Academic journal article IUP Journal of Applied Economics

Impact of Exchange Rate on Export of Coconut Products from Sri Lanka

Academic journal article IUP Journal of Applied Economics

Impact of Exchange Rate on Export of Coconut Products from Sri Lanka

Article excerpt

The specific objective of the study is to develop a multi-market model for the analysis of alternative policy options to increase exports of coconut products from Sri Lanka. Secondary data on the production and exports of coconut products are used. Simulations indicate that depreciation of the rupee exchange rate has a significant impact on export prices, volume of exports and income of industry stakeholders, but there is no significant impact on the producer prices or producer incomes, and supply of coconut products. Simulations show that export prices of coconut products declined for the rupee exchange rate depreciations in real terms. But in nominal terms, the export prices increased to cause an increase in the exporting firms' income and government tax revenues, and a modest increase in the industry income. Depreciation of the rupee could raise the income of exporters and the government tax revenue, which could be used for investing in development of new technology or factory modernization subsidy schemes. Increased export prices can also boost processing of coconuts and encourage firms to export more coconut products. But the depreciation of the rupee has larger ramifications on the economy as a whole, thus it is not a viable policy option to choose for the long run.

Introduction

Coconut is the largest plantation crop in Sri Lanka and occupies the second largest area after rice. In plantation agriculture, coconut occupies the highest area of nearly 402,649 ha (25% of the gross cropped area). Coconut is a very important commodity in Sri Lanka. It is used traditionally as a component of food, and about 70% of the production is consumed locally, while the remaining 30% is used in the production of processed coconut products. About 9% of the total expenditure on food of an average household is spent on coconuts, which is the principal source of edible oil and fats. In order to meet the high domestic consumption and the export demand, increased production of coconut is important, hence, a strategic government policy toward the development of the coconut sector is essential in the long run.

Coconut is the most widely planted agro-based industrial crop in Sri Lanka, next to tea and rubber. Concurrently with the stagnation of the area under coconut cultivation, the total annual nuts production has varied and remained stable between 2,300 million and 3,000 million nuts, during the past two decades. The slow growth of coconut production is a serious impediment to the economic viability of the coconut industry. The main factors contributing to this situation are loss of productive coconut plantations, particularly in the 'Coconut Triangle' area, the vagaries of the weather, low application of inputs such as fertilizer, and poor crop management.

Unless Sri Lanka's dwindling coconut harvest of around 2.5 billion nuts per year, is increased to over 4 billion, the coconut industry will continue to be under the threat of an imminent calamity of insufficient yield to feed the export-oriented desiccated coconut industry. The harvest of coconuts, which greatly varies from year to year, often leaves little or no coconuts to feed the Islands' desiccated coconut mills. This has resulted in a colossal loss of employment of millions in the desiccated coconut and coconut oil industries.

With coconut production showing declining trend and rising cost of production, coconut area remaining stagnant and showing a decline due to diversion of coconut lands for development activities, and severe export competition from Philippines and Indonesia have pushed the Sri Lankan coconut industry into a crisis. If Sri Lanka does not take appropriate policy measures to address the current problem in the coconut industry, she may have to lose the export opportunities and also face severe decline in foreign exchange earnings.

The specific objectives of the study are to develop a multi-market model, to analyze the impact of exchange rate policy options and quantify the magnitude of resulting effects, including the effects on production, prices, consumption, and exports of different coconut products. …

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