Smallholders locked out, imports locked in: The case to end Palm Oil ban

The strange and sudden ban on palm oil

- By Dr. Shatadru Chattopadhayay

IN April 2021, we received news that the Sri Lankan Government had banned palm oil imports and ordered the uprooting of oil palm trees to be replaced with rubber trees (Gazette No. 2222/13).

The main reason given was palm oil’s negative social and environmental impacts, based on a disputed 2018 report. Interestingly, it wasn’t an outright ban on all palm oil. The policy had a critical, and damaging, loophole: it specifically prevented the import of crude palm oil, the raw ingredient used by Sri Lankan factories. At the same time, it explicitly allowed the import of refined, finished palm oil. The ban caused price increases for essential products such as cooking oil, margarine, confectionery, and other consumer goods that rely on palm oil as a key ingredient. These higher costs were passed on to consumers.

The economic effect

The ban didn’t stop palm oil from entering the country; it only stopped local companies from processing it. The policy effectively paralysed the nation’s domestic refining industry, which was built on processing that low cost, raw feedstock. The import data proves this shift. In 2023, Sri Lanka still imported $23 million worth of palm oil (down from $28 million in 2022). But tellingly, 99% of this was the expensive, refined product, confirming the move from raw materials to finished goods.

With local refiners starved of crude palm oil, the country had to find a substitute, and the financial shock was massive. Imports of coconut and palm kernel oils skyrocketed, jumping from just 24% of the total oil import bill in 2022 to a staggering 65% in 2023. But again, this was not raw material. In 2023, these imports were dominated by $99 million in finished, refined coconut oil, compared to just $16.9 million in its crude form.