COLOMBO (EconomyNext) – Sri Lanka’s cabinet of ministers have approved a plan to provide guaranteed prices by paying a subsidy to small rubber and tea farmers for three months starting from April 01, cabinet spokesman Rajitha Senaratne said.
The price guarantee promised in the 100-day plan of the Maithripala Sirisena election platform will be made effective by paying the difference between the domestic market price and the election promise.
For RSS 01 and 02 grade rubber the government will guarantee a price of 350 rupees a kilo (subsidy 140), for RSS 03 grade, 325 rupees (subsidy 125), for RSS 04 and 05 grades 300 rupees (subsidy 110) and for Latex 300 rupees (subsidy 105).
At the moment the market price gap between latex and RSS 01 is only 15 rupees but with the subsidy it will increase to 50 rupees.
The subsidy will be paid by the Rubber Development Department to small holders who claim it.
The monthly subsidy cost will be 687.75 million rupees with the highest amount of 264 million rupees going to lowest grade RSS04 and 05. For the next three months the total cost will be 687.75 million rupees to the tax payer.
For the raw tea leaf price guarantee of 80 rupees a kilo, a subsidy will be paid to cover the gap between the price factories pay based on a Colombo Auction Average and the election promise, to suppliers who give 60 percent undamaged, immature leaf.
Sri Lanka Tea Board has also proposed an incentive of 02 rupees per kilo for 70-80 percent undamaged green leaf and 4 rupees extra for 80-90 percent quality teas.
Tea production is expected to go up by 30 million kilograms a year after the subsidy, costing 691.8 million rupees a month, or 2,075 million rupees for the next three months.
Assuming prices do not fall further tax payers will have to fork out 16,554 billion rupees a year for the tea and rubber subsidies.
With the Federal Reserve pulling out of its deadly quantity easing money printing excesses, the US dollar has strengthened, pushing down prices of oil, precious and base metals and food commodities. Some classical economists say a 1980s style low inflation period (Great Moderation 2.0) may be returning.
Price guarantees can have far reaching consequences. Thailand which promised price guarantees for rice virtually bankrupted itself with subsidies and rotting rice and ex-Prime Minister Yingluck Shinawatra was thrown out of office and charged over the scheme.