Palm oil import ban paralyzes Sri Lanka’s manufacturing sector

Sri Lanka’s ban on palm oil imports, imposed in 2021 due to environmental concerns, as well as high taxes on locally produced edible oils, is now causing serious problems for the country’s economy. The impact goes beyond the shortage of cooking oil — key sectors such as the food industry, tourism and manufacturing are also under pressure, making it difficult for the country to recover from the recent economic crisis, the Daily Finantional Times reported.

Today, palm oil is produced in Indonesia and Malaysia, which account for more than 85% of global supplies. In addition, 42 other countries produce palm oil, but not Sri Lanka.

The licensing requirement, introduced in April 2021 under Gazette No. 2222/31, effectively blocked the import of crude palm olein into the country. Meanwhile, a value-added tax (VAT) of 18% and a social security levy (SSCL) of 2.5% were imposed on locally refined oils from January 2024 and October 2022, respectively.

These changes have paralyzed Sri Lanka’s domestic refining sector. The once thriving local industry is now at a standstill due to price distortions that make imported finished oils cheaper than domestically refined alternatives. Sri Lanka is now dependent on imports of refined coconut oil, which costs much more. Industry estimates show that the global price difference between crude palm olein and refined coconut oil has widened to around US$1,500 per tonne. This results in exchange rate losses of around US$15-20 million per month, or US$150-200 million per year.

At the same time, Sri Lanka’s annual requirement for coconut oil is about 240,000 tons, of which only about 40,000 tons are produced domestically, which is about 16.7% of the total demand.

As a result, attempts to protect the environment and support local producers have turned into counterproductive measures that have hit key industries. Sri Lanka’s experience shows that a sharp rejection of critical imports without a well-thought-out alternative leads to increased dependence and losses.

Since Sri Lanka imports about 20,000 tons of edible oil every month, the country spends an additional $15–20 million per month on the import of expensive refined oils compared to what it used to be when crude palm oil was imported and processed locally. This leads to an annual outflow of $150–200 million, undermining the country’s strained balance of payments and recent successes in rebuilding foreign exchange reserves.

Tags: palm oil, imports, Sri Lanka, restrictions