The brown sugar sector is clinging to optimism following President Anura Kumara Dissanayake’s speech in Parliament on Thursday (7), despite the controversies it sparked.
In his address, Dissanayake pledged to increase taxes on ethanol produced from maize – a move clearly aimed at limiting competition and promoting ethanol from struggling local sugar companies, even though these companies continue to endure chronic financial losses.
Alongside the promised tax revisions, he revealed that the Government had, just days earlier, approved a substantial bailout of Rs. 1 billion for loss-making sugar companies.
Despite repeated appeals from farmers for Value-Added Tax (VAT) reductions on brown sugar, Dissanayake firmly rejected any tax relief across all industries. He argued that, even with VAT in place, these companies had yet to pay taxes, so any cuts would have little impact. Consequently, tax levels will remain unchanged, at least for now.
Instead of offering relief, the Government’s strategy focuses on expanding ethanol production alongside sugar, based on a claim that this will reduce company losses. However, critics view this as a short-term fix that fails to address deeper structural issues.
Sugarcane burden
Meanwhile, financial pressures continue to burden sugarcane farmers across several regions, many of whom still have unsold harvests and unresolved grievances. Recently, farmers staged a protest outside the Sevanagala sugar factory, accusing authorities of halting sugarcane purchases and worsening tensions in the area.
Farmers in Monaragala attribute the industry’s crisis to Government tax policies that distort sugar and ethanol markets. They highlight that four months have passed since their last harvest, yet they remain unpaid.
Furthermore, critical seeds and fertilisers for the upcoming planting season have not been distributed as expected. Usually, this period would be dedicated to fertilising crops and preparing fields for sugarcane cultivation, but these essential activities are currently stalled.
At a recent District Coordinating Committee meeting, Industry Minister Sunil Handunnetti urged farmers to wait another three weeks, assuring them that the Government would then be able to sell off the remaining ethanol stock. Nonetheless, farmers insist the core problem is the Government’s lack of a clear strategy to market sugar effectively.
Under the current tax system, brown sugar is subject to VAT while white sugar is exempt. This results in white sugar being priced at Rs. 220 per kilo, whereas brown sugar costs between Rs. 260 and Rs. 280 per kilo. This price disparity has sharply reduced demand for brown sugar, a major factor contributing to the industry’s troubles.
At the same time, the Government has approved ethanol production from maize but lacks a comprehensive marketing plan for the product. Farmers insist that policy reforms are needed to set a sugar price around Rs. 200 per kilo and ethanol at Rs. 800 per litre.
In Monaragala alone, about 25,000 families depend directly on the sugarcane industry, with an additional 10,000 labourers involved. Nationally, nearly 200,000 people rely on this sector, underscoring the urgent need for decisive Government action.
Reliable sources close to Lanka Sugar Company Ltd. (LSCL) told The Sunday Morning that approximately 17,000 MT of pure, locally produced brown sugar remained stuck in Lanka Sugar Company warehouses across the country, unable to enter the market. Adding to these operational challenges, the company is experiencing severe financial strain, struggling to pay salaries of nearly all employees and to compensate approximately 15,000 farmers still awaiting payment for recent harvests.
When contacted for comment, a senior official from Lanka Sugar, speaking anonymously due to the issue’s sensitivity and Government pressure, revealed that the company spent close to Rs. 1 billion annually on Corporate Social Responsibility (CSR) initiatives. These programmes include measures to protect farmers and their crops from threats such as elephant attacks.
“Despite these significant expenditures, we are still burdened with a Government-imposed VAT of Rs. 42 per kilogramme,” the official explained, adding: “If the VAT were removed, we could price our products at about Rs. 250 per kilo. Even then, we would incur losses, but at least we could generate enough revenue to cover salaries and farmer payments.”
Imports and production
LSCL is a fully Government-owned enterprise under the Ministry of Plantation. The Government took over the Pelwatte and Sevanagala sugar factories under the Revival of Underperforming Enterprises or Underutilised Assets Act No.43 of 2011, following a Cabinet-appointed subcommittee’s review of their economic performance and industrial value.
After an in-depth study of these factories alongside 34 other institutions, the committee recommended Government takeover. A competent authority was appointed to manage the transition, which lasted until August 2012 when LSCL was officially incorporated. The company is mandated to operate profitably and be self-funded, aiming to reduce Sri Lanka’s foreign exchange expenditure on imported sugar and ethanol.
Data from the Central Bank of Sri Lanka (CBSL) shows a notable increase in sugar imports, reflecting shifting domestic market dynamics and consumer pricing.
The rise in imports, alongside declining prices, suggests multiple pressures are affecting the market. Increased imports are likely driven by lower international prices and domestic supply shortfalls. These factors exert downward pressure on prices, making it difficult for local producers such as Lanka Sugar to compete, especially given their high operational costs and tax burdens.
While consumers may welcome the reduced prices amid rising living expenses, the domestic sugar industry faces a precarious future. This situation highlights the urgent need for policy reforms to balance import volumes and bolster local production to ensure the sector’s sustainability.
According to Lanka Sugar Company statistics, sugarcane cultivation in Sri Lanka covered 26,866 hectares in 2024, reflecting ongoing efforts to boost domestic output despite fluctuating import levels. The average yield was 62.4 tonnes per hectare, indicating moderate productivity compared to regional benchmarks.
Additionally, approximately 1,247,551 tonnes of sugarcane were crushed throughout the year, significantly contributing to local sugar production. The industry maintained an average sugar recovery rate of 9.2%, consistent with historical figures, although experts note room for improvement through enhanced farming methods and milling technology upgrades.
Sri Lanka’s total sugar requirement in 2024 was estimated at 663,678 MT, with local production accounting for only 80,678 MT. This underscores the country’s heavy reliance on imports, which amounted to roughly 583,000 MT during the year. Notably, the average import price (CIF) per metric tonne fell significantly from Rs. 104,645 in December 2023 to Rs. 82,254 by December 2024, bringing the overall import bill to nearly Rs. 48 billion.
In addition to sugar, Sri Lanka produced 12.9 million litres of ethanol in 2024, a key output from the sugar and distillery industries, contributing to the nation’s energy needs.
The annual sugar requirement for 2023 was estimated at 661,183 MT, with imports covering 90% of demand. This resulted in a substantial foreign exchange expenditure of around Rs. 127 billion.
The domestic sugar sector in Sri Lanka is under mounting pressure. Although the country consumes approximately 550,000 tonnes of sugar annually, local production accounts for only about 7%. Factories produce between 40,000 and 55,000 tonnes per year, with the remainder met through imports.
Losses, losses and more losses
A National Audit Office (NAO) review of LSCL’s financials revealed a significant decline in profitability during 2023, with profits dropping to Rs. 2.8 billion from Rs. 6 billion the previous year. This downturn was mainly driven by increased expenses and decreased income.
The audit has highlighted several operational and financial weaknesses, including delays and inefficiencies in key projects such as the capacity expansion at the Sevanagala factory, which remained incomplete beyond the warranty period, resulting in additional delay charges. Multiple long-term projects initiated years ago have been abandoned despite substantial investments totalling Rs. 176 million, failing to yield the intended benefits.
Procurement irregularities were a major concern, with unauthorised purchases of machinery and supplies made without following established procedures. Notably, furnace oil was procured from a non-approved supplier, resulting in the use of substandard black oil that caused boiler downtime and production losses estimated at Rs. 300 million. Similarly, a biomass boiler was acquired through informal means, with a cost-benefit analysis based on falsified data, and advance payments were made without proper safeguards.
Staffing practices have also shown deficiencies, as employees were recruited and promoted without formal approvals or manpower planning, further complicating organisational efficiency.
Financial mismanagement was evident in various forms, including the unauthorised use of company guesthouses for external parties, unrecovered loans to farmers who shifted away from sugarcane cultivation, and the retention of idle inventory and obsolete materials worth millions without proper disposal.
Additionally, stock shortages and losses were reported, along with storage of third-party sugar stock without charging late fees, which led to unnecessary costs. The company has also suffered losses by selling sugar below production cost, amounting to over Rs. 73 million, and faced idle assets like an unused crane machine that resulted in financial losses.
Legal and ownership issues were another significant area of concern. The company does not have formal ownership of land plots it occupies, and unauthorised cultivation and construction activities were found on company lands. Pending lawsuits delayed the disposal of obsolete stock and spare parts. Furthermore, losses were incurred due to unrecovered Customs duties and payments made for molasses imports that never materialised.
The NAO has recommended urgent completion and operationalisation of delayed projects, strict adherence to procurement procedures, recovery of losses from responsible parties, and implementation of robust internal controls over loan recovery and inventory management.
It has also emphasised the need for formal manpower planning, legal action to resolve land ownership disputes, prevention of losses by avoiding sales below cost, proper disposal of idle assets, and accountability measures including disciplinary actions against those responsible for financial and operational mismanagement.
Lanka Sugar Chairperson Sandamali Chandrasekera stated that even without a VAT reduction, the company had developed a comprehensive plan to improve its performance.
“We cannot let down our farmers or the company. We must work with the resources available to us. Despite the absence of a VAT reduction, we have a clear strategy to reduce current losses and move forward,” she said.