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Should we subsidise sugar exports?

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If the government decides to go for export it will have to subsidise the sugar exports

By AMANULLAH BASHAR
Feb 14 - 20, 2000

As against the desire of some of the sugar mills, Pakistan should not enter the export business without careful estimation of the exact size of production this year.

Unlike previous year when local industry had produced around 3.5 million tonnes of sugar out of the crushing of 42.9 million tonnes of sugarcane the situation is a little bit different. They feel that sugar industry is not likely to touch the production mark it attained last year due to various reasons including unfavourable weather conditions, no timely rains, improper water supplies which consequently reduces the level of sucrose contains in the crop. Since the crushing is still going on which may be lasting for another 6 week it will be too early to assess the size of exact production for the current year. According to figures released by Pakistan Sugar Mills, the sugar industry has produced around 1.6 million tonnes of sugar out of which 7.5 lakh tonnes has already been lifted while inventory stocks are estimated around 9 lakh tonnes during current season.

There was an interruption in crushing operations due to price controversy between the millers and the growers for quite some times. The matter is however resolved as the sugar mills like Fauji Sugar Mills, Ghotki, Hungario Sugar Mill and Mirza Sugar Mill have agreed to purchase sugarcane at the rate of Rs50 to Rs52 per 40 kg.

The millers decided to go for that price because of the threat given by the sugarcane growers to discontinue supply of the crop to all sugar mills if the owners persisted at their procuring price of Rs40 per maund.

The industry feels that developing a harmonized culture between the growers and the millers is the need of the hour to get the maximum benefit out of this important segment of the economy. For achieving that target the issue of support price should be resolved once for all by giving status of a crop to the sugar produced in the country. It is also practiced elsewhere in the world. Under this mechanism the millers will be made responsible to lift the cane crop at an agreed price provided the support price is subsidised to the millers. They said that the prevailing system is proving nothing but increasing the cost of production.

SUBSIDY ON EXPORTS

Currently, there are some hot discussions going on about Rs5 billion, the government had to subsidise the sugar industry for export of sugar during past two years to enable the industry to export the surplus commodity which is perishable in nature.

In exact terms, the sugar industry exported 504,500 tonnes of sugar in 1997-98 and 505,735 tonnes against the export earnings of $165 and $145 million in respective years which come to a total of $310 million.

In fact it is not a matter of choice that whether a subsidy should be made available or not. The subsidy is given to the exporters to enable them to match the international prices. It is however the responsibility of the ministries looking after the international trade or the ministry of finance to ascertain the actual price level in the international market before taking a decision about grant of the subsidy. For example the current sugar price in the international market is around $171 per tonne because of excessive supplies. The current price level in no term offers any justification to allow export. However if the government decides to go for export it will have to subsidise the sugar exports, otherwise the industry in no way can afford to sell it in the international market. It may be recalled that during the last two previous years, the government under the sugar policy had given a subsidy of Rs4500 per tonne which amounted to Rs5500 million to the government. The export of sugar during that period was unavoidable due to surplus domestic production as well as to strengthen the forex reserves and low price of sugar in the international market. It is however amazing that under the sugar policy at one hand the government allowed to export sugar from Pakistan but when the prices of sugar started picking up, government decided to import sugar against the will of the sugar industry.

Sugar policy

The sugar industry had to suffer a loss of Rs8 billion due to the government intervention and its policy to import the product and also because the industry was forced to pay high price to growers of sugarcane. The government's intervention in the sugar industry should however be seen in the context of interest the former prime minister Nawaz Sharif had in the sugar business.

In order to avoid recurrence of such events, there is the need for restricting of the sugar policy so that the cost of production could be brought down through maximum capacity utilization of the existing mills. Situation also demands for early announcement of sugar policy prior to crushing season is start to encourage the millers. The lack of understanding and coordination between official circles and the private sector is reflected in the reports that on one hand the PSMA has demanded an increase in import duty on sugar to protect the domestic industry, on the other hand there are reports that the government intended to reduce the import duty to curb increase in sugar price in the local market.

Source in the industry said that increase in sugar price during the crushing season is a natural outcome of the situation. During the season, the millers had to meet the financial pressures from different corners including timely payment to the growers. The trend of increase in sugar price automatically subsides when the crushing season comes to an end. The statistics of the past years could supplement this argument, they said.