Liberalising wheat, sugar markets

Sugar sector is characterised by a group of powerful sugar barons who take advantage of the protected domestic market

Leila Yasmine Khan/daud Khan April 25, 2020

Following price spikes for wheat/flour and sugar early this year, the PM set up special committees to identify those responsible. The committees have submitted their reports; and as could be expected from such a high-powered investigation team, both reports did an excellent job of following the trail of inefficiencies, malpractices and corruption that characterised the wheat and sugar markets. However, not being economists, they failed to point out the two most critical problems in both markets.

Firstly, that they are closed and protected from competition; and, secondly, there is an excessive level of government interference, backed by large amounts of public funding with little transparency and no accountability. This creates perverse incentives and will always be susceptible to exploitation by an inefficient or corrupt bureaucracy, as in the case of wheat; or by powerful political elites, as in the case of sugar.

It is essential that the government use the crisis and the FIA report to deal with these issues. Particularly, it should use this to open the markets for both commodities to international competition while reducing the government’s role. Only bold actions along these lines will ensure that corruption, inefficiency and elite capture is avoided in the future.

The wheat report points out that during 2018-19, the Ministry of National Food Security and Research made a number of estimates of production, stocks and consumption. The ministry made recommendations regarding wheat procurement and exports, some of which proved wrong. To address this, the committee calls for strengthening the ministry’s capacity to monitor and make assessments on a “scientific basis”. However, making accurate crop forecasts is extremely difficult. Production is a result of decisions by millions of farmers responding to factors including the availability of inputs such as seed, water, credit, machinery and equipment and labour — all needed at the right time — pest and disease attack, and the vagaries of the weather. No amount of “science” will overcome these basic uncertainties, and market conditions and prices will fluctuate. Government, consumer and producers must understand and accept this as they do in the case of other food and non-food items. The government must stop trying to set prices from farm gate to individual consumers by being the dominant player at all stages of the chain process. Nevertheless, given the importance of wheat, government should keep prices within a certain range. This should be done by selective and well-timed interventions in the market, rather than by becoming the dominant player.

The committee also recommends “aggressive procurement” to build up government stocks. There is no need for the government to do this. Pakistan has a well-developed private sector that buys, sells and holds stocks of essential food commodities. The private sector can certainly deal with the wheat trade if the government withdraws from day-to-day operations. Instead of aggressive procurement, the government should announce its intention to progressively reduce involvement and let the private sector manage the wheat market. Such a withdrawal would allow the government to move away from complex business logistics and stock management; reduce the need for borrowing vast sums from commercial banks to finance their purchases; and allow government staff to focus on monitoring and regulation which should be their primary activity. Its withdrawal would encourage the buildup of modern silos and storage capacity by the private sector. Currently, such investments don’t make sense for the public sector who only handle wheat, or for the private sector which mainly handles other grains such as maize and rice.

The government should also have no illusions about its ability to efficiently handle the large wheat stocks. The committee notes that the food departments are rife with malpractices. Referring to Punjab, the report says that “corruption is rampant in the lower formation of the Food Department, who in connivance with the millers are involved in pilferage of Government stocks.” Similar problems of theft exist in Sindh. The committee recommends the use of “IT-based surveillance mechanism, to prevent pilferage and damage”. Having worked with a large-scale private commercial farm in Eastern Europe, I personally know how difficult this is. Substantial thefts take place even with sophisticated control systems comprising external security guards, weigh bridges, and CCTVs. Technical solutions are no doubt useful, but effective if constantly scrutinised by top management, and upgraded. In a public system where accountability is rare and funds are scarce, theft and corruption are likely to return.

Would a wheat market dominated by the private sector be subject to manipulation? This is possible. However, the committee pointed out that even when collusion occurs, as investigations by the Competition Commission of Pakistan (CCP) suggest, there is no effective mechanisms to address this. However, the government may consider holding a strategic stock of one to two million tons to prevent this to use to intervene in the markets if prices rise, or to supply areas struck by natural disasters. However, the most effective way to an effective price ceiling, promoting competition and discouraging collusion would be allowing free imports of wheat and its products. In fact, the committee rightly raises the issue of why the food ministry did not “advise the Government for import of wheat, a policy intervention that could have effectively discouraged speculation, hoarding and profiteering that subsequently fueled wheat shortage and price hikes”. The federal government should act on this forthwith by freeing wheat imports.

Pakistan’s sugar sector is characterised by a small group of powerful “sugar barons” comprising representatives of all major political parties. These barons take advantage of the protected domestic market where they can sell their expensive sugar. Moreover, they normally produce well above domestic requirements and the surpluses are exported with a subsidy from the public purse. The cost of this has been almost Rs25 billion from 2015-18.

However, the greatest injury to the national economy comes from the fact that precious irrigation water is being provided, almost free of cost for sugarcane production. This when irrigation water is becoming increasingly scarce and should be used for water-efficient crops like cotton and rice where Pakistan has a comparative advantage, or for horticulture products where domestic consumption is growing rapidly. Moreover, untreated toxic effluents from sugar mills (kaala pani) are dumped into water bodies creating more problems.

The Sugar Committee has done a great service by naming names and providing dates and figures about who is benefiting and to what extent. It has recommended further investigations to uncover other malpractices and guide the government in setting prices for cane and sugar. This would involve detailed scrutiny of financial accounts, and assessments of key parameters such as the recovery rates of sugar from sugarcane. However, this will prove controversial as records may turn out to be very opaque and difficult to decipher. It will likely get mired in discussions between the federal and provincial governments about jurisdiction and competence. Fortunately, the committee recommended that “the Federal Government may consider the import of sugar for strategic reserve to ensure the stability of prices in the market”.

This will be simple to implement as it falls within the federal government’s competence. It would force competition into the sector and free it from the clutches of the sugar barons.

Published in The Express Tribune, April 25th, 2020.

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