When Price Caps Backfire: Rethinking Rice Policy

By Tormalli Francis

For a country that prides itself on self-sufficiency, Sri Lanka’s struggle to keep rice both affordable and available has become a recurring national drama. Long seen as the backbone of food security, the rice industry has weathered turbulent seasons — from erratic weather and disrupted harvests to sudden policy shifts and market shocks. In the latest Maha season, 701,453 hectares were cultivated, producing 2.7 million metric tonnes of paddy. Yet despite paddy dominating the country’s farmland, productivity gains have largely stalled — even slipping in recent years — reflecting both the resilience of farmers and the mounting strain of input shortages and climate disruptions.

The government’s recent purchase of over 40,000 metric tonnes of paddy through the Paddy Marketing Board (PMB), under a Rs. 60 billion procurement programme, highlights the state’s continued effort to stabilise supply. Yet, despite these interventions, the market still faces periodic shortages and sharp price swings that leave both farmers and consumers frustrated. These recurring bouts of scarcity expose the fragility of Sri Lanka’s rice economy — one long cushioned by decades of price controls aimed at shielding consumers. But in doing so, these policies have distorted incentives across the value chain, discouraging investments in production, storage, and distribution.. The result is a system that perpetuates the very instability it seeks to prevent. It is time to ask whether these controls genuinely strengthen food security, or merely preserve inefficiency in one of the country’s most sensitive markets.

The recent shortage of keeri samba rice lays bare the structural weaknesses in Sri Lanka’s rice production system. Favoured by urban consumers in the Western Province for its distinct taste and texture, keeri samba receives little state-level production support. Government-supplied seed paddy through the Department of Agriculture and the Paddy Marketing Board (PMB) is dominated by Nadu and other high-yielding varieties, prioritised for their productivity and lower cost. This bias is reinforced by a glaring data gap — the government lacks consumption data by variety. While the Household Income and Expenditure Survey (HIES) offers some insight into rice consumption patterns, it does not break down demand by type, leaving policymakers blind to shifts in consumer preference.

As a result, farmers often respond to the availability of subsidised inputs rather than to actual market demand. The acreage under keeri samba has steadily declined, making up only 14% of paddy cultivation during the 2024 Yala season (Figure 1). The problem is compounded by the infrequent nature of the HIES — conducted just once every five years — which fails to capture fast-changing consumption trends. Without targeted seed distribution or data-driven planning, keeri samba production remains limited and highly vulnerable to weather shocks, storage losses, and opportunistic stockpiling.

Figure 1: Keeri samba percentage of all cultivated paddy.

Sri Lanka’s rice market remains heavily tilted in favour of a few powerful millers who wield disproportionate control over both supply and price. With the capital and storage capacity to buy up large volumes of paddy right after harvest, these millers can influence availability and set the tone for prices during the off-season. This imbalance is compounded by the state’s chronic data deficit. The lack of accurate, up-to-date consumption data — especially by variety — leaves policymakers reacting to crises rather than preventing them.

While government interventions like price controls and import openings are often made in the dark, private millers operate with a distinct advantage: they have their own market data, financial liquidity, and logistical foresight. They can anticipate demand surges and time the release of stocks to their benefit, effectively steering the market. What emerges is a predictable cycle of shortages — not due to an actual lack of rice, but as the by-product of distorted policy incentives and concentrated market power.

The continued preference for keeri samba, despite its limited cultivation, has elevated it to a premium rice variety — one whose price now reflects both scarcity and status. In the aftermath of the economic crisis, as incomes recover and consumption habits shift, the price gap between Nadu and keeri samba has only widened. Yet, when the government steps in with price controls during shortages to “protect consumers,” the outcome is often the opposite. Controlled prices, especially when set below market-clearing levels, discourage traders from selling and create artificial shortages.

As supply dries up, demand intensifies, fuelling informal markups and the rise of black-market channels. When official price ceilings make open retail trade unprofitable, rice quietly flows through backdoor networks where millers, wholesalers, and retailers sell keeri samba at inflated prices. The result is a system where a handful of well-positioned players — those with the means to buy, store, and distribute — reap windfall profits while ordinary consumers face higher prices and fewer choices. In the process, transparency and trust in the rice market erode, leaving the illusion of control but little real stability.

The distortions extend to imported rice as well. A recent gazette introduced price caps for various imported varieties in response to the keeri samba shortage. But such ceilings, imposed without easing import restrictions or cutting tariffs, only worsen scarcity. Traders cannot import or sell at controlled prices when costs exceed the mandated ceiling. To make matters worse, the government often lacks the data needed to determine the true selling price, resulting in arbitrary controls that miss the mark. Ultimately, the persistent shortages of rice — across all varieties — are not a reflection of agricultural failure, but of regulatory misalignment that rewards market manipulation over genuine efficiency.

The keeri samba shortage is not merely a story of poor harvests, but of systemic policy distortions that undermine market responsiveness. By favouring uneven seed paddy distribution and enforcing rigid price controls, the government has created a rice market that ignores both consumer demand and production realities. At the same time, limited data transparency allows well-positioned players to exploit information gaps, while ordinary consumers face recurring scarcities and soaring prices. To restore stability, policy must shift from control to coordination, investing in variety-specific data, liberalising pricing, and fostering competition across the value chain, so that the rice market serves both farmers and consumers efficiently.

Why economic reality matters more than honesty

By Dhananath Fernando

Originally appeared on the Morning

At least once a week, we find ourselves blaming corruption and criticising how corrupt our current and former leaders are.

Blaming dishonesty and corruption often suggests that honesty alone could solve all our problems. Honesty, integrity, and transparency are universal values that we must all uphold. However, these values alone cannot guarantee success, especially if we lack an understanding of economics and how the world truly works.

The world operates on incentives. People naturally prioritise their self-interest, even when their actions seem altruistic. A common mistake is believing that policies based on good intentions will always lead to good outcomes.

However, in economics and public policy, success is measured by consequences, not intentions. A well-meaning policy, even when created by an honest person, can have disastrous outcomes. Good intentions alone are not an excuse for poor results in economics.

Take the example of the rice, coconut, and egg markets in Sri Lanka. In the case of rice, many believe that a mafia of rice millers hoarding stocks is the root cause of the problem. To address this, price controls were imposed with the honest intention of lowering prices. Instead, this led to shortages in the rice market and the creation of a black market.

When rice imports were allowed, the landing cost was around Rs. 130 per kilo. It was assumed that traders would add a profit margin if the imports were sold without price controls, so a tariff of Rs. 65 was imposed to limit their earnings.

This, however, resulted in consumers paying an additional Rs. 65 per kilo at a time when approximately 25% of the population lives below the poverty line. This demonstrates how well-intentioned policies can backfire when basic economic principles, like how price controls create shortages and tariffs burden the poor, are ignored.

A classic example of unintended consequences is the subsidy for kerosene. The subsidy was introduced to provide an affordable fuel source for poor households. At the refinery level, kerosene is a byproduct closely related to jet fuel.

The subsidy made kerosene so cheap that it created excessive demand, prompting industries to convert boilers and heat-generating systems to run on kerosene. Even tuk-tuks and long-distance buses began mixing kerosene with fuel to cut costs and boost performance. Once again, good intentions resulted in undesirable consequences.

The maize market provides a similar example. To encourage local maize farmers, a licensing system and high tariffs were introduced. This policy led to inflated maize prices, which significantly impacted the poultry industry since maize is a primary ingredient in animal feed.

As feed costs soared, chicken and egg prices increased, driving up the cost of bakery items. At a time when 25% of the population lives in poverty, the policy intended to protect maize farmers ended up raising food prices for everyone, disproportionately affecting the poor.

Even in the coconut market, the story is no different. Coconut imports are prohibited, forcing domestic production to meet all demands, including those for coconut oil and other byproducts. If imports of specific varieties were allowed, the prime coconuts could be reserved for export, potentially increasing export revenue.

While transparency, honesty, and integrity are essential values, they are not substitutes for sound economic principles. Economics operates on incentives and consequences. In public policy, we must focus on outcomes rather than intentions. That’s why, in economics, honesty alone is not enough – it must be accompanied by an understanding of how systems work.