Cost of Compliance of Sanitary and Phytosanitary Requirements in Beverages and Spices in Sri Lanka

Dr Anura Herath

Sri Lanka

Executive Summary

Spices and beverage crop sector is an important sub-sector of the economy of Sri Lanka. It contributes US $ 70.2 million to the foreign exchange, provides employment for about 470,000 persons, which is about 10% of agricultural labour force, generates income for growers’ and provides environmental services by increasing biodiversity and reducing land degradation. There are several government sponsored programmes including research, extension and education, information service, and financial assistance schemes being implemented to support the sector. The sector shows a notable growth during the last two decades. Area under cultivation has increased from 30,000 ha to 53,600 ha, volume of exports grew from 10,200 mt to 17,300 mt, and foreign exchange earning grew from US $ 6.3 million to US $ 72.4 million. Further performance of the sector greatly depends on the opportunities available in the world market to increase exports. Sanitary and phytosanitary measures are becoming trade barriers for export expansion. This paper addresses the issues relating to compliance of SPS requirements in spices and beverage crops. Current status of the quality, loss of exports, loss of revenue, loss of employment and loss of growers’ income caused as a result of complying with the SPS requirements are the main focus of the paper.

Over the last ten years spice crops showed a steady increase of export volume, whereas beverage crops had a declining export volume. Increasing volume of pepper and cinnamon contributed to the growth of the spices. Average volume of exports for the last ten years was 9,130 mt of cinnamon, 3,611 mt of pepper, 752 mt of nutmeg, 1,296 mt of clove, and 18 mt of cardamom. Beverage crops showed a notable decline during the same period, but more specifically after 1986. Particularly cocoa exports have declined rapidly. Average volume of exports for the last ten years is 1,550 mt of coffee and 127 mt of cocoa. As analysed in the paper, lack of compliance with SPS requirements was one of the main reasons for declining trend of exports of beverage crops, cardamom and nutmeg.

Major markets for Sri Lankan spices comprises of South Asia, Middle East, Europe and US. South American market is the leader for cinnamon. A large share of beverage crops goes to the Europe. Potentials in these markets for Sri Lankan exports depends on their tariff structure and the SPS requirements. There will be a notable market access increase once the import tariff of these markets are restructured under the WTO Market Access agreement. However, most of the SPS requirements are too stringent to comply with, given the current conditions in production, to expand exports.

At present the quality of spices and beverage crops of Sri Lanka is assessed on the basis of standards set by Sri Lanka Standard Institute (SLSI). Almost all the standards of SLSI focus mainly on the physical appearance of the products. Moisture contents, presence of foreign material, mouldiness are also included in the quality parameters. However, the mandatory levels of these quality parameters are lower than the international requirements. A national enquiry point for spices and beverages has not been formally established in Sri Lanka. SLSI functions as a focal point for the information, but the online linkages of SLSI and international standard setting organisations are very poor.

According the SPS quality requirements, the most stringent ones for Sri Lankan spices are the presence of mould, high moisture content and aflatoxin. Difficulties of attaining the required level of standards are, among other things, due to (a) poor weather conditions experienced by many producers with low cost processing technology; (b) poor storage facilities; (c) small scale nature of production units; and (d) early harvesting habits to meet family cash needs of resource poor farmers. Farm-gate quality standards assessed based on SLSI parameters are not equal to the international standards. Therefore a substantial amount of products that come to the exporters are of substandard quality.

This condition leads to a direct loss of potential export volume due to non-compliance of SPS requirements. The estimated average volume loss is about 5,500 mt during 1990-2000, which is 34% of the total exports of spices and beverages during the same period. The corresponding total value of the products, estimated at the opportunity value, is US $ 2.2 million per year amounting to about 6% of the foreign exchange earnings from spices and beverages. In total, the estimated value of foreign exchange loss due to non-compliance is US $ 2.9 million every year. This is about 7% of the total foreign exchange earnings from spices and beverage crops in 2000.

There is evidence to argue that there will be both positive and negative impacts of compliance of SPS requirements on the employment. However, in final account, there is a net negative impact on the employment due to the loss of export volume. Net loss of employment is in the range of 2,400 persons every year, which is about 4% of the total labour employed in trading activities of spice and beverage crops.

Many growers process spices and beverage crops as primary products using very traditional methods. High moisture retention, contamination of microbial population and also extraneous matters are common in these systems. Meeting SPS requirements under this condition is difficult and in some cases impossible. It is thus necessary to introduce improved technology mostly with mechanisation in processing to upgrade the quality. The investment cost of research in processing is in the range of US $ 24,000 per annum, which is grossly inadequate for the purpose. Therefore it is an absolute necessity to obtain appropriate technology from other countries to improve processing systems and the quality of products. Countries, which possess technology, could impose restrictions under TRIPS agreements. These should be reconsidered at an international level in order to assist developing countries such as Sri Lanka in technology transfer.

A majority of the exporters reported that the spices and beverages collected at the exporters level are of inferior quality and they would not meet SPS requirements. Whereas a much lower percentage of village collectors, retail buyers and wholesale buyers reported that the quality of the same products moved along the channel is inferior. This indicates that there is a notable gap of the knowledge among different partners in the trade channel. In order to create an awareness of the mandatory and voluntary quality requirements, well-planned education and awareness programmes should be carried out. There are about 70,000 traders involved in the spice industry. The total cost of a training programme for them would be in the range of US $ 1.954 million. The annual budget allocation for training of stakeholders in the EAC sector is US $ 24,400, which is only 3% of the requirement.

Following are the recommendations in brief proposed to the Sri Lankan government to minimise the negative aspects of issues arising from SPS restrictions to the spice sector.

  1. Increase growers’ awareness in lowering cost of production and increasing quality.
  2. Initiate commodity futures for selected spices. Pepper is a promising commodity.
  3. Emphasis should be placed on the possibility of exchanging improved genetic material and plant varieties since introduction of such items from other countries to Sri Lanka will be difficult under TRIPS protection.
  4. Along with the increased awareness of SPS aspects, programmes should be developed to improve the capability to detect and eliminate contaminants, to process spices to acceptable standards, and proper packaging etc.
  5. Government should take necessary steps to make use of the provisions under Article 9, where Technical Assistance under SPS measures are available, and expedite the process of securing assistance.
  6. The government should take adequate steps to enforce the provisions of the Agreement on TRIPS so that the private sector and state sector can invest on research and development in processing.
  7. State assistance should be provided to central collection and processing points to maintain the homogeneity of quality.
  8. Government should establish National Enquiry Points facilitating the flow of timely and reliable information on SPS.

Cost of Compliance of Sanitary and Phytosanitary Requirements in Beverages and Spices in Sri Lanka

Dr Anura Herath

Economics Research Unit

Department of Export Agriculture

Second Draft: 12th April 2001

1.Introduction

1.1Spice and Beverages in the Economy of Sri Lanka

The International Spice Group defines spices as any of the flavoured or aromatic substances of vegetable origin obtained from tropical or other plants, commonly used as condiments or employed for other purposes on account of their fragrance, preservative or medicinal qualities. Among several spices[1] Sri Lanka currently emphasises on cinnamon, pepper, clove, cardamom, nutmeg and betel. Spices are important commodities both in domestic and overseas market historically as well as currently. Spices contribute about 0.56% to the total Gross Domestic Product (GDP) and 1.72% to the total foreign exchange earnings by generating Rs 5,575 million in 2000. Its share in the total agriculture foreign exchange earnings is 8.4%. Coffee and cocoa are the beverage crops addressed in the paper[2]. Spices and beverage crops are collectively called export agriculture crops (EAC) in Sri Lanka. Foreign exchange earning and number of farmers involved in beverages are relatively insignificant when compared to spices. They generate about Rs 86 million of foreign exchange contributing 0.01% to the GDP, 0.03% to the total foreign exchange earnings and 0.13% to agriculture foreign exchange earnings.

Recognising the importance of the sector, the Government of Sri Lanka has provided various types of incentives for cultivation and processing of spices since 1972 with the inception of the Department of Export Agriculture. Meanwhile, the prices of spices escalated excepting clove prices, the cultivated extent of spices expanded from 30,240 ha in 1980 to 53,640 ha in 1997, the total spice export grew from 10,301mt in 1980 to 17,900 mt in 2000, and the foreign exchange earning from spices increased from Rs 510 million in 1980 to about Rs 5,575 million in 2000. These statistics show the growth of the spice sector.

1.2Objectives, Methodology and data

The main objective of the paper is to highlight the impacts of lack of compliance of SPS requirements in the spice and beverage crops in Sri Lanka. Specifically paper will highlight:

(a)the current status of quality of spices and beverages in relation to SPS requirements;

(b)the investment requirements to improve the quality of products to meet SPS requirements; and;

(c)impact of lack of compliance on foreign exchange earning, employment, and domestic growers’ income.

Mainly the study is based on secondary information obtained from the database of the Economics Research Unit (ERU) of the Department of Export Agriculture, Central Bank and the Custom Department. The database of ERU comprises both secondary and primary data. Several farm level socio-economic surveys, conducted scientifically, have provided primary data. The surveys have been conducted using social survey techniques thus reassuring the representation of the whole sector in the database.

Secondary data on export volumes and values, prices and investment expenditure are adequately accurate for the analysis. However, the secondary data on cultivated extents, production and total employment in the sector are based on estimates and hence less accurate. Nevertheless, they are useful in indicating the magnitude of impacts of compliance and non-compliance of SPS.

2.Spice and Beverage Sector of Sri Lanka

2.1Cultivated Extent and Famers

Over 50,000 ha of wet zone land is under spices (see Appendix 2 for the distribution of area under spices and other exports crops in the country). Figure 1 depicts a comparison of land under spices and other perennial crops. Spices and beverage crops collectively take about 6% of the land under perennial crops. Although the proportion is not larger, they occupy the lands endowed with most favourable weather conditions and soils suitable for many crops. Thus the opportunity value of the lands are considerable.

Figure 1: Comparative Picture of Land Use in Spices, other EAC and Plantation Crops

Source: Central Bank of Sri Lanka, 1996

2.2Employment Generation in the Industry

The spice and beverage crop industry contributes notably to employment generation by way of cultivation, processing and trading.

  • There are over 200,000 small-scale growers involved in cultivating spices and further 50,000 in coffee and cocoa cultivation. It has been estimated that about 50,000 of these producers depend on spices as their main income.
  • Further, there are about 70,000 people involved in various activities connected with the processes from cultivating, trading to shipping of spices and beverage crops.
  • Cultivation and processing are labour intensive and in that women labour has a substantial role to play. Sri Lanka and other countries have shown that labour cost is over 50% of the total cost of production (62% in Indian pepper, 65% Indian clove, 51% Indian cardamom).

3.Export Trends for Spices and beverages

3.1Export Volume, Value and Trends

Total export volume of spices shows a steady growth during the last 30-year period (Figure 2). Increasing volume of pepper and cinnamon contributed to this growth. Average volume of export for the last ten years is 9,130 mt of cinnamon, 3,611 mt of pepper, 752 mt of nutmeg, 1,296 mt of clove, and 18 mt of cardamom. Beverage crops show a notable decline during the same period, but more specifically after 1986. Particularly cocoa exports have declined rapidly. Average volume of export for the last ten years is 1,550 mt of coffee and 127 mt of cocoa. Appendix 1 shows the volume and value of spices and beverage crop exports for the last ten years. The main reasons for improving spice trend is attractive market prices, government incentives for expansion, and exporters willingness to accept products even without strict quality standards. India started importing a large percentage of Sri Lankan black pepper amounting to about 80% of total pepper exports in 2000 (see Appendix 3 for export markets). The quality standards of Indian importers are not as stringent as in the case of the west, according to many exporters. This would also have contributed to a rapid growth of pepper exports.

The reasons for the declining trend in coffee and cocoa are the loss of cultivation area, depressed market prices, and substandard quality of a higher proportion of the volume. The quality is a constraint in coffee exports as almost all the importers are from the west needing stringent quality requirements (see Appendix 4 for coffee export markets)

Figure 2 : Total Volume of Spice (cinnmaon, pepper, clove, cardamom and nutmeg) Exports (mt), and Export of Coffee and Cocoa from Sri Lanka

3.2Foreign Exchange Earnings

Spice and beverage crops are not a major foreign exchange earner in Sri Lanka. They totally contribute about 2% to the foreign exchange earnings and take a share of 10% in the agriculture foreign exchange earnings. However, as depicted in Figure 3, there is a steady incline in the earning from spices and beverage crops collectively known as export agriculture crops (EAC) in comparison to tea, rubber and coconut, which are the major export crops. This indicates that spices and beverage crops are a growing industry, particularly the spices, and thus every development efforts should be provided to improve the industry. As explained later, one of the main development efforts in the spice and beverage crop sector is the improvement of product quality.

Figure 3 : Trend in Foreign Exchange Earnings from Spices, Beverage Crops, in Comparison to Tea, Rubber and Coconut (tea earning is in US $ 10 mn and others are in US $ mn)

3.3main Export Markets and Tariff Structures

The main export markets for spices and beverage crops, and the tax structure of these markets are listed below. Markets that take 80% of the total Sri Lankan exports are considered for this presentation. The percentage of the market share is computed taking the total export for the period 1990 to 1999. Certain countries have import tariff for spices and beverage crops. Under the WTO market access agreement, these tariffs need to be reduced at the end of the transition period by 36% in developed countries and 24% in developing countries. This reduction rate is also presented in Table 1 with a view to illustrating the future direction of efforts that should be taken to promote spices and beverage crops.

Cardamom:

According to the tariff rates for cardamom listed in Table 1, the market access advantage for Sri Lankan cardamom could only be realised if Singapore market relaxes mandatory quality standards, as Singapore is the largest buyer. The indications are that they will have to follow the standards of the West, as they are a net re-exporter of cardamom. Hence it is finally the quality, which would determine the market access, but not the reduction of import tariff.

Table 1 : Main Export Markets for Cadamom, which Makes 80% of Exports, and Rate of Tariff Reduction

Country / % Volume out of total export volume to each country / Potential reduction rate of tariff under WTO market access agreement
Germany / 2.1% / 36%
Australia / 2.3% / 0% (no tariff)
Sweden / 2.4% / 0% (no tariff)
Pakistan / 2.6% / 24%
Qutar / 2.8% / 24%
Jordan / 2.8% / 24%
Japan / 3.2% / 0% (no tariff)
India / 3.6% / 50%
U.K. / 3.7% / 0% (no tariff)
South Africa / 3.8% / 0% (no tariff)
U.A.R. / 3.8% / 0% (no tariff)
UAE / 5.5% / 0% (no tariff)
Bangladesh / 5.5% / 24%
Yemen / 7.6% / 0% (no tariff)
Maldives Islands / 9.6% / 24%
Singapore / 20.5% / 0% (no tariff)

Pepper:

In the case of pepper all the main markets which imports 80% of the total black pepper export from Sri Lanka are developing country markets, except USA and UK where 20% is consumed (see Table 2). USA and UK use pepper mainly for oleoresin production and thus the SPS standards are not very restrictive. However, as there is EU restriction on SPS, UK may also consider imposing high restrictions in time to come.