The Sri Lanka crisis disrupted its tea industry and resulted in severe fallouts. As a major tea producer, Sri Lanka’s situation has a great impact on the global tea industry.
Contents
Introduction
Recently, the economic crisis in Sri Lanka has turned this country into a “hotspot” in recent times. Wrong policies of Sri Lanka’s government such as the fertilizer ban have left serious consequences in the tea industry. However, it is also an opportunity for other countries to boost tea exports, especially India and Vietnam.
The worst economic crisis in Sri Lanka since 1948
Sri Lanka is struggling to recover from its worst economic crisis ever. The resignation of President Rajapaksa is seen as the culmination of a severe economic and political crisis that has raged over the past several months in Sri Lanka. Sri Lanka’s debt-laden economy could not afford food, fuel, and medicine, making Sri Lankans’ life miserable.
Huge and insolvent foreign debt is the reason for Sri Lanka crisis. The Sri Lankan government owes $51 billion and cannot pay interest on its loans. Much of the revenue is affected by the Covid-19 pandemic and the crippled tourism industry, which is an essential engine of Sri Lanka’s economic growth. The finance ministry says this country has only $25 million in usable foreign reserves while they need $6 billion to stay afloat for six months.
According to analysts, economic mismanagement by governments weakened Sri Lanka’s public finances. Soon after taking office in 2019, the Rajapaksa government enacted a policy of deep tax cuts, making the situation worse. The ban on fertilizers has caused a sharp drop in crop yields, causing inflation and decreasing exports of tea and rubber from Sri Lanka.
In April 2021, the chemical fertilizer ban was announced, forcing farmers to shift to organic farming, causing serious damage to the agricultural sector, especially the tea industry. Sri Lanka has recorded the lowest tea production in 206 years. Sri Lanka’s economy also declined rapidly partly due to loss of revenue from tea and other export crops.
To salvage the economy, President Ranil Wickremesinghe was picked to guide the country out of its economic crisis. This country needs to address food insecurity and political instability first. At the same time, a bailout from the International Monetary Fund (IMF) will be crucial to stabilize its finances.
The influence of the Sri Lanka crisis on the Sri Lanka tea industry
As a key industry in Sri Lanka, the tea industry has taken a hit from the worst economic crisis, with production and export dropping drastically. Before Sri Lanka crisis, the country’s tea exports were worth US$1.3 billion a year and accounted for 5% of the global tea production, but now it is at the lowest level in more than 20 years.
According to a report, tea production in Sri Lanka crisis in September 2022 fell 7.8% to 20.9 million kilograms, tea exports decreased by 8.11% to 21.54 million kilograms. In the first 9 months of 2022, the total production was 192.37 million kilograms, which decreased by 18% compared to 234.72 million kilograms in the same period last year. This would be the lowest recorded since 1996 with a record of 188.40 million kilograms for the corresponding period.
The reason which crippled the tea industry was the fertilizer ban in April 2021. At that time, President Rajapaksa abruptly banned imports of chemical fertilizers, pesticides, and herbicides, in an attempt to maintain Sri Lanka’s foreign exchange reserves. The government, ignoring warnings from academics and agronomists, took it as a shift to organic agriculture, making Sri Lanka the first non-toxic country in the world. As a result, tea production decreased by more than 20% in the first few months following the ban, making Sri Lanka crisis.
7 months after this decision, the Sri Lanka government lifted the ban but fallouts for its tea industry continue. However, fertilizer prices had risen by more than 25%, increasing the hardships faced by tea pickers. The production cost of tea growers has steeply risen by 30-35% so far this year. From electricity, and labor to packaging – all the prices have hit the roof. Economic losses for Sri Lanka’s tea industry amounted to 573 million USD.
Recently, the Chairman of the Indian Tea Exporters Association said the industry is expecting Sri Lanka’s crop to be around 15% lower this year because of its economic decline. On the bright side, tea is now Sri Lanka’s most important net foreign exchange earner, and agrochemicals are beginning to trickle back into the market. When political stability returns, they believe that the tea industry can bounce back.
Sri Lankan crisis brings opportunity for the Indian tea industry
As a major exporter, the tea production disruptions in Sri Lanka crisis have had an effect on the global tea market. India, the second largest tea producer in the world, gets an increase in prices and export opportunities. This has been aided by the situation in Sri Lanka.
The disruption in Sri Lankan production has caused orthodox tea prices to increase significantly, with the average Indian auction price at around INR 320/kg in August 2022, surpassing the 2020 high of INR 280/kg. Indian tea exporters hope to reach 220-225 million kilograms in 2022. They hoped to fill the gap left by Sri Lanka.
According to Ind-Ra, tea exports from India grew 16% year-on-year in the first 8 months of 2022, with orthodox varieties accounting for most of the increase. From June to August 2022, the Indian tea industry recorded a rise of 27% year-on-year. Tea exports to the UAE doubled while exports to Russia and Iraq also increased.
The current growth of the Indian tea industry is partly benefiting from Sri Lanka’s disruptions. Before the crisis, Sri Lanka produced 3 million kilograms of orthodox tea, most of which was exported. Iraq, Russia, the UAE, and Turkey have been among the main countries importing Sri Lankan tea. However, the Sri Lanka crisis made tea buyers unable to deal with Sri Lankan exporters, and India is among the best alternatives.
Although the Indian tea industry has great opportunities to get big profits, Indian exporters may face higher tariffs. For example, Turkey imposes an import tax on tea products of 145%. Currently, India is negotiating to sign free trade agreements with Australia, UAE, the UK, and the EU to enjoy tax reductions for export products, and thereby take advantage of these potential new markets.
Benefiting from the Sri Lanka situation, Vietnam’s tea export increase
In the influence of the Sri Lanka crisis on the global tea industry, Vietnam is no exception. Vietnam is the 5th country in the world in terms of tea production and export. Similar to India, Vietnam may benefit from this situation when recording the growth in both export volume and prices.
The average export price of tea in August 2022 is estimated at 1,7810 USD/ton, an increase of 56% compared to August 2021. In the first 8 months of 2022, the average export price of tea was estimated at $1,727.8 per ton, up 3.8% over the same period in 2021. From January to September 2022, Vietnam tea exports reached 92.1 thousand tons, worth 157.8 million USD, an increase of 0.5% in volume and 3% in value over the same period in 2021.
Vietnamese tea is mainly exported to Pakistan, Taiwan, Russia, Iraq, etc. Tea exports to Pakistan and the USA increased sharply in the first 8 months of 2022. Taiwan increased imports of black tea from Vietnam and reduced imports from Sri Lanka and India. In the US market, Vietnam overtakes Sri Lanka to become the 4th largest tea supplier to the US. Vietnamese tea exports to the US increased by 25.9% in volume and 38.9% in value, compared to the same period in 2021.
The situation in the Sri Lanka tea industry contributes to the growth of Vietnamese tea exports. In some markets, Vietnam is an alternative when tea buyers find it difficult to trade with Sri Lankan producers due to Sri Lanka crisis. Its record low tea production has also caused tea prices to rise in many countries, including Vietnam. Besides, the growth of Vietnam’s tea exports is also driven by global demand and investment in improving tea quality.
According to analysts, the demand for Vietnamese tea will continue to increase in 2022-2023, creating opportunities for Vietnam’s tea production and exports. Vietnam is striving to diversify tea types, improve quality, and packaging design, and thereby increase its ability to meet market demand.
Conclusion
The Sri Lanka crisis as well as the fertilizer ban may still affect the tea industry in the next few years. Sri Lanka’s new government is striving to recover its economy, especially the tea industry. However, this production disruption resulted in huge losses for Sri Lanka’s tea industry. In contrast, Sri Lanka crisis is an opportunity for other tea producers to fill the gap in the global market that Sri Lanka left.
Source:
https://economictimes.indiatimes.com/small-biz/sme-sector/indian-orthodox-tea-players-to-benefit-as-sri-lankan-production-plummets-to-25-year-low-ind-ra/articleshow/94806596.cms
https://www.dw.com/en/why-is-trouble-brewing-in-sri-lankas-tea-industry/a-62553687
https://www.historyofceylontea.com/ceylon-publications/ceylon-tea-articles/sri-lanka-records-the-lowest-tea-production-in-26-years-006.html
https://www.aljazeera.com/news/2022/7/13/sri-lanka-in-crisis-what-when-and-why-explainer
https://www.eastmojo.com/world/2022/10/05/how-sri-lankas-forced-organic-transition-crippled-its-tea-industry/
https://economictimes.indiatimes.com/news/economy/foreign-trade/tea-exporters-buoyed-by-robust-demand-expect-225-million-kg-shipments-in-2022/articleshow/92113379.cms
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