A road map out of Pakistan’s sugar conundrum

ISLAMABAD: A recent report by the inquiry commission calling for the forensic audit of sugar mills to investigate the increase in prices of sugar alleges widespread practice of accounting, tax and regulatory frauds by the mills.

While I leave this to be judged as per the rule of law, I take this opportunity to highlight structural issues in the sugar sector. The sugar value chain has four main stakeholders – growers, industry, consumers and the government. The sector faces a major conundrum as farmers’ security, consumers’ welfare and industrial survival apply competing pressures on the policy.

The protection of farmers, for example, comes at the cost of survival of the industry and protection of the industry itself comes at the cost of consumer. This article proposes a way out of this conundrum.

Issues

First, the sugar market is distorted, which is manifested in under-pricing of water as input, support price offered to the growers, export subsidy and export quotas for mills, import barriers in the form of high customs duty, high level of sales tax and ban on entry of new sugar mills.

Second, the legal framework is archaic comprising the Sugarcane Act 1934, Sugar Product Control Order 1948, Sugar Factories Control Act 1950 and Control on Industries Establishment & Enlargement Ordinance 1963.

As a result, this becomes a highly controlled sector in which everything including licence, procurement of raw material, start and end of crushing season, entry to market and import or export is controlled by the government.

Third, the government earns more than the private sector in sugar sales. According to Pakistan Sugar Mills Association (PSMA), the government charges Rs15.20 per kg in the form of taxes at the current retail price of Rs83.59 whereas the mills, on average, earn Rs6 per kg.

Fourth, the price of sugarcane is determined by the weight and quantity and is not driven by the quality indicated through sucrose percentage. Furthermore, the entire value chain is driven by cost consideration and not the value through market.

Solutions

Broadly speaking, there seems to be two sets of recommendations to address the issues highlighted earlier.

One set may be referred to as “more government”, which includes strict enforcement of support price, timely payment to growers, closer inspection of sugar mills’ accounts, better quality of data, efficient use of Trading Corporation of Pakistan, more efficient role of institutions like the Sugar Research Board and agriculture price institution, and provincial cane commissioners.

This direction needs more capacity in the government, de-politicisation of the bureaucratic machinery and efficiency in decision-making at the top. It is understood that this approach will be supported by the government as well as large sections of growers’ lobbies. The sugar inquiry report also leans heavily towards this solution. However, the limitations to this approach are obvious.

Another set of recommendations may be referred to as “more market”. This solution includes an end to support price, rationalisation of water pricing, end to export quotas and export subsidy, open trade and open competition with no barriers to entry or exit from the market. This solution is recommended by the Competition Commission of Pakistan (CCP), the industry and many analysts.

However, this is challenged by the proponents of food security. This argument implies that once the government removes the floor price, the growers will stop or reduce sugarcane plantation, leading to shortages. That may have political ramifications including an increase in farm unemployment.

However, if this is associated with open trade and a buffer stock, the food security objective will not have to be compromised. The effect on farm unemployment needs closer examination due to availability of substitute crops.

Way forward

I support “more market” in this case. In the new road map, the government needs to minimise its footprint. It should eventually withdraw from any commercial role including support price, export subsidy/quota and other direct business operations as well as measures through extensive regulations and taxes in the sugar sector.

The role of the Economic Coordination Committee in granting permissions for import or export of sugar should be discontinued. All archaic laws (the Sugarcane Act 1934, Sugar Product Control Order 1948, Sugar Factories Control Act 1950 and Control on Industries Establishment & Enlargement Ordinance 1963) along with concomitant institutions need to be phased out and abolished.

The government may invest in strategic sugar reserves, which can be further complemented by more agile trade operations that should be liberalised instead of limiting them to the Trading Corporation of Pakistan only. The government can finance such operations, if needed, instead of directly managing it.

Mills should be at liberty to export their surplus stock. Similarly, private parties should be allowed to import sugar without seeking any prior approval. Necessary measures to monitor hoarding of stock can be taken to ensure the flow of the commodity without controlling prices.

In the long run, price volatility is an important signal for market participants and should not be suppressed. We need open trade, competition and price rationalisation.

The writer is the founder of independent think tank PRIME

COVID-19: Food market constraints threaten social fabric

Ali Salman / BEENISH JAVED

No rules enacted to halt cartelisation, hoarding of essential commodities

ISLAMABAD: Pakistan has recently experienced flour, wheat and sugar crisis which is a result of bad policy, poor regulation and low private-sector capacity.

The Covid-19 pandemic has badly exposed constraints in Pakistan’s food commodity markets and supply chains. It threatens the very nature of social and political fabric of Pakistan.

Despite government’s assurance of consistent food and medicine supplies, there is shortage of essential commodities such as wheat, rice, sugar and medicines due to panic buying as well as supply-side constraints.

The response of the government also remains sluggish. In Sindh, for instance, factories have not received wheat from the government for the last 8 to 10 days, thus resulting in flour crisis.

At present, no rules have been enacted to halt cartelisation and hoarding of the said commodities.

In these rather straightforward economic transactions, bureaucrats should not be playing any role once a policy is defined. They cannot make quick decisions, especially when decision-making is likely to face penalties due to excessive outreach of accountability agencies in the country.

Tariff and non-tariff barriers to medical equipment and medicines are undermining efforts to treat the affectees and contain the spread of the virus. It should be recalled Pakistan has implemented an effective price control system for medicines in the past 20 years. The policy was relaxed a couple of years ago only to be resisted or reversed on the pressure of different quarters. Already, the worst losers of price control of medicines are the consumers.

The knee-jerk reaction of the government facing dual crisis of both constrained supply and excessive demand is to place price control and opt for rationing of supply.

It is certain to cause more harm than good. Very soon, we will see stocks vanish. We have seen it many times. It is high time for the government to reconsider its economic policies for mitigating adverse economic effects of the pandemic. In this regard, there are a few policy suggestions.

First, the government should resist the temptation of controlling prices as this provides wrong signals to both producers and consumers. When prices are controlled, consumers go for panic buying and producers stop investing in supply.

The government should still regulate, focus on supply and take measures against cartelisation and hoarding, especially when it comes to essential commodities such as food and medicines.

Second, as we have advocated in the past, open trade helps in a free flow of medicines and medical equipment, therefore, the government should withdraw tariff and non-tariff barriers at least till the time the crisis is over.

To provide a small example, if Pakistan was a signatory to the Information Technology Agreement (ITA), as we have recommended many a time, duty-free import of medical machinery would be possible today. However, it is noted that the government has relaxed import conditions given the crisis.

Third, the government should re-allocate its resources and should induce commercial banks to re-allocate capital to industries with plans to boost production of critical medical equipment such as testing kits, ventilators and hospital beds on a war footing.

Fourth, the government should announce a new regulation to ensure that the workers on daily wages, employed by the industry, continue to be paid during the closure of factories.

It is something that the government has already declared and it is hoped that the employers implement this, though it will not be sustainable without bringing any fiscal stimulus.

Lastly, the government should re-prioritise Zakat spending and should also encourage private foundations to create a pool of funds to provide cash to informal workers in industrial, agriculture and services sectors during the crisis.

The crisis like this provides a short window of policy reforms. In Indonesia, where strict controls on imports have been placed for the last many decades, the government has been forced to relax these controls, albeit temporarily.

One hopes that Pakistan’s government also learns some lessons. Whereas more investment is certainly needed in the healthcare system, we need to see lesser role of the government in food commodity markets.

For a population of 220 million, with a huge number living in poverty, a lack of access to food items can have the potential of threatening the political fabric of society, risking anarchy.

The writers are affiliated with PRIME, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, April 6^th, 2020.