The proposal for liberalization of tea imports has been debated for over 15 years without any decision. The Tea Exporters’ Association (TEA) of Sri Lanka’s request for liberalization was included in the 2016 government budget approved by parliament. However, it was not implemented due to strong objections from some stakeholder members.
Last year, two international tea brands, namely Tetley and Ahmad, submitted proposals to establish tea-packing plants in Sri Lanka as the Board of Investment (BOI) projects. As per the information given to the sub-committee appointed for evaluation of the two proposals, the two companies were planning to invest US $ 70 million each and provide employment opportunities for about 700 people.
Only the TEA representative at the committee supported the proposals as it believes in the positive contribution that would accrue to the tea industry and economy with the presence of two international tea brands in the country. However, these two proposals were also not approved by the government due to objection from the same stakeholder members.
The TEA would like to highlight below the consequences of not liberalizing tea imports to the country’s economy.
- Tea production in Sri Lanka, during the last 10-year period has been on a declining trend compared to other major tea-producing countries. Sri Lanka’s share in world tea production has now come down to 6.5 percent. Since replanting is not taking place at the required level of 2-3 percent of the tea land extent per annum, tea production will continue to be comparatively low against the other tea-producing countries. As a result, the growth of the tea exports sector would be restricted by the limited availability of tea in Sri Lanka.
- If Sri Lanka maintained an annual growth rate of 3 percent during the last decade, the tea production would have exceeded 400 million kilogrammes by now. The loss of export opportunities is estimated at around 75 million kilogrammes per year. If this volume is converted into value at US $ 5 per kilogramme, the country is losing around US $ 375 million annually. The liberalization of tea imports could have covered this shortfall in the supply side and increased the available tea quantity for export.
- Sri Lanka is losing market share in many countries due to the decline in tea production and the high price of Ceylon Tea. These markets are being captured by our competitors – India, Vietnam, Kenya, etc. Once a market is lost, it will be extremely difficult to regain that market. Further, the increase in CTC tea production poses a strong threat to Sri Lanka’s orthodox tea market share in some of our traditional markets. Kenya with an annual tea production of over 470 million kilogrammes has already entered into the traditional Iran market earlier dominated by Ceylon Tea.
- The constraints in the tea production front have led to an increase in the cost of production in the country. Although the prices at the Colombo tea auction are comparatively higher than other auction centres, the exporters find it difficult to compete with other international brands, which are offered at much more competitive prices. Hence, the growth of Sri Lankan-owned tea brands is restricted due to the high cost of production in the country.
- Some exporters are unable to cater to certain market segments due to the non-availability of suitable types of tea locally, which has a negative impact on the growth of brands. In most markets, the importance of origin of tea is gradually phasing out to the strength of brands.
- The permission granted for import of CTC, Green and Specialty tea under the 1981 Sri Lanka Tea Board Regulations for value addition and re-exports has enhanced the value proposition of export of tea in bags and other consumer packages and their FOB prices are much higher than the prices of other categories. This scheme has in fact helped to get better prices for locally made CTC and Green Teas as well. It should be noted here that in the 14 years period from 1981 – 1995, where orthodox tea was allowed to be imported without restriction for value addition and re-exports, there was no adverse effect on the local tea producers. The authorities should have considered allowing certain selected orthodox tea grades under the same scheme for value addition and re-export until a long-term decision on liberalization of tea import is taken. A scheme can be designed to make sure that tea importation will not affect the demand for local tea.
- The protection given to tea producers/manufactures does not expose them to real competition. Under the circumstances, some producers may not make any serious effort to improve the tea quality, reduce COP and improve management efficiency. They will continue to depend on government protection and subsidies that would be a burden on the entire economy.
- A number of international and local tea brands have already moved out from Sri Lanka due to the current policy and the country has lost a substantial amount of foreign exchange, capital investment and employment opportunities. More Sri Lankan tea brands will consider shifting their operations to places like Dubai under the current system. The liberal trade policies adopted in Germany and Dubai have helped these countries to capture a substantial share of world tea exports without producing any tea.
- The plans to regain some lost markets such as Egypt and Pakistan will not be successful as Sri Lanka is unable to offer competitively priced tea to these markets under the prevailing system.
- Sri Lanka will not be able to expand their business to more secure Europe or the USA markets without having the right type of tea mix at competitive prices. The retail sale segment in these countries is controlled by hyper markets/supermarkets and they maintain the retail prices without any change for six to 12 months. The high cost of production in Sri Lanka does not allow the Sri Lankan tea brands to get into the mass market segment controlled by supermarket chains.
- If liberalization of tea imports was allowed, the service sector including banking, insurance, warehousing, transportation, etc. could have expanded providing more employment opportunities. However, this has been prevented due to non-liberalization of tea imports.
- The Sri Lankan tea brands that exclusively market the Pure Ceylon Tea concept account for less than 10 percent of the country’s annual tea export volume and their growth in terms of volume remains static. These brands are unable to drive the tea industry to achieve the expected growth due to the comparatively low volumes. The world market share of single origin tea is insignificant and it is unlikely that this share would increase.
- Sri Lanka will not be able to achieve the tea export revenue targets set for 2020 as the growth of the sector is curtailed due to non-availability of adequate volumes and the right mix of tea to cater to many international market segments.