TIME TO CONTROL EDIBLE OIL IMPORTS
Stricter measures needed to discourage price increase, hoarding trendBy AMANULLAH BASHAR
Nov 23 - 29, 1998
Pakistan has already spent Rs13 billion on the import of Edible Oil in four months while eight months of the current fiscal year are still to go. The trend indicates that an additional amount of Rs.4.36 billion has been paid on the import of edible oils, so far, against the import bill worth Rs8 billion during the similar period in1997-98.
During July-October 1998 some 88,492 tonnes of soyabean worth Rs2.774 billion($60milion)and 344,182 tonnes of palm oil worth Rs10.522 billion($224million) was imported which estimated to over Rs 13 billion during that period. Last year imports during the same period were estimated as 47,441 tonnes of soyabean oil at a cost of Rs1.216 billion($30 million) and 302,148 tonnes of palm oil worth Rs7.72 billion($188 million) while the total import bill was estimated at $760 million during 1997-98.
In terms of quantity, the import of edible oil is up by 83,085 tonnes during first four months of the current fiscal. The increase in imports of edible oil in the first quarter of the year was not on account of increase in consumption. It is essentially because of speculations about devaluation as well as expected increase in demand in the coming months which is purely the business tactics.
According to market sources, the traders were expecting devaluation of rupee in the month of October in view of the trend during the past two years when the government devalued rupee in the month of October both in 1996 and 1997. Another reason of excessive imports is stated to be the fast approaching month of Ramazan when oil consumption is essentially increased manifold throughout the country.
The State Bank has recently delisted edible oil from the essential items and imposed 30 per cent cash margin restrictions on the import of edible oils.
Commenting on the restriction of30 per cent margin imposed by the State Bank of Pakistan, the vice chairman, Kiryana Merchant Association, Jafar Qudia said that under this scheme 30 per cent amount of the import value is needed to be deposited before opening of the letter of credit. Although the motive behind the scheme is to curb unnecessary imports of edible oils. However, according to Jafar, neither government nor the consumers are benefited out of the scheme, the only beneficiaries are the commercial banks which are lending at high markup rates. The importers who are short of liquidity have to arrange 30 per cent cash margin through commercial banks at the persistent rates. Jafar, who is also a prominent edible oil importer, said that due to these restrictions the imports are, however, likely to drop as compared to last year's imports around 1.8 million tonnes. He was of the view that SBP could develop a mechanism for availability of finances at comparatively cheaper rate of 12 per cent in the region to facilitate imports of edible oil which ultimately help stablising the prices in the local market.
The action has naturally hit the interests of ghee manufacturers and also of the importers who despite having imported the oil in excess are paving way for increase in prices during the month of Ramazan by expressing fears of shortage due to30 per cent cash margin restrictions, which they said, have started liquidity problems.
Reacting over the imposition of 30 per cent cash margin, the Pakistan Vanaspati Manufacturers Association has demanded of the government to withdraw the requirement of 30 per cent L/C margin so that the smooth operation of the manufacturing ghee/cooking oil could be safeguarded.
The Association is of the view that lesser imports of edible oil due to SBP's 30 per cent cash margin is feared to add to the shortage of vegetable ghee and cooking oil and price hike in the existing situation, especially during the holy month of Ramazan.
The Association further said that the condition of 30 per cent L/C margin on payment in cash has badly affected the liquidity position of the importing oil units. Serious financial problems would surface if the government did not withdraw 30 per cent L/C margin condition, the Association said.
The government, on its part realising the fact that the edible oil is an essential food item, has kept the duty structure specific over the years on edible oils including soyabean oil and palm oil to avoid impact of fluctuations in international prices.
During the budget 1998-99, an important change in policy was made by levying Sales Tax on import of edible oils. In order to avoid any big impact on prices in the local market, the rates of customs duty, however, were adjusted proportionately so that duty and taxes should remain at pre-budget level. The prices of edible oil in the local market, however kept on moving upward due to increase in prices in the international market as well as impact of the devaluation of the rupee. Since the government is now rationalising the duty structure under the reform packages, all imports have to be shifted from specific rates to ad volarem rates. The shift in the policy is likely to harmonise the system of collection of duty as well as sales tax on edible oils and also help this sector responsible to price fluctuations in the international market. Due to change in duty structure from specific to ad volarem the revenue gain in customs duty and sales tax is estimated at Rs540 million this year.
It may be mentioned here that Pakistan is among the major edible oil importing countries. In 1997-98, the country paid $760 million on the import of edible oil, which includes $660 million for import of palm oil and $100 million on soyabean oil. Currently there is a general tendency of lesser imports during the first half of the fiscal year.
It is, however, unfortunate that despite having rich lands, Pakistan which essentially has an identity of an agriculture-based economy has to rely on imports for edible oil, wheat and milk. During the current fiscal year the country will have to import at least two million tonnes of wheat to meet the shortfall in local production of wheat which is estimated at 19 million tonnes against the total requirement of 22 million tonnes.
The edible oil sector, instead of reducing its imports, is continued to increase the import bill which is attributed to enhanced consumption and focus on the loopholes of smuggling to adjacent Afghanistan and Iran, said a market player.
Although, the government has arranged finances from Islamic Development Bank for payments of edible oil imports, yet this sector is continued to pose problems for the government in meeting its target to bring the trade deficit at zero level during the current financial year.
Pakistan's total requirement of edible oil in 1977 was around 0.3 million tonnes, which has jumped to a level of around 2 million tonnes out of which 1.8 million tonnes is met through imports. The increase in consumption has subsequently increased the import bill from Rs810 million to over Rs31 billion over the years.
The major imports include palm oil, soyabean oil from Malaysia, Indonesia, Singapore and UK.
Various measures have been taken by the successive governments to reduce import bill of edible oil through development of indigenous oilseed farms including soyabeans, canola, palm oil plants currently being cultivated in an area over 3,115,000 acres of land and more land is being allocated for the purpose throughout the country.
The government has also allowed import of palm oil seedlings free of duty and taxes to plant at least 1.1 million plants around the coastal belt in Sindh and Balochistan.
It may be mentioned that till recently the import of oil palm seedlings was subject to duties at the rate of 15 per cent ad-volarem. In order to encourage the growers, the government has decided to waive the customs duty and taxes. The programme of importing palm oil seedlings is now in operation and the first consignment of 15,700 seedlings has arrived at Karachi from Malaysia on Wednesday last week.
The government of Malaysia, it may be recalled, had agreed to provide some 0.175 million palm oil seedlings and the consultancy services on government to government basis. Another consignment of 3,500 palm oil seedlings is also expected to arrive shortly from Sri Lanka.
In order to overcome the problem, the government established Pakistan Oilseed Development Board (PODB) in 1994-95 with an assignment to enhance the local production of edible oil. The overheads of the Board are met through funds collected from the levy of a cess at a rate of Rs 0.05 per kg on imports of edible oil.
Since 1994-95 the local production of edible oil has been able to reduce the import bill by at least Rs 1 billion but it is a scratch of the huge import bill which has to be paid by the country.
The scheme of importing palm oil seedlings aims at developing private sector farms where plantation of 1.1 million plants at an area of 6,665 acres is expected at a cost of Rs90 million.
The Malaysian government, under an agreement, has allowed selling of around two lakh seedlings while Indonesia and Sri Lanka may also provide the seedlings to Pakistan. These seedlings would be nurtured at the nurseries before handing over to the private sector farms for plantation. The scheme also envisages to develop a green belt of Palm trees around the coastal areas of Sindh and Balochistan. However, experts in the edible oil sector are not optimistic about the future of these trees as according to them climate in Pakistan does not suits to the growth of palm oil trees.
The country, however, has the potential to find import substitutes of the edible oil, but the efforts made in this direction so far, have produced rather poor results.
According to official figures, agriculture sector is producing different types of oil seeds including rapeseed, mustard, soyabean, canola and sunflowers to produce edible oil locally. The production of edible oil through indigenous resources had taken a good start with a production level of 574,000 tonnes in 1991-92. The production level continued to decline since then due to unknown reasons. The production of edible oil kept on declining to 482,000 tonnes in 1992-93; 339,000 tonnes in 1993-94. The situation improved to some extent following the establishment of Pakistan Oilseed Development Board and production of edible oil increased to 464,000 tonnes in 1994-95; 528,000 tonnes in 1995-96 and 538,000 in 1996-97.
Currently around 50 local solvent extraction plants are in operation all over the country. In terms of value, these extraction plants are producing local edible oil worth Rs 17 billion, besides producing feeds, for poultry and dairy sectors.
According to sector-wise break-up of oilseed cultivation in Pakistan, the cultivation of sunflower increased from 239,000 acres in 1995-96 to 315,000 acres in 1996-97. The area under cultivation for canola also increased from 100,000 acres to 260,000 acres during the same period. The production of edible oil from sunflower has also shown signs of improvement from 44,000 tonnes to 83,000 tonnes and of canola from 16,000 tonnes to 49,000 tonnes during the said period. Presently the area, earmarked for soyabean cultivation, is around 9,000 acres while rapeseed and mustard are being grown in an area of five lakh acres. Rapeseed and mustard producing around 69,000 tonnes of edible oil while contribution by soyabean is 9,000 tonnes. The size of imports is around 1.8 million tonnes while the total production of indigenised edible oil is estimated at around 538,000 tonnes which could only increase with dedicated efforts both by the government quarters and essentially by the growers.
Around 50 solvent extraction plants are operating in Pakistan, which, besides producing 538,000 tonnes of edible oil, are supplying refuse of the extracted sunflower, rapeseed and mustard for poultry meal. However, there is a controversy between the All Pakistan Solvent Extractors Association (APSEA) and All Pakistan Poultry Association (APPA) over the import of soyameal from India.
According to Afsar Qadri, Chairman APPA, soyabean extraction which is richly nutritious for poultry meals, having 45 per cent protein as against 5 per cent in sunflower and cotton seed. Since soya is cheaper in term of value and more nutritious, poultry farmers prefer it to import from India.
The APSEA is, however, making hue and cry over the import of soya from India and has threatened to close down their units all over the country. Currently the matter is lying with Economic Coordination Committee (ECC) of the Cabinet for a final decision, Qadri said.
The APSEA, however, feels that the import of soyameal from India is a serious threat to the existence of the solvent plants in Pakistan therefore, it has lodged a strong protest with the government. APSEA has demanded a complete ban on import of soya meal from India and imposition of anti-dumping duty against, what it called, flooding of the Indian meal, otherwise they would go on indefinite strike till the issue was resolved by the government.
According to Afsar Qadri, Pakistan has already imported 36,000 tonnes of soyabean under PL-480 programme from USA.
On the other hand the solvent extractors say that huge quantities of sub-standard meal was being imported from India against dumping prices of Rs7,500 per tonne against Rs18,000 per tonne imported last year. The import of cheaper meal from neighbouring countries is being made at the cost of local solvent plants, they said.
The Solvent Association also held a number of meetings with the Ministry of Food and Agriculture to convince the government that the import of soyameal is against the interest of the local solvent plants. The edible oil solvent extraction industry, no doubt, has assumed an important role specially in view of the government's programme to grow more oil seed in the country which aimed at reducing the import bill of the edible oil. The solvent extraction industry claims to have reduced the import bill to a great extent and is steadily moving towards the goal for self reliance.
The solvent industry claims producing high quality oilseed meals of abut 200,000 tonnes from locally grown oilseeds. If the locally produced meal was not encouraged by the poultry sector, the government's programme for growing oilseeds may severely hit and the country would have no option but to rely on imports of edible oils.
The poultry sector has its own point of view. According to a poultry farmers spokesman, the poultry sector is facing acute financial problems due to sharp decline in demand of poultry following the ban imposed by the government on serving meals at the wedding parties. The poultry sector is importing soyameal from neighbouring countries because it is much cheaper than the local one. They feel that if a ban is imposed on import of soyameal or import duty is enhanced to give undue protection to the solvent extraction industry, it may not only bring huge losses to the poultry industry but prices of chicken and eggs would also shoot up in the local market. It may be noted that around 1.5 million tonnes of poultry meal is required per annum.
Since bulk of the edible oils requirement in Pakistan is met through imports, the devaluation of local currency has always been instrumental in pushing up edible oil prices in the local market.
After linking of the imports with the composite rates of dollar, the unabated increase in edible oil prices has already hit the masses severely as the price of palm oil in local markets has gone up by at least Rs140-150 per 40 kg causing a difference of Rs70 in 16 kg tins.
The 16kg pack is presently being sold at Rs850 as compared to the previous price of Rs780. The landed cost of palm oil at Karachi is quoted at Rs1,790.95 per 40kg resultantly affecting the prices of smaller packs of 5 and 2.5 kgs.
According to retail prices, quoted on Nov18,1998, the 5 kg pack of different brands, including Habib Oil, at Rs317; Soya Supreme, Rs315; Dalda, Rs330; Sundip at Rs290; Season Oil, Rs290; and Planta is sold At Rs320.
The profiteers, anticipating further increase in edible oil prices and the current reports about lesser import of edible oils due to imposition of 30 per cent cash margin on L/C, and in the hope of increase in demand in the holy month of Ramazan, have started hoarding of the commodity. This is the high time when the authorities, responsible for maintaining price level of the essential items, should take all precautionary measures to avert the recurrence of onion-like phenomenon which is still continued to persist as the onion is still selling at Rs24 per kg in retails.
Despite reaching the age of maturity i.e. 50 years, country is still heavily relying on imports to meet its edible oil needs. The cost, paid last year for imports, was $760 million which is likely to touch the level of $800 million at the end of current fiscal year. Of course, some remedial measures have been taken by the government including efforts to go into plantation of palm gardens within the country. The oil palm trees obviously strangers to the Pakistan soil. It is not yet certain whether the soil will accept them or not. The certainty, however, lies in the local resources i.e. cotton seeds. The average cotton crop in this country is estimated at around 8 million bales. According to cotton experts, the country is capable of producing at least 1.4 million tonnes of edible oil through available cotton seeds. The formula for producing 1.4 million tonnes of oil are based on the calculations that one kg of cotton produced is equal to one kg of oil. If this opinion is true, Pakistan could save much needed dollars by using the home resources instead of indulging in uncertain experiments.