Dissanayake's rice test - Gateway House

The newly elected Sri Lankan government is facing its first test, rice prices. The price of rice is a sensitive issue in Sri Lanka, where rice is a staple – and there is a shortage of it. The government often stipulates the maximum price at which common rice varieties can be sold[1] but local millers don’t find it viable. On December 2, 2024, President Anura Kumara Dissanayake’s met with rice millers to discuss ensuring a steady, affordable rice supply without shortages. A week later, on December 9^th, the government announced hikes of up to 5% in the ceiling prices of common varieties[2] – a change from the price ceilings that have long been set at Sri Lanka Rupees (SLR) 220-260/kg (Indian Rs. 65-75/kg).

This is expensive, and comparable in cost to some of the branded basmati rice sold in India. The inevitable black market in rice began and the government arrested 300 traders for selling rice above the official price ceiling.[3]

While price controls rarely work anywhere, there are other issues at play in Sri Lanka. The popular narrative is that of a powerful lobby, called the rice mafia, hoarding the crop and protecting its interests. The rice mafia has been blamed for high prices since 2017.[4] In 2021, the Gotabaya Rajapaksa government seized 807 tonnes of rice stock from private millers to keep prices in check.[5]

Rice is served on every Sri Lankan table for at least two meals a day. The rice milling business is an oligopoly controlled by a few large mills like Araliya and Nipuna, and smaller ones like New Rathna and WHG. This cartel controls the purchase of paddy, its milling, and its distribution. It dominates the rice trade in most of Sri Lanka, outside of the Northern and Eastern regions – those which were affected by the civil war. The oligopoly is headed by Dudley Sirisena, brother of former President Maithripala Sirisena.[6] Dudley’s only competition is the state-controlled Paddy Marketing Board (PMB), which is supposed to buy rice from farmers and maintain government stocks for price stability. However, it is practically defunct. During the 2022-23 growing season, the PMB purchased 2,200 tonnes of rice from farmers, while the annual rice production of Sri Lanka is over 4 million tonnes. Most farmers therefore sell their produce to the rice millers – the only game in town. These millers have invested in a parallel ecosystem for rice: storage and processing infrastructure and also loans to farmers.

As an opposition MP, Dissanayake had spoken out against the rice mafia.[7] As President, he has vowed to crack down on them.[8] In his meeting with rice millers in early December, Dissanayake highlighted the subsidies and support provided for rice cultivation, a subtle hint to keep prices at a reasonable level. However, these price controls are unlikely to work in practice over the long term.

The ‘rice mafia’ is a popular bogeyman but it doesn’t fully explain the high rice prices in Sri Lanka. The mafia has simply taken advantage of two other distortions. First, Sri Lanka has in place a tariff of SLR 65/kg (Indian Rs 19/kg) on rice,[9] to protect domestic farmers against cheap imports. In practice, this means much higher rice prices in Sri Lanka compared to India – 40%-50% more. Bringing down customs duty will lower the retail price of rice but will hurt farmers – about a quarter of the labour force.

Second, rice can be freely sold to distilleries for beer production – which offer an alternative market and better prices. As long as these incentives are in place, administrative measures such as price caps and arrests of traders will not be enough to keep prices low. The new government is considering creating a paddy reserve by purchasing up to 300,000 tonnes of paddy annually – which can be sold periodically when prices are high. However, this will need funding of over $100 million – something Sri Lanka cannot afford at this time.

Given the uncontested mandate of Dissanayake, expectations from him are high. Bringing down rice prices, or not, is his first test. Considering the large number of farm workers and the government’s strained finances, his options are limited. A reduction in customs duty will increase imported rice supply the market and keep prices down but infuriate his rural voters. Keeping the import duty unchanged will hurt urban consumers. Either way, he will lose some political capital.

Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For permission to republish, please contact outreach@gatewayhouse.in.

Support our work here.

References

[1] Wahab, Leenah, “Rice prices average above rate stipulated by Govt”, Daily Mirror, October 31, 2024. https://www.dailymirror.lk/breaking-news/Rice-prices-average-above-rate-stipulated-by-Govt/108-294931#

[2] “New Gazette Notifications Sets Maximum Retail Prices for Imported and Locally Produced Rice”, News First, December 10, 2024. https://www.newsfirst.lk/2024/12/10/new-gazette-notifications-sets-maximum-retail-prices-for-imported-and-locally-produced-rice

[3] Daily News, “Over 300 traders nabbed for violating rice price controls”, December 16, 2024. https://www.dailynews.lk/2024/12/16/lawnorder/689435/over-300-traders-nabbed-for-violating-rice-price-controls/

[4] Warakapitiya, Kasun, “Govt. allegedly in bed with millers to rig rice market”, The Sunday Times, March 12, 2017. https://www.sundaytimes.lk/170312/news/govt-allegedly-in-bed-with-millers-to-rig-rice-market-232509.html

[5] “Sri Lanka seizes rice stocks from private mills under emergency for defying price controls”, EconomyNext, September 8, 2021. https://economynext.com/sri-lanka-seizes-rice-stocks-from-private-mills-under-emergency-for-defying-price-controls-85919/

[6] Karunathilaka, Prageeth Sampath, “Rice monopoly continues to put farmers, consumers in peril”, Daily Mirror, September 25, 2024. https://www.dailymirror.lk/news-features/Rice-monopoly–continues-to-put-farmers—consumers-in-peril/131-292404#

[7] “Sri Lanka opp lawmaker accuses govt of representing interests of “rice mafia”” Economy Next, September 29, 2021. https://economynext.com/sri-lanka-opp-lawmaker-accuses-govt-of-representing-interests-of-rice-mafia-86564/

[8] “President Dissanayake Vows to Eradicate Rice Mafia and Enforce Legal Accountability Among State Officials”, Mawrata News, November 5, 2024. https://mawratanews.lk/news/president-dissanayake-vows-to-eradicate-rice-mafia-and-enforce-legal-accountability-among-state-officials/

[9] Bandara, Kelum, “Rice crisis: Importers cite inability to stick to control prices”, Daily Mirror, December 16, 2024. https://www.dailymirror.lk/front-page/Rice-crisis:-Importers-cite-inability-to-stick-to-control-prices/238-298182