Abstract:
The government of Sri Lanka has introduced a number of policies and programs in order to increase paddy production since the independence in 1948. Among the policies implemented, the program can be considered as one of the longest lasting, most expensive and most politically sensitive policies. The expenditure on the fertilizer subsidy in 2010 was Rs 26.9 billion which constituted a 2.24 percent of total government expenditure. With this background the objective of the present study is to analyze the effects of fertilizer subsidy on the supply of paddy and rice in Sri Lanka. A Partial Equilibrium model was adopted in the study treating Sri Lanka as a small open economy and it was calibrated to the equilibrium dataset for the year 2009. The levels of endogenous variables were obtained when the rate of fertilizer subsidy changed by 5%, 10%, 20% and 40% from its original levels. According the findings, the reduction of the subsidy rate by 5%, 10%, 20% and 40% reduced the demand for fertilizer to 250,317mt, 231,221mt, 193,505mt and 117,767mt respectively. Subsequently the supply of rice has reduced to 2,332,791mt, 2,301,935mt, 2,240,171mt and 2,116,689mt at the levels of 82%, 77%, 67% and 47%. In order to fulfill the demand of the consumers the importation has increased to 117,209mt, 148,065mt, 209,829mt and 333,311mt. With respect to the given subsidy rate at 82%, 77%, 67% and 47%, the expenditure was of 11.092, 10.419, 9.737 and 7.726 Billion Rupees respectively. Further, there is a need to analyze these changes in different subsidy rates while considering the welfare of producers, consumers
