Impact of macro-economic policies on the sugar sector of Sri Lanka

Abstract

An analysis was carried out to study the effect of changes in domestic prices of sugar, sugar import, tariff rates, interest rates and exchange rates together with mill capacities, per capita incomes and world sugar prices during the post-liberalisation period on the sugar sector of Sri Lanka to suggest policy guidelines for its development. The analysis was based on a simulation model which consisted of relationships of sugarcane area, cane and sugar production and imports, consumption and price of sugar determined using data from 1978 to 1999. The results indicated that domestic price of sugar was the most important economic variable in determining sugarcane area and hence cane and sugar production, and sugar consumption. Price of sugar had a positive relationship with cane area and an inverse relationship with sugar consumption. The domestic price was mainly determined by the world price which was highly volatile. Thus need for a rational pricing policy on sugar to benefit both sugar companies and consumers was emphasized. A sugar pricing policy based on an efficiency price and a mechanism to insulate the effects of fluctuations of world price on the local price to offer a stable price to both sugar companies and consumers together with offering an incentive for improving sugarcane processing efficiencies and a component for ensuring a revenue for government was suggested.