Industry efficiencies: Agri policy changes, a big reason for declining agriculture productivity
World Bank report cites price distortions and uncertain policies as main reasons for decline.
The resulting trade regime has thus become highly discretionary and uncertain, leading to input-price distortions and highly variable output prices: PHOTO: FILE
LAHORE:
Policy Changes in agriculture since 2006 have steadily eroded the effects of trade liberalisation that Pakistan implemented over the 1996-2003 period. International and domestic trade is critical for improving agriculture productivity, but the local industry is facing challenges in the shape of unpredictable and discretionary instruments like Statutory Regulatory Order (SRO), tariffs and export taxes. This was said in a recent World Bank report on the agricultural industry in Pakistan.
Pakistan’s gross domestic product (GDP) has grown over the past decade at an average of 4.9% a year, growth in agriculture has been lower at 3.3% a year. The sector, which accounts for more than 40% of employment and more than 11% of total direct exports, will remain a socioeconomically and politically important sector of Pakistan even as its share in the overall economy continues to fall, having come down from its peak at 46% in 1960 to 21% in 2010, the report said.
Before 2006, the then government simplified the tariff structure and abolished the state’s trading monopoly for agriculture products. But it introduced exceptions in 2006 and reversed several of the more important liberalising reforms in agriculture, particularly for wheat, sugar and fertiliser.
The new regulatory duties and SROs have been used to provide exemptions to normal tariffs in some cases and to raise tariffs in others. The resulting trade regime has thus become highly discretionary and uncertain, leading to input-price distortions and highly variable output prices. The expanded ad-hoc use of SROs also has fiscal implications, as preferential provisions provide the beneficiaries of the orders with special tax and duty concessions and exemptions, leading to a loss of potential tax revenue, the report said.
In most years, major crops like wheat, rice, sugar and cotton are implicitly taxed by the various price distortions introduced by policies. The policy-induced implicit tax on crop production serves to depress production, despite implicit net input subsidies. For example in case of sugar, the surge in the world price of refined sugar raised the parity price, but the increase in the sales tax applied to sugar offset higher border prices. Sugar’s parity prices are roughly twice the observed farm-gate prices, with this price wedge discouraging production, the report said.
The benefits of some domestic trade policies have also been unclear, as illustrated by the public procurement of wheat. Governments procurement of wheat is extensive, involving federal, provincial and district agencies. The government sets procurement prices with targets which all departments are responsible for meeting. Provincial governments and Pakistan Agricultural Storage and Services Corporation procure about 20% of total wheat.
Federal and provincial procurement is absorbing the price transmission that would have otherwise prevailed in the markets, contributing to price stabilisation effect. This perhaps is one reason for the recent rise in wheat stocks, which has led to exports at subsidised prices in years of high wheat production.
The World Bank report recommends the removal of distortions in domestic markets of commodities like wheat. The simplest set of reforms would be to reduce the wheat procurement volume while designing and implementing complementary social safety net programs. The bank also recommends trade regime to be simplified in order to improve international trade in agriculture, which will require removing unpredictable and discretionary instruments like SROs, shifting to a lower set of uniform tariffs and simplifying the trade regime by removing alternative trade policy instruments like export taxes. These three measures would reduce uncertainty, volatility, and the policy bias against agricultural products like rice and sugar.
Published in The Express Tribune, October 20th, 2013.
Policy Changes in agriculture since 2006 have steadily eroded the effects of trade liberalisation that Pakistan implemented over the 1996-2003 period. International and domestic trade is critical for improving agriculture productivity, but the local industry is facing challenges in the shape of unpredictable and discretionary instruments like Statutory Regulatory Order (SRO), tariffs and export taxes. This was said in a recent World Bank report on the agricultural industry in Pakistan.
Pakistan’s gross domestic product (GDP) has grown over the past decade at an average of 4.9% a year, growth in agriculture has been lower at 3.3% a year. The sector, which accounts for more than 40% of employment and more than 11% of total direct exports, will remain a socioeconomically and politically important sector of Pakistan even as its share in the overall economy continues to fall, having come down from its peak at 46% in 1960 to 21% in 2010, the report said.
Before 2006, the then government simplified the tariff structure and abolished the state’s trading monopoly for agriculture products. But it introduced exceptions in 2006 and reversed several of the more important liberalising reforms in agriculture, particularly for wheat, sugar and fertiliser.
The new regulatory duties and SROs have been used to provide exemptions to normal tariffs in some cases and to raise tariffs in others. The resulting trade regime has thus become highly discretionary and uncertain, leading to input-price distortions and highly variable output prices. The expanded ad-hoc use of SROs also has fiscal implications, as preferential provisions provide the beneficiaries of the orders with special tax and duty concessions and exemptions, leading to a loss of potential tax revenue, the report said.
In most years, major crops like wheat, rice, sugar and cotton are implicitly taxed by the various price distortions introduced by policies. The policy-induced implicit tax on crop production serves to depress production, despite implicit net input subsidies. For example in case of sugar, the surge in the world price of refined sugar raised the parity price, but the increase in the sales tax applied to sugar offset higher border prices. Sugar’s parity prices are roughly twice the observed farm-gate prices, with this price wedge discouraging production, the report said.
The benefits of some domestic trade policies have also been unclear, as illustrated by the public procurement of wheat. Governments procurement of wheat is extensive, involving federal, provincial and district agencies. The government sets procurement prices with targets which all departments are responsible for meeting. Provincial governments and Pakistan Agricultural Storage and Services Corporation procure about 20% of total wheat.
Federal and provincial procurement is absorbing the price transmission that would have otherwise prevailed in the markets, contributing to price stabilisation effect. This perhaps is one reason for the recent rise in wheat stocks, which has led to exports at subsidised prices in years of high wheat production.
The World Bank report recommends the removal of distortions in domestic markets of commodities like wheat. The simplest set of reforms would be to reduce the wheat procurement volume while designing and implementing complementary social safety net programs. The bank also recommends trade regime to be simplified in order to improve international trade in agriculture, which will require removing unpredictable and discretionary instruments like SROs, shifting to a lower set of uniform tariffs and simplifying the trade regime by removing alternative trade policy instruments like export taxes. These three measures would reduce uncertainty, volatility, and the policy bias against agricultural products like rice and sugar.
Published in The Express Tribune, October 20th, 2013.