appeared on The Morning

I recently joined a television programme to discuss the economics of paddy and rice. Three farmers representing farmer associations joined the discussion, together with former Governor of the Sabaragamuwa Province Prof. Dhamma Dissanayake.

It was difficult to listen to the reality faced by the farmers. Their main request was for a paddy price of around Rs. 120–140 per kilo.

The Government has announced a guaranteed price of Rs. 120, but the Paddy Marketing Board (PMB) does not have the capacity to purchase even a meaningful share of the total harvest. The private sector, meanwhile, purchases paddy at around Rs. 95 per kilo.

One farmer presented his numbers. After nearly three months of work, his profit from one acre was about Rs. 20,000. When you hear numbers like this, it is easy to understand why farmers are protesting.

There is also another complaint. Farmers argue that keeri samba has been imported when there are already adequate stocks in the country, putting further pressure on local prices.

We know there is a problem. It is also very easy to politicise it. But the solutions are more complicated than announcing another controlled price.

Suppose the Government forces private millers to purchase paddy at Rs. 120 per kilo. Either the price of rice will have to increase further, which will be politically difficult, or millers will simply reduce their purchases. Similarly, the Government itself cannot purchase the entire harvest at the guaranteed price.

There are around 346 storage facilities under the PMB, but their total capacity covers only a small fraction of the annual harvest. Therefore, the Government cannot become the buyer of last resort for the entire paddy market.

The problem of storage

When we look at the problem through an economic lens, one of the most important issues is storage.

My colleague Sudaraka Ariyaratne and researchers at Advocata have conducted an in-depth study on the paddy market, which is yet to be published. One important insight from their research is that market power in the paddy sector is closely connected to the ability to store the harvest.

Farmers and farmer organisations generally do not have sufficient storage capacity. Most of the storage capacity is with millers.

Paddy is also different from many other products because a large quantity of the harvest enters the market within a short period. Farmers cannot keep the harvest for long without proper storage. They therefore have little choice but to sell soon after harvesting.

When thousands of farmers bring paddy to the market at the same time, prices naturally fall.

Storage changes that equation. It gives the owner the ability to decide when to sell and allows the harvest to be released gradually into the market.

Therefore, if we genuinely want to empower farmers, part of the solution lies in storage.

One option is to create more storage opportunities for farmers and farmer organisations. Another is to improve access to storage for smaller millers, creating more competition in the market.

But how can farmers build storage facilities? That is where access to credit becomes important. Farmers, farmer associations, or farming communities should be able to borrow and invest in storage and other productivity improvements.

But banks require collateral. Many farmers have very little collateral. Some cultivate land under permits. Others farm rented land and pay part of the harvest as rent. This is where land rights become directly connected to the paddy problem.

We often discuss land rights as a separate economic reform. But without clear and bankable property rights, farmers cannot unlock the value of the assets they already use. The land remains dead capital. Without collateral there is no credit, and without credit there is no investment in storage, technology, or productivity.

The structure of the market

The second major issue is the basic demand and supply structure of the market.

Suppose our farmers suddenly achieve an extremely good harvest because productivity improves. Under the present system, even that success can become a problem. A larger harvest can create an oversupply and push prices down further.

Normally, when a country produces a surplus, exports can become a safety valve. But Sri Lanka has limited opportunities in this area because many of the rice varieties we cultivate do not have strong international demand.

Much of global demand is for long-grain varieties such as basmati. Sri Lanka largely cultivates different varieties suited to our own consumption patterns and agricultural conditions. We cannot simply switch to basmati overnight. Soil conditions, weather, seed varieties, and farming practices all matter.

Therefore, even if we produce a significant surplus, exporting it is not necessarily easy. At the same time, our cost of production remains very high.

During the television programme, one farmer explained how many parts of the process are still highly labour intensive. Paddy is dried on roads and open grounds using manual labour. Workers have to be paid at every stage. Paddy is stored in bags, which then have to be physically carried, stacked, and moved again.

From applying fertiliser to drying, storing, transporting, and finally processing the harvest, there are inefficiencies throughout the value chain.

Every inefficiency adds another cost. Eventually that cost has to be absorbed either by the farmer, the miller, the consumer, or the taxpayer. Most of the time, all four end up paying in different ways.

There is another structural weakness in the market. Farmers mainly depend on one broad category of buyer: the rice miller.

Ideally, paddy and rice should have many different types of buyers. Rice can be used for a range of industrial products and value-added applications. These can include processed foods, beverages, rice-based ingredients, and other industrial uses.

The more diverse the buyers are, the less dependent farmers become on a single market.

But such a market cannot develop through Government instructions alone. Farmers and smaller businesses need access to capital, storage, technology, and markets. New investors need space to enter. Competition needs to increase.

The real solution

The paddy problem cannot be solved simply by imposing a controlled price on rice or announcing a guaranteed price for paddy.

A guaranteed price without the capacity to purchase is only an announcement. A controlled rice price without addressing production costs creates shortages and distortions. Forcing millers to buy at a particular price without considering the final selling price will not create a sustainable market either.

The farmer who earns only Rs. 20,000 after three months of work certainly deserves a better outcome. But the answer is not another temporary intervention every harvesting season.

The real solution is to give farmers more options: the option to store, the option to borrow, the option to invest, the option to improve productivity, and, most importantly, the option to sell to more than one type of buyer.

For that, economics has to come into the paddy market.

Patriotism isn’t protectionism

By Dhananath Fernando

Originally appeared on the Morning

Ask any Sri Lankan what we should do to develop the country, and most will say we need to improve our exports. The same majority will also suggest that we must cut down imports to achieve this. While the need to grow exports is true, the belief that reducing imports is the way to do it is where things start to fall apart.

Many Sri Lankans even see boycotting imported goods and shifting to locally produced alternatives as an act of patriotism. The logic is simple: buying local helps local producers generate a surplus, which can then be reinvested to expand internationally. 

It is an emotional argument, but one that is deeply flawed when translated into policy. This sentiment often influences governments to raise import tariffs or impose outright bans on products that can be locally produced, believing that this will encourage domestic industry and, over time, boost exports.

But this approach misunderstands how exports work. Take the Donald Trump administration, for example. It also embraced this worldview, failing to recognise a basic economic truth: the ability to export doesn’t come from blocking imports, it comes from being competitive in price and quality. 

When we restrict better quality and lower-priced imports, we don’t support patriotism; we harm it. We shield local industries from global standards, stifle innovation, and force both consumers and other businesses to bear higher costs, weakening their global competitiveness in the process.

From an economic theory standpoint, protecting one sector of the economy often comes at the cost of others that are already competitive globally. 

Here is a simple example to illustrate this fact. Suppose Sri Lanka produces 100 coconuts a month. We consume 80 and have 20 left to export. But if we allow coconut substitutes or cheaper imported coconut oil for industrial use, we might reduce domestic consumption to 70, freeing up 30 coconuts for export. Better still, we could use imports for industrial purposes and reserve our highest-quality coconuts for premium export products like virgin or desiccated coconut.

All that we import is not final consumer goods. In fact, most of our imports are intermediary or investment goods. For instance, if the price of steel is high due to protectionist policies, it increases costs across all industries that rely on steel, from construction to manufacturing. The resulting job losses across those industries far outweigh the jobs ‘saved’ in the protected steel industry. 

In Sri Lanka’s case, nearly 80% of our imports are intermediary or investment goods. When we restrict these, it doesn’t help the economy – it hurts it. This is yet another reason why protectionism is not patriotism, but quite the opposite.

If we block these types of imports, domestic consumption remains high, and we are left with fewer coconuts – or fewer resources in general – to export or reinvest. This is the irony of protectionism; it reduces our export potential. 

We do a triple disservice: first, we make our exports uncompetitive, second, we increase the burden on local industries and consumers, and third, we create long-term dependency where protected industries lobby to maintain their privileges, making it politically costly to remove trade barriers even when they no longer make sense.

This is why governments find it so difficult to roll back import restrictions. Once protection is in place, it breeds cronyism. Protected industries band together, fund political campaigns, and perpetuate a cycle where economic power is concentrated in the hands of a few politically connected elites. In the name of ‘patriotism,’ we end up creating an unproductive, anti-competitive economy.

Another key misconception is the belief that a negative trade balance is caused by high imports. At face value, it seems logical since the trade balance is calculated as the difference between exports and imports. But in reality, imports and exports are not opposing forces; they are interconnected. Blocking imports hampers exports.

Let’s return to the example of coconuts. If we produce 100 coconuts, consume 80, and export 20, we might choose to invest 10 of those coconuts in planting new trees, increasing future production and export capacity. But we can only save and invest if we consume less. And we can only consume less if we have access to cheaper or more efficient alternatives, often through imports.

In economic theory, the trade balance is ultimately the difference between national savings and investment. Consumption is determined by the price of money – interest rates. This is why artificially lowering interest rates to stimulate growth can be disastrous. It increases consumption, and with it, imports, but without the productive capacity to match. 

When the situation inevitably unravels, we blame imports and turn to protectionist measures, instead of recognising that the true culprit is excessive consumption and insufficient savings.

The result? We reimpose import restrictions, raise tariffs, worsen the situation, and end up back at the International Monetary Fund (IMF) for a bailout. Then we repeat the same cycle, creating a class of politically connected cronies who thrive not by being competitive but by being protected.

And again, we tell ourselves we need to boost exports by cutting imports. It’s a tragic loop, reinforcing the very problems we claim we want to solve.

This is why protectionism is not patriotic. In fact, it is the exact opposite.

Central Bank Defends Liquidity Injections Amid “Money Printing” Controversy

By Dhananath Fernando

Originally appeared on Ada Derana Business

A fresh controversy has erupted following reports that Sri Lanka’s Central Bank (CBSL) injected nearly 100 billion rupees into the banking system by October 25. Given that money printing was the major cause of the country’s financial crisis, this news has sparked considerable attention. CBSL has defended its actions, arguing that these liquidity injections do not equate to money printing.

What is the CBSL’s Argument?

CBSL asserts that these liquidity injections were necessary to address persistent imbalances among banks. Despite an overall surplus of funds in the banking system, this liquidity is unevenly distributed. Foreign banks operating in Sri Lanka hold significant liquidity surpluses but remain cautious about interbank lending due to strict risk management guidelines. As Sri Lanka’s sovereign rating is still ‘Default, this limits their exposure to local financial institutions. As a result, foreign banks deposit excess rupees with the Central Bank rather than in the interbank market.

While this was a serious problem in the midst of the crisis things have improved since: interbank call market (clean or unbacked) trading volumes, once as low as zero 1-2 billion rupees daily, has now returned to Rs10bn to Rs20bn (averaged 10 billion last month). Repo volumes (backed by T-bills) are back around 30 to 70 billion rupees, which is higher than pre-crisis levels.

Notably, auction data shows the central bank offering more than what banks bid for, with some banks bidding close to the deposit rate, indicating a willingness to lose bids—yet CBSL still provided new funds.

Given the much healthier interbank volumes, the CBSL should avoid undermining the working of the interbank market. The CBSL should be the last resort for a bank facing a liquidity crunch, not the first.

The Core Issue: Temporary vs. Longer-Term Impact

The debate centers on whether these injections are temporary or enduring. If CBSL swiftly withdraws the new money by selling Treasury bills or foreign exchange, the money supply remains stable. However, if these short-term purchases are repeatedly rolled over, the increase in money supply could become more long-term. Critics warn that this scenario is no different from lending money to the government, potentially triggering balance of payments problems and inflation, thus jeopardising the ongoing economic recovery.

A Matter of Terminology

CBSL’s reluctance to label this as “money printing” is essentially terminological. Regardless of whether the funds are lent to banks or the government, the impact on the money supply is fundamentally the same. Therefore, interventions must uphold the principle of currency stability, given the grave consequences of unchecked money creation.

Acknowledging CBSL’s Efforts

It is It is important to acknowledge that since September 2022, the CBSL has done an admirable job in restoring monetary stability. The critical task now is to maintain this hard-won stability. These points are presented to promote a healthy academic debate on an issue of great importance, not to cast blame on any specific entity or person.

Potential Alternative Strategies

What alternatives could CBSL have considered?

Purchase Foreign Exchange from Banks: Where balance of payments conditions permit, CBSL could continue the practice of buying foreign exchange, injecting rupees but reducing foreign currency in the If the injected rupees were later used for imports, CBSL could sell foreign exchange back, maintaining balance and avoiding exchange rate issues.

Use the Standing Lending Facility: Lending at the Standing Lending Facility Rate of 9.25% would ensure banks only borrow for urgent liquidity needs. As this penal rate is higher than the interbank rate, it discourages long-term dependency and helps avoid a lasting increase in the reserve money supply.

Reduce the Standing Deposit Facility Rate: If the CBSL wishes to lower rates, it could reduce the rate on deposits held at the Central Bank, which would encourage banks to lend more in the interbank market. However, this would also lower overall interest rates and must be carefully managed. To support reserve accumulation, interest rates need to remain at an appropriate level to curb credit and keep imports in check.

The Balancing Act

CBSL faces the difficult task of supporting the banking sector while safeguarding monetary stability. Any intervention must be carefully weighed to mitigate risks such as inflation and currency destabilisation.