Wheat in Pakistan - another U-turn?

Wheat is the basic staple food for most Pakistanis and makes up the bulk of our calorie intake. It is also the largest grown crop and takes up 40 per cent of our farming land. However, production has grown slowly, lagged behind population growth and made Pakistan increasingly dependent on foreign supplies. Around one million tons were imported in FY2023-24 and it is likely that similar, if not larger, imports will be needed this year.

For decades, the Government had been propping up an inefficient wheat production and marketing system. This was a system where billions were wasted on bank loans, and on corruption and inefficient storage. Moreover, despite subsidies on fertiliser and other inputs there was little increase in wheat yields.

In addition, Government policy set limits on both internal and external trade. This meant that private traders and processors could not stabilise wheat supplies across the country through domestic trade or through imports.

Last year, under pressure from domestic factors such as tight budgets and overflowing grain stores, as well as from international partners, the Government started on a process of reform. A first step in this process was for the Government to step back from the wheat market - it abolished the system of fixed prices and wheat procurement by Government agencies.

Unfortunately, complementary reforms were not implemented. Such reforms were necessary for a smooth transition from a public dominated system to a free market system and to ensure short-term stability of the market. These would have included greater flow of credit to the sector, and the liberalisation of wheat trade inside and outside the country. There should also have been a more gradual and phased implementation that would have allowed the private sector time to make investments to build up its supply chain, including storage facilities.

As a result of the overly rapid and poor implementation, the wheat market fluctuated wildly. Prices of wheat were around Rs2,200 per 40kg at the time of harvest causing much distress to farmers; they then shot up to Rs4,000 per 40kg through the course of the marketing year, causing much distress to consumers.

The short-term market turbulence also distracted the Government's attention from implementing measures for the long-term health of the wheat sector. Measures such as incentivising investment in larger more mechanised farms; greater use of arid lands where climate change is bringing more rainfall; and more, much more, emphasis on research and innovation.

However, instead of moving forward to strengthen and complete the reform, the Government is now moving backwards. In order to contain rising consumer prices, the Government of Punjab fixed a ceiling on sales prices of Rs3,000 per 40kg of wheat. This was a desperate and futile action. Government decrees, such as this one, have never succeeded in lowering prices which are largely determined by market demand and available supply.

To make matters worse, the Government then started raiding grain stores held by trader calling them "hoarders and speculators", and tightening restrictions on domestic trade - actions that not only proved useless, but were also counterproductive in that they punished precisely the agents that were necessary for the move to a more market driven system.

The nail in the coffin of the reform was when the Government issued a new wheat policy that reintroduced the wheat procurement system. It fixed a wheat buying price of Rs3,500 per 40kg; and in conjunction with the provinces, committed to purchase 6.2 million tons nationwide.

However, there is much that is still unclear about how the new system will work.

It is stated that Rs3,500 is indicative and is based on international market prices. Does this mean that the price could be changed if international market conditions change? And will the procurement price be changed administratively or will the restrictions on imports and exports of wheat be lifted so that domestic prices automatically align with international prices?

It is stated that licences will be issued to the private sector to buy and store wheat on behalf of the federal government. These licensed buyers will be compensated for procurement services, storage services and financial costs. Presumably, Punjab will follow the Federal Government and do the same. Does this mean that licensed agents can charge the Government whatever costs they incur, without any benchmarking or audit?

However, the Sindh Government has stated that it will not rely on the private sector and will buy directly from farmers - presumably only from farmers in Sindh. But how can this be enforced if restrictions on inter-provincial movement of wheat have now been removed?

These issues will most likely be sorted out in the usual chaotic way our food security has been handled for years. But whatever happens, it is clear that this is going to cost a lot of money - overheads, bank borrowing, losses and theft in the storage systems, and the difference between the buying price from farmers and the selling price to flour millers - money that would be far better spent on things like improving research and innovation, provision of better seeds and improved water control infrastructure.

It is also clear that the Government has once again demonstrated its lack of appetite for implementing important structural reforms. Without such reforms, and the ability to stick with these reforms despite market turbulence and despite pressure from some powerful lobbies, our country is unlikely to make the progress it is capable of.