Since 2004, Sri Lanka has pursued inward looking policies that have encouraged import substitution, especially with respect to agricultural commodities. This report provides empirical evidence to inform the policy dialogue over the impact of current trade and price policies on the incentive framework for agriculture in Sri Lanka. This analysis provides a quantitative assessments of: (1) the level of support to farmers producing import-competing products
(2) the degree to which final consumers are indirectly taxed by those policies
(3) the extent to which agricultural exports are taxed
(4) the contribution of trade policy to government revenue through tariffs on imports and taxes on exports
(5) an evaluation of the cost-effectiveness of the current fertilizer subsidy scheme
and (6) a better understanding of the web of income transfers between producers, consumers, and government accounts. The report is structured as follows: section one gives introduction. Section two gives overview of the current (2009-11) import and export policy framework and a brief analysis of government revenues and expenditures for agriculture. Section three reviews the data sources and methods used in calculating the degree of protection, and summary statistics on the degree of protection for 10 agricultural commodities. Section four looks closely at the cost-effectiveness of fertilizer subsidies, which represent a large share of the government agriculture budget. Section five focuses on how agricultural trade policies influence income distribution, particularly among different groups of rice producers. The last section recapitulates the main findings and highlights their implications, with an emphasis on the often implicit and unintended income transfers among producers, consumers, and the government.