Wheat policy costs Punjab dearly

Report warns of circular debt, calls for risk mitigation

LAHORE:

Punjab's cumulative outstanding debt resulting from the wheat commodity operation is likely to rise to Rs640 billion by the end of the ongoing month.

The provincial government suffered a Rs73 billion loss in the wheat procurement and storage operation during the financial year 2019-20 because of difference between the procurement and sale price under its policy.

A fiscal risk statement highlights that the cumulative financial loss to the province between 2005-06 and 2019-20 amounts to Rs377 billion, growing at a compound annual growth rate of 23 per cent.

It shows that the cumulative outstanding debt for the commodity operation as of June 30 last year was Rs548 billion, which is estimated to rise to Rs640 billion by the end of the ongoing month.

Mark-up payable on the debt is more than Rs40 billion.

The report warns that the debt is gradually increasing, which shall be unsustainable at higher levels. The risk is exacerbated by sizable subsidies given by the government on wheat flour.

Although the federal government’s sovereign guarantee is backing the commodity operations, the report states, it is acknowledged as essentially a legal liability for Punjab. The intensifying debate over the subject demands a responsible and consistent policy on commodity operations, including continuity of purchase or phasing out of it, co-financing by the federal government and federating units, reduction of the margin of subsidy built into the wheat release price and consistency of release and purchase prices across Pakistan.

It warns that the looming risk of withdrawal of federal guarantee, persistent demand of the federal government for a comprehensive debt retirement plan, absence of any strategy to tackle the increasing debt, and the possibility of at-source deductions from the National Finance Commission (NFC) shares, non-participation of federating units in the commodity operations of Punjab and increased cost of borrowing given the ongoing macroeconomic situation expose the provincial government to a considerably high risk in the medium to long term.

To avoid a circular debt-like situation, for the first time the provincial government is considering reviewing the wheat procurement and release operations. Earlier, all decisions related to commodity procurement policy were solely being made on political grounds.

Now, the report indicates, that the Punjab Finance Department is endeavouring to formulate a mitigation strategy to address the risks.

At the minimum, the finance department is planning to provide financing support to wheat operations through the provincial budget. In addition, provincial food and finance departments need to come up with a comprehensive commodity debt management plan to continue the operations in a sustainable manner.

It states that the food department, overseeing the commodity operations, also needs to be mindful of the fact that international wheat prices have increased significantly, owing to various economic and geopolitical factors. This poses the potential for pilferage and the illegal movement of wheat.

Such an eventuality, if unchecked, has a high risk of impacting the financial requirements of commodity operations emanating due to early and additional releases or any import requirements later in the year.

Consequently, the commodity operations in their current form carry a medium-to-high risk tag which needs to be mitigated on a priority basis, the report suggests.

Agriculture and economic experts argue that the government should seriously consider subsidising agriculture inputs instead of incurring huge financial loss annually.

Subsidising the inputs, including seed, fertiliser, machinery, electricity and fuel tariffs, will not only help farmers but also help in curtailing food inflations in urban centres besides boosting agriculture production and the rural economy.

However, it would be difficult for the leaders to showcase such an initiative before the people like road projects.

Published in The Express Tribune, June 17^th, 2022.