Economic Advisory Group (EAG) in its Vision document has strongly argued in favour of revisiting the support price regimes and the relevant laws that hinder competition, including in the agriculture and commodities sector.
A general principle we espouse is that economic activity should be contestable, i.e. individuals and firms should face the pressure of unrestricted competition. Deviations from this principle should be thoroughly scrutinized and vigorously debated.
Historically, there have been significant deviations from the principle of contestability. For example, the Punjab Sugar Factories Control Act 1950 states,“… cane grown in a reserved area shall not be purchased by a purchasing agent or by any person other than the occupier of the factory …” This adversely affects the bargaining position of the farmer in relation to factory owners.
Likewise, the licensing regime governing the setting up of sugar factories not only prevents existing factories from relocating to where production can be organised more efficiently, but also prevents new entrants, thus limiting competition. Excessive government intervention in restricting exports and imports of the commodity has also frequently given rise to surpluses and shortages in the domestic market, thus keeping government functionaries busy with managing one crisis after another.
In light of this, the Sugar Sector Reforms Committee (SSRC) setup by the federal government has proposed a set of reforms that go a long way in addressing the above challenges. Some of the key proposals include abolition of restricted areas, tax free imports of sugar, a gradual move away from the minimum support price regime, bringing transparency to forward contracts by allowing for such under the Pakistan Mercantile Exchange, and implementing adequate pricing of water to incentivise the adoption of water-saving farming practices.
EAG supports these measures and encourages policymakers both at the federal and provincial level to take necessary steps towards their implementation. EAG believes that these measures will improve farmers’ bargaining positions in relation to other stakeholders by allowing them to sell their produce to whoever offers the higher price. These reforms will further allow for new factories to be established, while facilitating existing ones to relocate to where it is more productive to operate. In addition to improving productivity at the level of sugar factories, the increase in competition between factories will also benefit both the farmer and the consumer.
Allowing for forward contracts while ensuring effective supervision will help reduce seasonal volatility in sugar prices. Likewise, removing restrictions on imports will expose the industry to international competition and incentivize the adoption of more productive technology. Alternately, the new regime will allow inefficient players in the sugar industry to exit the market, thus reallocating economic resources to more productive activities. This latter point is the bedrock of EAG’s vision document.
While supporting the reforms agenda in principal, EAG also recommends that the SSRC reconsiders some of the other proposals put forward in the report:
Overall, EAG largely supports the reforms agenda put forward by the SSRC. This is in line with what the EAG has been proposing on different forums. However, EAG also points to certain proposals and reservations that must be revisited in line with the recommendations above. This will ensure that the overall effectiveness of the reforms agenda is not compromised.
The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.
For media inquiries, contact at info@eag.org.pk or visit www.eag.org.pk.
