Decomposition of Productivity Growth in Sri Lanka’s Paddy Sector : Roles of Area Expansion and Chemical Fertilizer Use

Peer reviewe

Estimation of short-run and long-run food import demand elasticities in Sri Lanka: The bound testing approach

The elasticities of import demand are required to ascertain the direction and magnitude of the effects of various import regulations and global market disruptions on import volumes, tax revenue, exchange rates, and the trade balance. However, empirical estimates for food import demand elasticities in Sri Lanka are scarce. The objective of this study is to estimate price and income elasticities of import demand for six food commodities in Sri Lanka, namely, rice, potato, B onion, chilli, mung bean, and soybean. The bound testing procedure was employed to test for cointegration relationships followed by the Unrestricted Error Correction Model approach to obtain consistent short-run and long-run estimates in a single equation framework. The import demand for rice, chili, B onion, and potato were found to be inelastic but elastic for mung bean and soybean in the short run. In the long run, rice, mung bean, and soybean were elastic, while B onion and potato were inelastic. None of the income elasticities were significant in the short run; rice, chili and B onion had positive elasticities in the long run. Using these results, the effects of the increase in import taxes imposed in response to the COVID-19 pandemic were simulated. In the short run a reduction in import demand by 18.9% for B onion and 22.9% for potato were observed leading to foreign exchange savings of LKR 287.82 million and an increase in tax revenue by LKR 396.22 million. In the long run a reduction in import demand by 1.6% for B onion, 9% for potato and 40.8% for mung bean were observed, which are associated with foreign exchange savings of LKR 126.45 million and an increase in tax revenue by LKR 553.78 million. The results highlight the importance of using food import elasticities to compute the likely effects of food import regulations before any policy decisions are made