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# **VII.B Baseline Results: The Effect of the Fertilizer Import Ban**

Table IV presents the model-generated impacts of the fertilizer import ban on outcomes measured at the national level. The primary effect of the ban is the full elimination of fertilizer imports, with a resulting increase of 6.41 USD/kg (or 2,068%) in gross fertilizer prices in Sri Lanka between the baseline and the counterfactual equilibrium. This leads to a massive decrease of 4 billion kg (or 96.5%) in fertilizer use in Sri Lankan agriculture. The ensuing decline in the government’s expenses with fertilizer subsidies allows the tax rate to be cut by 2.4 percentage points (or 27%).

Lack of fertilizer causes declines in Sri Lankan crop yields, which ultimately result in a reduction in downstream agricultural exports to the tune of 596 million USD. From a trade balance perspective, these export losses represent a 48% offset of the 1.25 billion USD reduction in fertilizer imports, indicating that the ban’s implicit goal of saving foreign exchange may have been severely limited by the large decline in crop exports. This finding would have been missed by a naive inspection of fertilizer import values that failed to account for such downstream effects. Furthermore, as will be shown in Section VII.D, this offset factor would be even higher, and possibly even higher than 100%, in the absence of Sri Lanka’s large fertilizer subsidies.<sup>71</sup> To better understand the ban’s effects on agriculture, Table V shows crop-by-crop results. Columns (2) and (3) show that, due to the ban, yields fell by 12 to 54%, with considerable heterogeneity across crops. Columns (5) and (6) show that crop exports fell across the board but also with substantial variation across crops. The most fertilizer-intensive crop, maize, saw yields fall 53.7% and exports 36.1%. Less fertilizer-intensive crops like cinnamon saw decreases of only 12.2% in yields and 7.3% in exports. Rice yields decline by 37.9%, which is comparable to the 31.6% drop observed in the 2022 data relative to the historical average (see Section IV.B). Further illustration of the ban’s effects on agriculture is provided by Figure V, which shows a strong negative correlation (-0.986) between crops’ fertilizer intensity coefficients _γk_<sup>_f_and the ban’s effects on</sup> export value. The three most fertilizer-intensive crops (rice, potatoes, and maize) suffer the largest percentage losses in exports.

A crucial benefit of using a quantitative GE model is the ability to provide estimates of the ban’s welfare effects. Column (1) of Table VI displays cross-district average welfare effects for mobile workers, estate workers, farmers, and a (weighted) average of these three agent types.<sup>72</sup> The overall average welfare loss is equivalent to a 7.33% decrease in income.<sup>73</sup> However, there

> 71The intuition for this finding is that subsidies drive farmers to above-optimal fertilizer use. In the absence of subsidies, the cost and marginal revenue product of fertilizer are more closely aligned, so a marginal decrease in fertilizer use leads to reductions of roughly similar magnitude in fertilizer imports and agricultural exports.

> 72Appendix Table A8 displays the full set of welfare changes for all agent types and districts.

> 73Our average welfare loss metric puts zero weight on middlemen (since we assume their population has measure zero), as explained in Appendix F. However, our main results are robust to relaxing this assumption. For example, assuming 1 middleman per Sri Lankan district, the overall average welfare loss due to the ban is 7.32%. Assuming instead 10 middlemen per district, the corresponding loss is 7.18%. Using our preferred estimate of the middleman