Import ban on palm oil cripples Sri Lanka's edible oil sector, escalates economic woes

SRI Lanka's ban on palm oil imports, which began in 2021 due to environmental concerns, along with high taxes on locally made edible oils, is now causing serious problems for the country's economy. The impact goes beyond cooking oil shortages-key industries like food, tourism, and manufacturing are also feeling the pressure, making it harder for the country to recover from its recent economic crisis.

- By Prof. S.P. Premaratna

Palm oil holds the largest market share in the world

Among the vegetable oils, palm oil emerged as the largest segment (https://www.imarc-group.com/vegetable-oil-processing-plant). Accordingly global prediction (https://www.custommarketinsights.com/report/edible-oil-market/), by 2034, the valuation is anticipated to reach $ 362.80 billion. Today, palm oil is produced in Indonesia and Malaysia, which account for more than 85% of the world's supply. Other than that, there are 42 countries that produce palm oil. Sri Lanka therefore has a huge potential.

Several factors drive the strong demand for palm oil. Its low cost and high yield make it an economical choice for both consumers and industries. Palm oil is widely used in the food industry for frying, baking, and in processed products like snacks and sweets. Beyond food, it is a key ingredient in cosmetics, detergents, and biofuels, making it valuable across various sectors. Additionally, palm oil's long shelf life and stability at room temperature make it easy to store and ideal for warmer climates, further boosting its popularity.

Palm oil ban: A double-edged sword - import ban and tax regime

The licensing requirement introduced in April 2021 under Gazette No. 2222/31 effectively blocked the import of crude palm olein, a critical input for domestic edible oil refining. In tandem, the Value-Added Tax (VAT) of 18% and the Social Security Contribution Levy (SSCL) of 2.5% were imposed on locally refined oils starting January 2024 and October 2022, respectively.

These changes have crippled Sri Lanka's domestic oil refining sector. Once a thriving local industry, it is now idling due to price distortions that make imported finished oils cheaper than domestically processed alternatives.