US embassy cable - 05COLOMBO1919

UNCLAS SECTION 01 OF 02 COLOMBO 001919 
 
SIPDIS 
 
DEPT FOR SA/INS M.GOWER AND C.SIM; MCC FOR D.NASSIRY AND 
E.BURKE; TREASURY FOR S.CHUN 
 
E.O. 12958: N/A 
TAGS: ECON, EAGR, CE, ECONOMICS, Elections, Political Parties 
SUBJECT: CULTURALLY SENSITIVE RICE SECTOR A KEY CAMPAIGN ISSUE 
IN SRI LANKA 
 
 
1.  Summary. Rice is Sri Lanka's most important agricultural 
crop in terms of area cultivated, production and rural 
employment (approximately 1.8 million farmer families depend on 
rice for their livelihood). Rice production contributes 4 
percent of the country's GDP and around 850,000 hectares are 
under cultivation.  Sri Lanka produces around 2.7 million metric 
tons of unmilled rice("paddy") which accounts for about 90 
percent of domestic requirements.  Successive governments have 
intervened in paddy marketing in order to attempt to provide a 
fair price for the farmers as well as control retail rice 
prices.  The rice farming sector has become a hot button 
campaign issue yet again, with both candidates for the November 
17 Presidential election clamoring for the rural vote and 
attempting to wrap themselves in the rhetoric of rice's cultural 
value to Sri Lanka.  End Summary 
 
2. Although rice production has increased significantly over the 
years, paddy farmers' incomes continue to stagnate.  There are a 
variety of reasons for this stagnation: 
--Over 70 percent of paddy farmers cultivate less than one 
hectare, which does not allow for economies of scale; 
--Farmers obtain inputs on credit from traders who are repaid 
from the paddy harvest, often at preset prices that represent an 
exorbitant interest rate; 
--Lack of storage and transport facilities; 
--Limited investment capital; 
--High cost of labor; 
--Soil deficiencies due to excessive use of fertilizers. 
 
2. The Paddy Marketing Board (PMB) was established by an act of 
Parliament in 1972. The PMB was vested with monopoly powers for 
purchase and sale of paddy.  This act allowed the PMB, or their 
agents(the Cooperatives and the Food Commissioners Department), 
to have sole authority with respect to collecting paddy from 
farmers and storing, processing and providing milled rice to the 
Food Commissioners Department to distribute to consumers through 
the Cooperatives. Unofficial channels involving traders, 
however, were also in operation during this period.  The role of 
the government in paddy/rice marketing was changed with the 
introduction of economic liberalization policies in 1977, which 
allowed the private sector to market rice based on competition. 
 
3.  As a result of intense competition within the private 
sector, the government's role in paddy and rice marketing fell 
dramatically. Although the PMB is technically still in 
existence, it has no workers and does not function.  The 
Government owned Cooperative Wholesale Establishment (CWE) 
entered paddy/rice marketing activities in 1996.  More recently 
the Treasury has released funds to the Agrarian Services 
Department for paddy purchases in particular districts.  Rice 
has been artificially stimulated in Sri Lanka for decades.  The 
guaranteed price scheme (GPS) was introduced in 1948 in order to 
assure a fair price and ready market for local producers of 
agricultural commodities, stimulate production of food crops 
consumed in the country and to replace/reduce food imports by 
protecting locally produced food. 
 
Paddy in the Campaign 
--------------------- 
 
4.  Both leading candidates for President are attempting to wrap 
themselves in the culturally-sensitive rice issue, as a means of 
attracting the rural vote (NOTE:  the rural vote is considered 
as a potentially deciding factor in this election).  The 
candidates are pledging to increase farm gate prices by around 
35-40 percent.  Prime Minister Mahinda Rajapakse, the Sri Lanka 
Freedom Party (SLFP) presidential candidate, proposes to 
resurrect the PMB and focus heavily on domestic agriculture 
sector to achieve this goal.  Ranil Wickremasinghe, the 
presidential candidate of the opposition United National Party 
(UNP) takes a more market-oriented approach, and proposes the 
establishment of a produce marketing agency to assist farmers in 
marketing their produce both locally and internationally. 
 
5.  Comment: The proposed revival of the PMB has been submitted 
for Cabinet approval.  Under that plan, the PMB would function 
as a marketing authority for government paddy purchases. 
However, specific functions and operational details have not yet 
been answered.  The PMB would need storage facilities for the 
procured paddy, which would require significant capital 
infusion. PMB-owned facilities were disposed of at the time the 
organization ceased its marketing activities.  The approach to 
paddy marketing will most likely be decided by the outcome of 
the November 17 presidential election.  If the Prime Minister 
wins, the revival of the PMB is expected to proceed as planned, 
although its long-term sustainability and efficiency are 
uncertain.  The more private sector-oriented United National 
Party (UNP) is likely to focus on a more private sector approach 
to paddy purchasing with government assistance. 
 
LUNSTEAD