The home of Ceylon tea, Sri Lanka, is facing its worst political and economic crises since its independence in 1948. Due to the scarcity of foreign currency reserve, the country fell in default in May, and the President changed from Gotabaya Rajapaksa to Ranil Wickremesinghe in July. Sri Lanka is seeking assistance and aid from the international community, and the negotiation on a bailout program with the International Monetary Fund (IMF) is likely to resume this month after a debt sustainability report under the new administration is submitted.
The crisis hit people’s day-to-day living substantially. The citizens are suffering from soaring inflation said to be more than 60 percent, along with a shortage of food, fuel and medicine. Rolling power cuts have been imposed since February, in which the supply of electricity is suspended by changing areas and the duration of time that was extended to 13 hours a day in the worst period. Long queues at gas stations, interrupting businesses, transport, schools, etc, have been experienced nationwide.
The tea industry is not an exception — its tea production in the first half of the year showed an 18 percent decrease, from 161.7 metric tonnes (mt) in 2021 to 132.9 mt in 2022, per the Sri Lanka Tea Board.
Under this challenging situation, Niraj De Mel was appointed as the new chairman of the Sri Lanka Tea Board (SLTB) on 22 June for the second time (his first term was from June 2004 to November 2005). Having a professional career in tea for 45 years, De Mel is anticipated to lead the industry in a right direction.
Explaining the main cause of the current crop loss, De Mel said, “The decline of crop started from November 2021, caused by the sudden ban of importing chemical fertilizers in April 2021 triggered by the decision of the then president to go organic for all agriculture. However, tea producers did not have readily available organic fertilizers, neither allowed the already imported fertilizers to be distributed.”
The ban was lifted on 30 November 2021, but it was soon followed by the Russia’s invasion in Ukraine since February 2022, which led the price hike of agricultural fertilizers globally. Furthermore, the Central Bank of Sri Lanka devalued the Sri Lanka rupee (SLR) on 7 March 2022 up to 15 percent as one of several steps to obtain an IMF’s loan program, resulted in further price rise internally.
“The cost of fertilizer was SLR 30 per kilogram in the first quarter in 2021, which surged 20 holds to SLR 600 per kilo now,” said Lalith Munasinghe, executive director of Bogawantalawa Tea Estates PLC. However, the SLTB introduced a low interest loan scheme in June to enable tea estates and small holders to purchase fertilizers.
Anil Cooke, managing director of Asia Siyaka Commodities PLC, further elaborated, noting, “The soft loan is granted to estates and private factories, the latter distribute fertilizers to registered small tea growers who will pay back out of leaf sales to the factories. Then, the repayment from estates and factories is through tea auction with brokers recovering from auction proceeds.”
The depreciation of the SLR was reflected in the weekly tea auction price, which has risen about 30 percent in SLR-basis since mid-March. “Auction prices responded to the depreciation and initially compensated for rising costs. However, the value in US dollar-basis has declined due to the high cost of freight and other market factors,” Cooke commented.
Despite the current turmoil, the Colombo tea auction has been conducted without any postponements or cancellations, apart from the massive anti-government demonstrations or disturbances those often escalated to violence. The crucial shift of the auction system from the traditional outcry to an online platform in April 2020, urged by the outbreak of Covid-19 infections, has played a significant role in continuing production, sales and export of Ceylon tea.
De Mel said that the shortage of fuel is affecting all stakeholders in the value chain across the board. “Thankfully, tea exporters are getting together to pay with their proceeds and ensuring at least some quantities flow down to the tea manufacturers so they can carry out green leaf collections, transport made tea, and so brokers may distribute samples.”
The large estate sector has been operating within its normal practices. “Tea factories in large estates have conventionally installed their own generators. Therefore, we could carry on tea processing either with the government power or our own electricity,” Munasinghe commented. “Furthermore, tea factories are on a preferential list to get fuel, so we are producing tea without interruption and maintaining the quality.”
The private sector, which contributes about 70 percent of the total tea production, is also managing under this challenging circumstances. “At the moment, the private tea factories are facing severe shortage in fuel supply to run the factories, green leaf collection, made tea transportation, etc. Some factories have limited their production because of this,” said Chaminda Jayawardana, owner of Lumbini Tea Valley, a private tea factory. “Fortunately, Lumbini has a generator as well as our own fuel tank, which we acquired from the profit of direct exports. This is an advantage for us, and we keep running tea processing in full capacity.” He added that there is a strong demand for quality teas and tea export is benefitted by the depreciated exchange rate of SLR, although the cost of production is rising rapidly.
The tea industry in Sri Lanka, with its 155 years of history, has been one of the most essential foreign currency earners for the country. It is obvious and strongly expected that Ceylon tea will be a key performer during the reconstruction of the nation.