Neglect of agriculture sector to stall recovery

Forex reserves will come under pressure due to imports; exporters will face headwinds

LAHORE:

There is optimism that the economy is in the phase of recovery and the situation would further improve in coming months.

In order to exhibit this positivity, the government is relying on trade statistics. The usual mantra is that imports were under control and exports kept on increasing in the last four months which happened after eight years.

In addition, textile exporters are brimming with orders and even labour shortage has been witnessed in performing certain tasks. The economy has successfully surpassed the worse phase and the trade situation will bring precious foreign exchange which, in turn, will strengthen the rupee.

Such statements are given based on statistics and we know that the data contains noise. If we give an assessment based on these statistics, we will ignore the underlying economic forces. Those underlying forces help us in determining the path of economy.

By looking at the trade statistics from July to December 2020, a key point that emerges is that the agriculture sector is under stress. For instance, the government imported a hefty volume of wheat in the current financial year, while it exported a reasonable volume in the last financial year.

In addition, it has already imported sugar in a large quantity, while the import quantity was negligible in FY 2019-20. In the previous year, we exported the commodity by granting subsidy and the next year, we have already imported the same one.

Nothing new about this practice since it has happened in the past as well on a number of occasions.

If anybody comes up with an economic description, he/she will say the country needs dollars desperately, therefore it exported the surplus quantity by granting timely subsidy.

Furthermore, it is not easy to keep these commodities since they entail storage and warehousing cost.

On the contrary, a political economist will take a critical view of this kind of situation. He would argue these steps have been taken to benefit the business elite, while masses will pay the cost.

Therefore, the benefits are concentrated in a few hands, while costs are dispersed across the masses. Hence, words like sugar barons and wheat mafia will gain currency in the print and electronic media.

Whatsoever the explanation of this situation, we cannot play down the significance of these two commodities as they are consumed by the masses. These commodities play a major role in increasing food inflation in the country.

In addition, these commodities will put pressure on the wages of labourers which will further add to the cost of production for the labour-intensive manufacturing operations.

Turning to cotton imports, which have gone up in the current financial year since domestic production of 15 million bales could not be achieved. In order to address the acute shortage of cotton, manufacturers in the supply chain have resorted to imports.

Pakistan’s textile exports are around 60% of the total merchandise shipments. Keeping in view the pent-up export orders, the exporters will face supply chain issues in the absence of locally produced cotton.

Export data reveals that rice exports came down by 10% in quantitative terms in July-December 2020.

This reduction also indicates that there is something wrong with the agricultural situation.

Briefly, the economy is in a recovery phase. The neglect of the agriculture sector by the successive governments will create headwinds for the exporters.

Although food inflation has come down to some extent due to imports, the situation will put pressure on the precious foreign exchange and even stall the recovery.

In the absence of structural reforms in the agriculture sector, the firefighting will keep on going.

The writer is the Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)

 

 

Published in The Express Tribune, February 8^th, 2021.

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