Protectionists dominate: Govt set to give Rs15b subsidy for wheat procurement

Relations with IMF may come under further strain.

ISLAMABAD:

In what could be described as a victory for protectionists over free market advocates, the government is all set to quietly give Rs15 billion subsidy for wheat procurement, an approach likely to further strain relations with the International Monetary Fund (IMF) during talks in May.

Finance ministry sources told The Express Tribune that continuous wheat procurement, apparently for the benefit of landlords, would cost the government Rs15 billion this year on account of loan mark-up, storage cost and depletion of stocks. The federal government has a wheat stock of 2.5 million tons and under an agreement it is bound to pay charges of Rs5,000 per ton to the Punjab government.

The Economic Coordination Committee (ECC) of the cabinet has allowed purchase of 6.5 million tons of wheat from farmers, of which the federal government’s share is 1.3 million tons.

Sources said this would add Rs6.5 billion to the subsidy account in the new budget for 2011-12. After adding this year’s Rs15 billion subsidies, the government is likely to give a total of Rs21.5 billion.

Total subsidy from June 2010 through June 2012 may come to around Rs49 billion. In 2009-10, the federal government paid a subsidy of Rs12 billion for wheat procurement.

The provision of subsidy underscores contradictions in the federal government’s approach to policy-making. The government has again assured IMF that in next year’s budget it will completely phase out electricity subsidies except for lifeline consumers.

IMF to take up commodity financing issue

IMF has also raised the issue of another circular debt in the making in commodity operations and advised Islamabad to avoid intervention in commodity markets or at least reduce its reserves. Sources said the IMF review mission, due in May, would take up the issue of commodity financing, which was expected to touch Rs434 billion by the end of wheat procurement operations. The amount is equivalent to 2.5 per cent of this year’s national income.

The IMF’s biggest worry was the negative implications of commodity financing for the private sector, as the government had already borrowed one-third of the money available in the market to finance its budget, sources said. Commercial banks happily lend to the government at an average interest rate of 15 per cent due to minimal risks involved.

On April 9, total commodity debt stock stood at Rs348 billion, but the government needs another Rs156 billion, which will jack it up to Rs434 billion.

When the protectionists overcame the free market advocates in ECC, they gave a commitment that the federal government will slash its wheat reserves to 500,000 tons from 2.5 million tons for easing the impact on the budget. However, despite the Punjab government’s repeated reminders, the federal government is not ready to sell two million tons of stocks which will cost the taxpayers Rs10 billion on account of storage charges and mark-up.

Free market versus mixed economy

Former Finance Minister Dr Salman Shah says the agriculture sector should be deregulated as it has been proved in the world that protectionist approaches cannot sustain the economies. He believes the need for government intervention arises only when markets fail to perform and in case of agriculture the chances of collapse are very remote due to involvement of vibrant players.

Former State Bank of Pakistan governor Dr Ishrat Hussain says the economy cannot be divided into protectionism and free market, as both the market and the state have to play their roles simultaneously. However, a strong regulator is a must for a smooth functioning of the economy. He says the government should not procure wheat but only fix the support price for ensuring a reasonable return to the farmers.



Published in The Express Tribune, April 24^th, 2011.