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Tuesday May 28th, 2024

Sri Lanka fertilizer ban haphazard, modern tech, risk management the answer: researcher

ECONOMYNEXT – Sri Lanka should use modern fertilizer technology, manage risks and overcome challenges of using organic fertilizer in well thought out process instead of banning chemical fertilizer outright, a fertilizer technology researcher and practitioner has suggested.

“The decision to ban chemical fertilizer importation and usage should have been given more thought considering the scientific evidence rather than taking such a haphazard decision,” Ranil Waliwitiya, founder of Canada based Active Agriscience, an agro tech says.

“Government must not take impulsive decisions which affect the livelihood of a whole nation and its food security.”

There are technologies to sharply reduce the use of chemical fertilizer and using organic fertilizer also requires specialist knowledge and techniques, to manage the risk of falling yeilds he says.

The risk of chemical fertilizer can also be managed instead of an outright ban while moving towards organic fertilizer.

The Science of Fertilizers and the Consequences of Banning Chemical Fertilizers

By Ranil Waliwitiya

The decision to ban chemical fertilizer importation and usage should have been given more thought considering the scientific evidence rather than taking such a haphazard decision. Government must not take impulsive decisions which affect the livelihood of a whole nation and its food security.

As we all are in a pandemic situation, all the nations around the globe are giving utmost priority to ensure domestic food security. I do not believe that any government will take such a decision in a crisis like this.

This decision should have been taken in consultation with scientists and agriculturists with a well-developed plan to systematically transition to perhaps a predominantly organic agriculture over a period of time without causing a famine. My scientific knowledge and research, and years of experience in the application of science in agriculture clearly show that any country needs a balanced and carefully planned combination of conventional, organic and organic-based agriculture systems.

I would like to lay out the facts and methodologies that we can employ to reduce dependency on conventional fertilizers. With the currently available technologies it is possible to gradually cut down the usage of conventional fertilizers, up to a point; the operative words being ‘gradually’ and ‘up to a point’.

If fertilizer chemistry is properly manufactured and managed, it can be utilized even to control fungal and bacterial diseases, which in turn reduces the use of pesticides. However, Sri Lanka does not have this type of technology and, as an agricultural nation, it should work to attract investors to bring these technologies to the country.

Unfortunately, haphazard and arbitrary decisions like this will deter any investors coming to Sri Lanka. Without doubt the foreign embassies in Sri Lanka must be seriously concerned by now about the arbitrariness of decision making in Sri Lanka on life and death issues, not only for investors but also for the people and their food supply. The advisors to the president must take full responsibility and accountability for this developing catastrophe.

Science of plant nutrients:

Crops need 16 elements to grow and produce a good yield: Carbon (C), Hydrogen (H), Oxygen (O), Nitrogen (N), Phosphorous (P), Potassium (K), Calcium (Ca), Magnesium (Mg), Sulfur (S), Boron (B), Chlorine (Cl), Copper (Cu), Iron (Fe), Manganese (Mn), Molybdenum (Mo) and Zinc (Zn). Some crops may need Nickel (Ni) and Aluminum (Al) for specific functions. C, H, and O are taken from the air and water, hence chemical vs organic does not matter for these three elements. Plants absorb N as ammonium (NH4+) or nitrate (NO3-), Phosphorous as phosphate (PO4-3), Potassium as Potassium ions (K+), Sulfur as sulfate (SO4-2), Calcium as Ca+2, Magnesium as Mg+2, Boron as borate (BO3-3), Copper as Cu+2, Iron as Fe+2, Manganese as Mn+2, Molybdenum as molybdate (MoO4-2) Zinc as Zn+2.

Whether these elements are provided by conventional or organic means, plants absorb these elements in the same form and does not differentiate based on their origin. Conventional fertilizer inputs are available to provide these nutrients in high percentages so that the quantity of fertilizer needed is less. Some compounds can provide multiple elements as well (monopotassium phosphate can provide both potassium – 34% and phosphorous – 52%). It is very difficult to find organic sources to provide these critically important nutrients, which is the biggest hurdle in converting to organic agriculture.

Synthetic sources of Nitrogen are urea, ammonium nitrate, ammonium sulfate, diammoinium and monoammonium phosphates. Out of these, urea is the most widely used and cheapest source of N available today. Urea also contains relatively high percentage of N – 46% in it. In 2019, world agriculture consumed 198 million tons of urea. The data in the graph below shows that world population and population growth are directly related to world urea production and usage. Based on this, the world can only support half its current population without the use of nitrogenous fertilizer. To extrapolate this to Sri Lanka, only 11 million of the current population of 22 million can survive without the use of nitrogenous fertilizer.

Farming based on chemical fertilizers as well as organic fertilizers have their own merits and demerits. Using chemical fertilizers, you can precisely provide the elements required by a crop. As these elements are readily available in highly soluble forms they are easy for the plants to absorb.

Proper Fertilizer Application

As formulation of chemical fertilizers are defined and controlled and are always the same from one batch to another, there is consistency in the product (similar to the consistency in pharmaceutical products), and therefore crop planning with conventional fertilizers is much easier. For almost all crops grown today it is known how much of each element is required to produce a healthy yield. Using commercial fertilizers, you can exactly provide the need of each crop.

However, just as much as a patient taking a pharmaceutical product needs to follow the recommended dosage, a farmer must follow the application rates of fertilizers. If these application rates are not followed there will be over application as the human tendency is to feel that ‘more is better’.

Over application of commercial fertilizers can cause leaching of excess nutrients into ground water and other water bodies and can cause eutrophication and acidification. This can lead to health issues for humans. I am not sure whether these application rates are effectively relayed to the farmers to manage application rates in Sri Lanka. If not, this can lead to over application of fertilizers and the concomitant health issues.

Modern technologies are able to manufacture conventional fertilizers with less energy, less cost, and with more purity, while also minimising the presence of heavy metals. Green urea is an example where technology has developed to reduce manufacturing energy requirements and greenhouse gas emissions by using nanotechnology.

In conventional urea manufacturing, 5 tons of CO2 will be released for every ton of urea manufactured, whereas with green urea the emissions are reduced to less than 2 tons of CO2 per ton of urea manufactured.

Challenges of Organic Fertilizer

Organic fertilizers provide very low nutritional value to plants when compared to conventional fertilizers, and therefore need to be applied in large quantities. There are not many materials available in the world to formulate quality organic fertilizers, and extraction methods are also limited. To be certified organic, most inputs should come from certified organic sources, which further limits sources and makes them even more expensive.

As an example, conventional urea with 46% nitrogen can be bought at USD0.88 per 1 kg while an organic plant-based product with 12% nitrogen (this is the highest % of plant-based organic nitrogen available) is about USD12.00 per 1 kg. Therefore to get the same percentage of nitrogen in urea, you have to spend nearly USD50.00 if going with organics. In this case, it is 50 times more expensive to choose organic nitrogen.

Neither the grower nor the food consumer could afford this additional expense. Another example is monopotassium phosphate which can give 34% Potassium and 52% Phosphorous at USD 1.65 per kg. It is difficult to find good plant based organic materials to replace both potassium and phosphorous. You can buy kelp/seaweed extract at USD12.00 per kg, but it has only 16-18% of potassium. Therefore, cost is a significant factor when comparing conventional vs organic fertilizers.

Micro-nutrients

In terms of micronutrients (boron, copper, iron, molybdenum, manganese, zinc) no suitable organic sources are available, and organic systems recommend conventional sources to get these elements (sodium borate, copper sulfate, iron sulfate, manganese sulfate, sodium molybdate, zinc sulfate) only when there is proof of deficiency in the crops. Therefore, even organic agriculture must depend on certain conventional fertilizers to provide microelements.

Due to the much less solubility and availability of elements in organics, it will be difficult to plan yield targets. Unlike conventional fertilizers, organic fertilizers can contain many unknown compounds which may accumulate in soil and plants and cause detrimental plant growth and human health issues. As they comprise of many different sources and available mainly as solids, it may not be possible to correct nutrient deficiencies quickly in an organic setting. These compounds have poor solubility.

When liquid organic fertilizers are made using these compounds, there will be suspended particles which can cause fermentation in the containers, which in turn can result in bloated containers. As well, blocking of spray nozzles will always be a problem.

Managing Risks

Fishmeal, bonemeal and bloodmeal are also considered as organic sources to provide nitrogen and phosphorous in an organic setting, if they are produced using organic inputs.

As these are animal based, there are always issues related to animal diseases such as madcow disease. Importing organic inputs is neither easy nor safe, as the importing country has to protect its biodiversity.

As these are plant or animal-based materials carrying microbial elements they can be a serious threat to endemic species.

A meta-analysis of life cycle assessments conducted by Clark and Tilman in 2017, that included 742 agricultural systems and over 90 unique foods produced primarily in high-input systems showed that, per unit of food, organic systems require more land, cause more eutrophication, use less energy, but emit similar greenhouse gas emissions (GHGs) as conventional systems (Michael Clark and David Tilman 2017): “Comparative Analysis of Environmental Impacts of Agricultural Production Systems, Agricultural Input Efficiency, and Food Choice” – Environmental Research Letters, 2017. 12).

Suggestions to reduce the dependency on conventional fertilizers:

1. Do not use untreated urea: Urea contains 46% of nitrogen. Once applied, soil bacteria elicit urease enzyme to hydrolyze urea molecule. During this process 35-50% of Nitrogen in urea can be lost as ammonia gas. Treating urea with urease inhibitors can protect 60-95% of the lost nitrogen as ammonia. Urea hydrolysis forms ammonium ions, which crops can absorb as nitrogen. Once ammonium ions are formed, they can undergo nitrification and denitrification processes.

During nitrification, ammonium ions convert to nitrite and nitrates. Nitrates are much more prone to leaching and runoff and end up in streams. This process can cause up to 80% of nitrogen to be lost. Nitrification inhibitors are available in the market and can be utilized to inhibit the process and save nitrogen and enhance nitrogen utilization efficiency. Many developed countries adopt these technologies. As far as I know, this technology is not available to Sri Lankan farmers. By adopting the technology, farmers can reduce nitrogen rates significantly.

2. Do not apply any type of fertilizer including organics during periods of heavy rains. Establishing fertilizer application cut off time will reduce run off of fertilizers to streams and will also enhance its utilization by crops.

3. Adopt the use of highly efficient foliar fertilizers. This will reduce ground applications and enhance fertilizer use efficiency. Spot applications can be done using this method. Novel technology is able to deliver and still be effective at 1L/acre application rate. To my knowledge, this technology is not widely practiced in Sri Lanka.

4. Use of inoculants when growing legume crops. Rhizobium and Bradyrhizobium inoculants can be utilized to cut down 100% of nitrogen requirement by legume crops (soybean, peas, lentils, mungbean, clover etc). Methods of culturing and applying these inoculants will not be that expensive and will not require major investments. Many countries adopted this technology decades ago but surprisingly Sri Lanka has not fully utilized this technology.

5. Mandatory testing for heavy metals and nutrients for all imported fertilizers as well as for fertilizers manufactured and sold in Sri Lanka need to be adopted. Testing should be done by a third-party accredited laboratory before shipping and after arrival at the local port. This will prevent inferior fertilizer products coming into the country.

6. Make decisions based on independent third-party research and not on data supplied by parties with vested interests in importing substandard products. Research and data must be independent and unbiased. Without implementing this process, it will be difficult to use the data for decision making processes.

7. Identify the locally available organic materials for formulating and direct their use in the industry.

8. Establish a national institute such as Organic Material Review Institute (https://www.omri.org/). This institute, as a regulatory body, will form the guidelines and protocols for developing an organic agriculture sector including certifying materials and products to be used in the sector. This is a necessary step before banning of commercial fertilizer and moving to organic agriculture.

Scientific facts are critically important in taking a decision like this and hopefully the catastrophic decision taken will be corrected soon.

The Author, Ranil Waliwitiya has a Ph.D in Toxicology from Simon Fraser University in Canada an M.Sc. in Plant Science from the University of British Columbia and a B.Sc from the University of Peradeniya. He has worked as Director of Research and Development at three fertilizer manufacturers in Canada, and developed developed and marketed fertilizers including microbial inoculants and nitrogen management technologies. He is founder of Active AgriScience, based in Saskatoon, Canada.

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Sri Lanka reforms have started to yield positive outcomes: State minister

ECONOMYNEXT – Sri Lanka’s State Minister of Finance Shehan Semasinghe says reforms have lead to positive incomes, including an increase in reserves.

“The reforms have started to yield positive outcomes, reflecting significant progress in multiple areas. Sri Lanka’s gross official reserves have seen a significant increase, reaching USD 5.5 billion by the end of April 2024,” Semasinghe said on social media platform X (twitter).

“Additionally, the Sri Lankan rupee has appreciated by approximately 8 % against the US dollar so far in 2024. This will boosts investor confidence and enhances the country’s ability to manage external shocks and meet international obligations and enhance confidence on the economy.

“The appreciation of the rupee can help lower inflation and reduce the overall cost of living and make it easier for the government and businesses to service foreign debt, thereby improving our financial reputation globally. Further, will improve the trade balance by potentially reducing the trade deficit.”

Sri Lanka’s inflation was 1.5 percent in the 12-months to April 2024, measured by the widely watched Colombo Consumer Price Index, data from the state debt office showed.

The CCPI Index fell 0.8 percent, to 195.2 points in the month of April after falling 1.9 percent in March.

Sri Lanka’s central bank has been operating largely deflationary policy, since September 2022, except perhaps in December 2023, and also allowed the rupee to appreciate in the balance of payments surplus it created.(Colombo/May28/2024)

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Sri Lanka risks foreign retaliation over VFS visa deal

ECONOMYNEXT – The Maldives could take reciprocal action after Sri Lanka’s new system of outsourcing its visas, which requires the payment of “processing” and “convenience” charges of 26 dollars, even though the government does not collect any fees.

Maldivian authorities have reminded Sri Lanka of the long-standing bilateral agreement under which their citizens could travel freely between the two neighbours without any charges or bureaucratic barriers.

A one month stay is available without a fee.

Maldivians, who consider Sri Lanka their second home, often spend more than a month in the larger country, but are now required to pay 26 dollars to VFS Global, which has controversially been contracted to handle Sri Lankan visas.

“The Sri Lankan government will not charge a fee, but Maldivians still have to pay VFS after applying online for a visa,” a Maldivian government official said in the capital, Male. “This violates the spirit of our agreement.”

He said the new administration of President Mohamed Muizzu was taking up the issue with Sri Lankan authorities in both Male and Colombo.

In a worst-case scenario, the Maldives will be compelled to reciprocate the new cost of a Sri Lankan visa and charge Sri Lankans traveling to the archipelago. There are also expat Sri Lankans in the Maldives.

There are only a handful of countries to which Sri Lankan passport holders can travel without any visa restrictions.

Singapore is another country which could take action against Sri Lanka if the bilateral deal is found to be violated, according a source said.

Opposition parties have said in parliament that outsourcing the visa handling to VFS Global and their partners was a bigger corruption scandal than the bond scam of 2015 and 2016, when billions of rupees were stolen through insider deals. (COLOMBO/May 28, 2024)

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Sri Lanka’s WindForce Plc rated ‘BBB+(lka) with stable outlook: Fitch

ECONOMYNEXT – WindForce Plc said Fitch Ratings Lanka Ltd had assigned a ‘BBB+(lka)’ rating for the company with stable outlook.

“The rating reflects WindForce’s large exposure to Ceylon Electricity Board (CEB, BB+(1ka)/Stable) as the key offtaker. The Stable Outlook reflects Fitch Ratings’ view that risks of significant payment delays from CEB to WindForce has decreased, easing liquidity pressure,” the company said in a stock exchange filing.

The full Rating Action Commentary by Fitch Ratings Lanka Ltd:

Fitch Publishes Sri Lanka’s WindForce’s ‘BBB+(Ika)’ National Rating; Outlook Stable.

Fitch Ratings – Colombo – 22 May 2024: Fitch Ratings has published Sri Lanka-based independent power producer WindForce PLC’s ‘BBB+(Ika}’ National Long-Term Rating. The Outlook is Stable.

The rating reflects WindForce’s large exposure to Ceylon Electricity Board (CEB, BB+ (Ika)/Stable) as the key offtaker. The Stable Outlook reflects our view that risks of significant payment delays from CEB to WindForce has decreased, easing liquidity pressure. However, Fitch believes medium-term risks to weaker collections of CEB’s dues
remain, and this is subject to the consistent implementation of CEB’s cost-reflective tariff mechanism.

Key rating drivers

Improving Receivables Collection: We expect WindForce’s receivable days to remain at around 80 in next 12 months. This is based on our expectation that CEB will continue to settle its payables, following improvement in its financial profile from cost-reflective tariff revisions. WindForce’s receivable days fell to around 198 days by December 2023, from 348 days at the end of the financial year 31 March 2023 (FY23). The company says it received further payments in 1Q24 that improved its receivables materially.

Weak Counterparty Profile: WindForce’s rating is constrained by the weak credit profile of its key offtaker CEB, the sole electricity transmitter and distributor in Sri Lanka, despite CEB’s improved financial performance. CEB’s rating is ultimately contingent upon support from the Sri Lankan sovereign (Long-Term Local-Currency Issuer Default Rating (IDR): CCC-; Long-Term Foreign-Currency IDR: Restricted Default) and its weak credit profile.

WindForce derived an average 80% of its EBIT from CEB in FY23-9MFY 724, with balance coming from its Ugandan operations. We expect WindForce’s cash flow exposure to CEB to increase further in FY25-FY27 with the commissioning of a 1OMW solar project in Kebithigollewa and a 1OOMW solar power plant in Hambantota in Sri Lanka.

Risks to Cost-Reflective Tariffs: Fitch believes there are risks to consistent implementation of cost-reflective tariffs, affecting the credit profile of domestic power generation companies. This is because of the government’s competing priorities: managing inflation, CEB’s financial health and the state’s own finances. We have assumed WindForce’s receivables days will deteriorate to 100 by FY27 as a result, but a longer record of consistent implementation could support a moderation of these risks.

The Sri Lankan government has implemented a cost-reflective tariff mechanism since mid-2022, to ensure CEB’s operating costs and interest obligations are covered. The new mechanism supports break-even operating cash flow for CEB, as of its latest financial year. This has enabled CEB to clear part of its overdue payments to trade creditors over the past 12 months. The tariff regulator – the Public Utilities Commission of Sri Lanka – approved lower tariffs by an average of 21.9% in its March 2024 review, which is a greater decrease than CEB’s proposal, reflecting the risks.

Investments Weigh on Free Cashflow: We estimate negative free cash flow (FCF) in FY25-FY27, due mainly to high capex and investments. This is despite improving operating cash flow from a shorter working capital cycle and newly commissioned projects. WindForce expects to invest USD12 million for the 30% stake in a LOOMW solar project in Hambantota in FY25-FY27.

Moderate Leverage; Adequate Coverage:
We forecast WindForce’s EBITDA net leverage to rise to 2.5x in FY25 (QMFY24: 2.0x) and 4.2x in FY26 on higher capex. However, interest coverage should strengthen to 3.7x in FY25 (9YMFY24: 3.1x) due to falling domestic interest rates even as debt increases. Sri Lanka’s monthly Average Weighted Prime Lending Rate fell to 10% by end-April 2024, from the peak of 28% in December 2022. Around 70% of
WindForce’s loans carried variable rates as of end-2023.

Steady EBITDA Margin: We expect the EBITDA margin to remain around 70% in FY25-FY27. WindForce’s power purchase agreements (PPA) offer long-term cash flow visibility, with a weighted-average remaining contract life of around 12 years, but production volume is affected by seasonal and climatic patterns. This is mitigated by its diversified portfolio, comprising wind (74MW), solar (38MW) and hydro (15MW) power plants, totalling to 127MW excluding associates and joint ventures.

Derivation Summary

WindForce is rated two notches below domestic power producer and engineering, procurement and construction contractor Lakdhanavi Limited (‘‘A(Ika)/Stable). The difference is on account of Lakdhanavi’s larger operating scale, and geographic and business diversification.

Both Lakdhanavi and WindForce have significant exposure to CEB. However, Lakdhanavi has operations and maintenance (O&M) services, manufactures transformers and switchgears, and offers galvanizing services. We also believe CEB is likely to prioritise payments to Lakdhanavi in a stress scenario, given Lakdhanavi provides O&M services to one of Sri Lanka’s largest power plants, and is investing in a large liquefied natural gas power plant, both of which are critical to CEB’s future strategy.

Resus Energy PLC (BBB(Ika)/Stable), a domestic power producer, is rated one notch below WindForce. WindForce’s higher rating is driven by a comparatively better liquidity position with sufficient cash flow to cover near-term maturities and better diversification in power generation sources and geographies.

Vidullanka PLC (A+(Ika)/Stable) is a renewable power producer with operations in Sri Lanka (35MW) and Uganda (13MW). WindForce is rated three notches below Vidullanka, despite the latter’s smaller scale. Vidullanka has lower counterparty risk and lower exposure to CEB, as 80% of its EBIT came from its Uganda projects in FY23.

Key assumptions

Fitch’s Key Assumptions Within the Rating Case for WindForce:

– Revenue to increase by 14% in FY25, mainly driven by commissioning of 1OMW Kebithigollewa power plant and 15MW Hiruras power plant’s first full year of operation;

– EBITDA margin of around 70% in FY25 and FY26;

– Receivable days at 80 in FY25;

– Capex of LKR2.5 billion in FY25 and LKR6.0 billion in FY26;

– Investments of around LKR2.0 billion a year in FY25 and FY26 in associate companies;

– Dividend payout of 80% of prior year profit.

Rating sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade

-A sustained and substantial reduction in counterparty risk, as reflected in a significant improvement in CEB’s credit profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade

-Deterioration in liquidity, including due to delayed receivables collection or challenges in refinancing;

-EBITDA net leverage above 5.5x for a sustained period;

-EBITDA interest coverage below 1.5x for a sustained period.

Liquidity and debt structure

Liquidity Subject to Counterparty Health: WindForce’s liquidity is subject to timely collections of dues from CEB. It had around LKR2.9 billion readily available cash and cash equivalents as of end-2023, with around LKR6.3 billion of unused but uncommitted credit lines from domestic banks, against LKR2.2 billion of debt maturing in the next 12 months. Maturing debt mainly comprises the current portion of long-term debt obtained to fund the investments in its power plants.

We expect the company to generate negative FCF in the near-to-medium term due to high capex. However, WindForce has adequate access to domestic banks, as most banks are willing to provide longer-tenured facilities for the company’s operating power plants that have more than 10 years remaining under their PPAs.

Issuer profile

WindForce is a leading renewable power producer in Sri Lanka, with total installed power generation capacity of about 163MW (including its share of associates and joint ventures) as of end-March 2024.

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