I.

ROLE OF TEA IN DEVELOPMENT IN SRI LANKA

A. Tea sector and its economic importance to Sri Lanka
Tea, which was once Sri Lanka's largest export commodity, has experienced intermittent crises over the past three decades. According to available statistics, in 1966 the value added of the tea sector as a percentage of the gross domestic product (GDP) was only 2.2 per cent. The contribution made by the tea sector to GDP in 1995 compared with other sectors of the economy is detailed in table 1. In 1996 the tea sector contributed 15 per cent of total export value. Manufactured garments have emerged as the leading single export product in Sri Lanka and accounted for 46.44 per cent of total exports in 1996. Export earnings of the tea sector in 1996 as compared to the other sectors is shown in table 2. In absolute terms, the tea industry is a major export producer, particularly as its net foreign exchange earnings are very high. In 1991, Sri Lanka emerged as the largest exporter of tea to the world market. The share of Sri Lankan tea in international markets in 1995 was 23 per cent (figure I). However, Kenya was reported to have overtaken Sri Lanka in 1996 as the largest tea exporter. Nevertheless, as an exporter of tea in bulk form, Sri Lanka has now developed into the largest producer-cumexporter of retail consumer packets and bags to the international market. The tea sector provides direct and indirect employment to over 1 million people in Sri Lanka. Total labour employed on the tea estates in 1995 was 215,338. It is the most important agricultural product sector in Sri Lanka with respect to economic, social and environmental benefits. However, for sustainability, tea requires a long-term growthoriented strategy with regard to land use. Table 1. Contribution by sector to Sri Lankan economy

Sector/subsector

Amount (SL Rs million) 1995

Percentage of GDP 1995 1996

Agriculture, forestry and fisheries Tea Rubber Coconuts

33,659 3,166 694 3,548

20.0 1.9 0.4 2.1

18.4 -------

Paddy Other agriculture, forestry and farming Mining and quarrying Manufacturing Processing of tea, Rubber, coconuts and kernel products Other Construction Service Total GDP

7,067 19,184

4.2 11.4

-----

4,048 34,294 3,724 30,570 11,564 84 888 167,953

2.4 20.4 2.2 18.2 6.8 50.4 100.0

2.5 21.0 ----6.9 51.2 100.0

Sources: Central Bank of Sri Lanka, annual report, 1995, (adapted) 1996; Sri Lanka Customs. Table 2. Export earnings of Sri Lanka in 1996 Sector Traditional exports Tea Rubber Coconut Sub-total Non-traditional exports Other export crops Fisheries products Gems and jewellery 86 51 193 3.04 1.80 6.85 426 71 75 571 15.05 2.50 2.66 20.21 Value in SDR million. Percentage of total exports

Textile and garments Manufactures Petroleum products Re-exports Others Sub-total Total exports

1,310 503 72 16 21 2,252 2,822

46.44 17.81 2.54 0.57 0.73 79.79 100.00

Sources: Sri Lanka Customs and Central Bank of Sri Lanka statistics, as quoted in the Export Performance Indicators for 1996 compiled by the Sri Lanka Export Development Board. Figure 1. World exports of tea, 1995
a)

Note: a. Total tons of world exports which exports from Asia amounted to 65 per cent and 30 per cent from Africa. The total land area under tea cultivation in Sri Lanka has declined over the years as a result of the closure of uneconomic tea plantations. According to Department of Agriculture statistics, the land area under tea cultivation in 1996 totalled 192,730 hectares which constituted 9.1 per cent of the total land area under agriculture as

indicated in table 3. Furthermore, the land area under accounted for 24.2 per cent of the total area taken up by the plantation of tea, rubber and coconuts. Private sector smallholders, each with less than 20 hectares, hold 45 per cent of the area under tea plantation. The remaining 55 per cent is held by large tea estates. Tea plantations are distributed over three areas and are categorized in terms of elevation: high-grown tea which is grown mainly in the Central Hills; mid-grown tea; and lowgrown tea. Approximately 65 per cent of the tea smallholders are located at low elevations. During the past decade, the share of tea smallholdersin total output increased from 39 per cent in 1987 to 57 per cent by 1996. Their productivity is also higher, compared to the well-established large tea estates. The extent of high-, medium- and low-grown teas and their distribution are detailed in table 4. Trends in production, exports and prices of Sri Lankan tea for 1989-1995 are given in table 5. The tea industry in Sri Lanka is following a policy of shifting from orthodox tea manufacturing to cut, tear and curl (CTC) teas, which have the advantage of being a faster brewing tea, to meet growing demand for CTC teas on the world market. In 1995 CTC teas accounted for 8 per cent of total production, and they are projected to rise further to 20 per cent by the year 2000. Another feature of the tea industry in Sri Lanka is that the production of tea packets and tea bags is expanding. Furthermore, the product base has been diversified, with the production of instant tea, green tea, organic tea (which is an environmentally friendly product) and flavoured teas, albeit in limited quantities. Table 3. Land area under agriculture in Sri Lanka Sector Tea Rubber Coconuts Paddy Sugar cane Other field crops (except fruit and vegetables, cereals and groundnuts) Fruit and vegetables Land area (hectares) 192,730 162,098 442,288 915,000 24,862 173,288 Percentage of total agricultural land 9.1 7.6 20.8 43.1 1.2 8.1

213,952

10.1

Table 4. Areas of tea cultivation in Sri Lanka

Category

Height above sea level (metres) Above 1,200

Districts

Area (ha.)

Percentage of total

High-grown

Nuwara Eliya, Badulla Kandy, Ratnapura Galle, Matara

52,272

27.66

Mid-grown Low-grown

600 - 1,200 Up to 600

56,863 79,836

30.00 42.25

Source:Tea Lands Survey, 1994-1995, by the Tea Commissioners Division of the Sri Lanka Tea Board. Table 5. Trends in production, exports and prices of Sri Lankan tea, 1989-1995 Year Production Exports(SL (Million Rs billion) kg) 207 213 241 179 232 242 246 258 204 216 212 182 218 230 241 244 Earnings (SDR million) 13.7 19.8 17.9 14.9 19.9 20.9 24.6 34.1 296 364 316 241 296 296 316 425 FOB (SL Rs/kg) 66.91 91.78 84.12 81.97 91.16 91.32 102.31 139.56 FOB (SDR/ kg) 1.45 1.69 1.49 1.33 1.36 1.26 1.32 1.64

1989 1990 1991 1992 1993 1994 1995 *1996

Source: Public Investment Programme 1996-2000, Department of National Planning, Ministry of Finance and Planning. * Figures for 1996 are from the Central Bank of Sri Lanka annual report, 1996. After the nationalization of large local and foreign-owned tea plantations in the early 1970s, management was continued under two large State-owned corporations: the Sri Lanka State Plantations Corporation (SLSPC) and the Janatha Estates Development Board (JEDB). However, that management approach appeared inadequate to meet the new challenges of improving productivity and maintaining competitiveness. When compared with competitors, SLSPC and JEDB labour productivity and plantation yields were the lowest despite the fact that wages were higher than those paid by other tea-

growing employers in the country at that time. As a result, the cost of tea production is highest in Sri Lanka. The lack of labour mobility is another constraint faced by the tea sector. There is a labour shortage in certain regions of the low-country estates and some high-country estates face the same problem. In addition, the wage-setting mechanism bears no relation to productivity growth. Nevertheless, Sri Lankan tea is reputed to be of high quality and is one of the cleanest teas on the world markets. Analysis shows that residue levels of pesticides, weedicides etc. are insignificant. Countries such as Germany impose strict standards and the quality of Sri Lankan teas are within such standards. An example of that recognition was provided recently by the Chairman of the European Tea Technical Committee at the seventeenth meeting of the Technical Committee on Tea of the International Standards Organization (ISO/TC), held in Colombo, when he noted that Sri Lankan tea was the cleanest in the world because pesticide residues in Sri Lanka tea were of no significance. In the late 1970s, Sri Lanka became the first country in South Asia to adopt an outward looking economic policy. The most important feature of that policy was an export-led growth strategy aimed at promoting and sustaining rapid economic growth. Since then, successive governments have been firmly committed to that policy and have recognized the private sector as the engine of growth for rapid and sustainable economic development. Consequent to that policy, in 1992 the government decided on a programme for restructuring the tea industry. Initially, the management of a majority of the Stateowned plantations was handed over to private management companies on five-year contracts. As the management companies did not have a stake in the ownership, and as the leases were short term, there was no incentive for capital investment. In 1995, the government took the courageous decision to privatize State-owned regional plantation companies on a long-term lease basis (50 years) through the sale of 51 per cent ownership of the companies. Several regional plantation companies were privatized in 1996 and the remaining companies were to be privatized during 1997.