23/03/2008 (Lanka Business Online (LBO)) – Sri Lanka's exporters of value added coconut products are asking to authorities to free edible oil imports, so that profits from oil milling would fall, freeing more nuts for other industries.
Sri Lanka's coconut milk powder, coconut cream and desiccated coconut producers have been found their cost of production increasing nut prices, but have been finding it difficult to compete in the international market.
Sri Lanka does not allow the import of raw coconut due to fear of disease making nuts a 'non-tradable' products whose prices cannot come down through import when the country prints money and drives up demand pressure or there are supply shortfalls.
Coconut oil imports are also restricted with heavy import duties, again preventing the island from benefiting from the 'deflationary' impact of 'tradable' imports.
In Sri Lanka a coconut is now retailed from around 38 to 42 rupees. Coconut product exporters say this is the highest price paid by a consumer in any producing country.
"This is because there is a very high tariff on imported edible oil amounting to 60 to 65 percent – causing an artificially high market for coconut oil there by resulting in high prices," says M Lumanjee of Adamjee Lukmanjee & Sons told reporters.
Coconut product exporters say a kilogram of coconut oil is now sold at 310 rupees in Sri Lanka.
In the international market coconut oil is around 170 rupees per kilogram.
The international markets have been hit by a commodity price bubble where anything from gold to copper to petroleum to palm oil has been fired up by loose monetary policy from the US, which drove dollar inflation above 4 percent by December 2007.
However in Sri Lanka inflation has been above 20 percent in 2007 for two years in a row amidst loose fiscal and monetary policy.
Coconuts have been one of the products that have seen some of the most spectacular price rises after inflationary economic policies based on deficit spending resumed in 2004.
Media reports showed poor people buying half a coconut as prices rocketed.
Economic analysts have said that goods that cannot be easily imported such as coconuts which are 'non-tradable' are most susceptible to move up in price in response to domestic money printing.
"The fact is all are the export industries are not in a position to pay these high prices," says Tharuka Dadagamuwa from A Baur & Company.
"Mainly we would like see to removal of all the import duties that is VAT (value added tax), cess and all the surcharges and other charges on all edible oil, coconut oil, palm oil in the coming period. That is until end of this year."
Coconut product exporters are hoping that nuts which are now used for making coconut oil would be freed for other value added products if taxes on edible oils are brought down.
Producers say coconut harvests are low during the period of October to April.
In the southern part of the island coconut groves have been hit by a new disease believed to have been introduced to the country through exotic ornamental palms.
The Coconut Growers Association has estimated the harvest in 2007 to have been around 2900 million nuts against 2600 million nuts in 2006.
According to Central Bank data, the crop up to October 2007 was 2,443.5 million nuts, an increase of 5.7 percent over the same 2006 period.
Heavy money printing and interest rates below inflation from 2004 has also fired a property bubble tempting some coconut farmers in the island's densely populated northwest area to tear up trees and sell the land.
High nut prices which increases profits would however help persuade farmers to keep producing nuts instead of going for real estate profits. Authorities have in the meantime brought draconian new laws to prevent the break-up of coconut land.
Economic analysts say the country needs fiscal discipline and sound macro-economic management to prevent asset price bubbles, inflation, reduce interest rates and bring back economic stability.
In this context cutting taxes presents another dilemma for policy makers as a reduction in taxes would hurt the budget further. Now more than 50 cents of every tax rupee is spent on paying state worker salaries and pensions.
Authorities also face the difficult decision of whether to favour exporters or to preserve the current profits of growers and oil millers.
However analysts say except for a flat rate value added tax, other import duties and specific excise taxes aimed at protecting particular sectors only promote inefficiency and unfair profits to some businessmen.
Economic analysts have pointed out that when revenue shortfalls are printed by the central bank inflation goes up.
In early 2007 the consumer affairs ministry persuaded the government to lower taxes on a range of import consumer items in a bid to import 'deflation'. The Treasury said it lost about 10 billion rupees in revenue from the move.
From May to September the central bank bought 45.2 billion rupees worth of Treasury bills reversing a dis-inflation trend in the first half to the year and sparking a minor currency crisis.
By November country-wide inflation hit 26.2 percent and the authorities promptly stopped releasing the inflation index.
Meanwhile a controversial new index from which an entire expenditure group has been dropped showed 21.6 percent inflation in February 2008.
In the United States a property bubble has already burst. A credit bubble has also been burst world-wide. Economic analysts say there are early signs that the commodity bubble is also running out of steam.