Empirical Analysis on General Equilibrium Performance of Agricultural Trade of Sri Lanka Under Adjustment Policy Reform

Abstract

This paper empirically evaluates the impact of Structural Adjustment Policy Program on Sri Lanka’s agricultural sector with special reference to the food imports and agricultural exports, which are considered as major components of policy reform. We attempted to use the Two Sector General Equilibrium model with Growth Accounting Approach, which comprises Growth Rate Multiplier, and combination of effect and contribution in this paper to measure the impact of the exogenous policy variables on endogenous variables. In this paper, we concentrated only on the agricultural trade, which is the component of food imports and agricultural exports, as the exogenous factor and evaluated the impact. Further important agricultural input, fertilizer, was also considered as an exogenous variable. Performance of exchange rate is also analyzed in relation to food imports and agricultural exports since exchange rate performance is considered one of the important policy variables here. Our results were quite different from earlier studies and reveals that policy changes are favorable to the overall agricultural development though their impact on the domestic food sector, which comprise the majority of the small farmer and fragmented land holdings, is negative. Agricultural exports and food imports are open under the new policy reforms, and they make considerably large impact on the agricultural production. Agricultural exports positively helped the overall agriculture development. Food imports negatively impacted the domestic food sector. We could also see from this study that devaluation of currency helped to reduce the real food imports and increase the agricultural exports. Furthermore, our study clearly indicates that the fertilizer prices changing under the policy adjustments affect the agricultural production and it was also negatively affecting the domestic food production.