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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, in1966 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 1995compared 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 andaccounted for 46.44 per cent of total exports in 1996. Export earnings of the tea sectorin 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 netforeign exchange earnings are very high. In 1991, Sri Lanka emerged as the largestexporter of tea to the world market. The share of Sri Lankan tea in internationalmarkets in 1995 was 23 per cent (figure I). However, Kenya was reported to haveovertaken Sri Lanka in 1996 as the largest tea exporter. Nevertheless, as an exporterof tea in bulk form, Sri Lanka has now developed into the largest producer-cum-exporter 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 mostimportant agricultural product sector in Sri Lanka with respect to economic, social andenvironmental benefits. However, for sustainability, tea requires a long-term growth-

oriented strategy with regard to land use.

Table 1. Contribution by sector to Sri Lankan economy

Sector/subsector Amount(SL Rsmillion)

Percentage ofGDP

1995 1995 1996

Agriculture, forestry and fisheries 33,659 20.0 18.4

Tea 3,166 1.9 ---

Rubber 694 0.4 ---

Coconuts 3,548 2.1 ---

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Paddy 7,067 4.2 ---

Other agriculture, forestry andfarming

19,184 11.4 ---

Mining and quarrying 4,048 2.4 2.5

Manufacturing 34,294 20.4 21.0

Processing of tea, Rubber, coconutsand kernel products

3,724 2.2 ---

Other 30,570 18.2 ---

Construction 11,564 6.8 6.9

Service 84 888 50.4 51.2

Total GDP 167,953 100.0 100.0

Sources: Central Bank of Sri Lanka, annual report, 1995, (adapted) 1996; Sri LankaCustoms.

Table 2. Export earnings of Sri Lanka in 1996

Sector Value in SDRmillion. Percentage oftotal exports

Traditional exports

Tea 426 15.05

Rubber 71 2.50

Coconut 75 2.66

Sub-total 571 20.21

Non-traditional exports

Other export crops 86 3.04

Fisheries products 51 1.80

Gems and jewellery 193 6.85

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Textile and garments 1,310 46.44

Manufactures 503 17.81

Petroleum products 72 2.54

Re-exports 16 0.57

Others 21 0.73

Sub-total 2,252 79.79

Total exports 2,822 100.00

Sources: Sri Lanka Customs and Central Bank of Sri Lanka statistics, as quoted in theExport Performance Indicators for 1996 compiled by the Sri Lanka Export DevelopmentBoard.

Figure 1. World exports of tea, 1995a)

Note:

a. Total tons of world exports which exports from Asia amounted to 65 per cent and30 per cent from Africa.

The total land area under tea cultivation in Sri Lanka has declined over the years as aresult of the closure of uneconomic tea plantations. According to Department of

Agriculture statistics, the land area under tea cultivation in 1996 totalled 192,730hectares which constituted 9.1 per cent of the total land area under agriculture as

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indicated in table 3.Furthermore, the land area under accounted for 24.2 per cent ofthe 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. Teaplantations 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 low-grown tea. Approximately 65 per cent of the tea smallholders are located at lowelevations. During the past decade, the share of tea smallholdersin total outputincreased 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 inproduction, 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 afaster brewing tea, to meet growing demand for CTC teas on the world market. In 1995CTC 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 packetsand tea bags is expanding. Furthermore, the product base has been diversified, withthe 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 Land area(hectares)

Percentage of totalagricultural land

Tea 192,730 9.1

Rubber 162,098 7.6

Coconuts 442,288 20.8

Paddy 915,000 43.1

Sugar cane 24,862 1.2

Other field crops

(except fruit andvegetables, cereals

and groundnuts)

173,288 8.1

Fruit and vegetables 213,952 10.1

Table 4. Areas of tea cultivation in Sri Lanka

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Category Heightabove sea

level(metres)

Districts Area(ha.)

Percentageof total

High-grown Above 1,200 NuwaraEliya,

Badulla

52,272 27.66

Mid-grown 600 - 1,200 Kandy,Ratnapura

56,863 30.00

Low-grown Up to 600 Galle,Matara

79,836 42.25

Source:Tea Lands Survey, 1994-1995, by the Tea Commissioners Division of the SriLanka Tea Board.

Table 5. Trends in production, exports and prices of Sri Lankan tea, 1989-1995

Year Production

(Millionkg)

Exports(SL

Rs billion)

Earnings

(SDR million)

FOB

(SLRs/kg)

FOB

(SDR/kg)

1989 207 204 13.7 296 66.91 1.45

1990 213 216 19.8 364 91.78 1.69

1991 241 212 17.9 316 84.12 1.49

1992 179 182 14.9 241 81.97 1.331993 232 218 19.9 296 91.16 1.36

1994 242 230 20.9 296 91.32 1.26

1995 246 241 24.6 316 102.31 1.32

*1996 258 244 34.1 425 139.56 1.64

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 early1970s, management was continued under two large State-owned corporations: the SriLanka State Plantations Corporation (SLSPC) and the Janatha Estates DevelopmentBoard (JEDB). However, that management approach appeared inadequate to meet thenew challenges of improving productivity and maintaining competitiveness. Whencompared with competitors, SLSPC and JEDB labour productivity and plantation yieldswere the lowest despite the fact that wages were higher than those paid by other tea-

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growing employers in the country at that time. As a result, the cost of tea production ishighest 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-countryestates 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 cleanestteas on the world markets. Analysis shows that residue levels of pesticides, weedicidesetc. are insignificant. Countries such as Germany impose strict standards and thequality of Sri Lankan teas are within such standards. An example of that recognitionwas provided recently by the Chairman of the European Tea Technical Committee at theseventeenth meeting of the Technical Committee on Tea of the International StandardsOrganization (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 nosignificance.

In the late 1970s, Sri Lanka became the first country in South Asia to adopt an outwardlooking 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 recognizedthe private sector as the engine of growth for rapid and sustainable economicdevelopment.

Consequent to that policy, in 1992 the government decided on a programme forrestructuring the tea industry. Initially, the management of a majority of the State-

owned plantations was handed over to private management companies on five-yearcontracts. 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 regionalplantation companies on a long-term lease basis (50 years) through the sale of 51 percent ownership of the companies. Several regional plantation companies were

privatized in 1996 and the remaining companies were to be privatized during 1997.