The situation demands radical changes

May 19 - 25, 2003

Despite many odds sugar industry has achieve a record production of 3.68 million tonnes during the just concluded crushing season. The large inventory, slower off-take and bleak prospects for export of sugar are bound to cause delay in payment to sugarcane growers. The government policy of constantly increasing sugarcane prices and inability of farmers to improve yield proportionately has not helped in increasing supply of sugarcane. The average capacity utilization of the industry still hovers around less than 55%. All the stakeholders continue to suffer due to higher cost of production and non-availability of subsidy on export of sugar results.

The crushing season had started with as high an inventory as 637,149 tonnes. Keeping in view the domestic demand the mills will have a surplus of over one million tonnes during the year. Therefore, unless concerted efforts are made to export the surplus stock, the sugar industry and farmers will emerge as the ultimate sufferer. This may force them not to cultivate sugarcane for the forthcoming season and the country may witness a plunge in production, necessitating import of sugar.

It may be correct to say that the industry has been a victim of inconsistent government policies. While the government has been constantly increasing support price of sugarcane, it is not willing to provide any subsidy on export of sugar. The local refiners of sugar cannot compete in the global market because of high cost of production, sugarcane constitute nearly 70% of total cost of production of sugar. Another factor responsible for higher cost of production is low capacity utilization - mainly due to inadequate supply of sugarcane. Unless mills run at optimum capacity, price of sugarcane rationalizes and average sugar recovery percentage improves cost of production cannot be brought down.

One of the reasons for inadequate sugarcane supply and its procurement at higher than support price is the absence of 'zone system'. This system was in force in the past and helped a lot in improving sugarcane supply and ensuring running of mills at optimum capacity utilization. Many mills are still in favour of this system but the farmers enjoying political clout are resisting its implementation. The situation has remained unresolved only because no department or division at federal or provincial level is responsible for regulating sugar industry. All those who enjoy political clout manage to move the tentacles and manage to get the decision that suits them the best.

The sugarcane growers always succeed in convincing the government to enhance sugarcane support price but are never willing to increase its production. They know that they can squeeze higher price, above the government stipulated price, only if the sugarcane is in short supply. However, some sector experts believe that the yield in Pakistan is low due to certain factors. These include: - inadequate water supply, improper crop management, insufficient nutrient supply, cultivation of low yielding varieties and compleacency arising from ensured cost plus price for their produce. All these problems cannot be resolved without the active participation of all the stakeholders.

All the above mentioned problems and other smaller irritants can only be resolved if the government comes up with a comprehensive sugar policy. The first step would be to constitute an autonomous Sugar Board comprising of all the stakeholders, including representation from general public. Similar boards have been constitited for cotton and rice. The Board must formulate long-term policies and also ensure that all the decisions are implemented in letter and spirit. However, to resolve the immediate but most grim situation, the government must allow export of sugar and also provide subsidy to enable the local mills to sell their sugar in international markets.

One may say that the government cannot provide subsidy being a signatory to the World Trade Organization (WTO). According to an expert on WTO related issues, "Being a signatory to WTO does not stop the government from providing subsidy to any sector or industry. The WTO recognizes and allows subsidy provided it is paid in a transparent manner and known to all. The WTO does not permit payment of hidden subsidies and stipulates that the amount should be explicitly expressed in the federal budget. It is only a make shift arrangement to overcome the prevailing issue. It is expected once the capacity utilization improves and costs optimize there will no longer be any need to provide subsidy."

The government policies often create contradictions that eventually result in economic distortions. For instance the notified support price is higher for Sindh and the mills are also required to pay quality premium. As a result cost of production varies among the three provinces. This distortion has inflicted adverse financial position to the mills in Sindh.

The common complaint is that Islamabad takes more than required time to formulate and announce the policy and implementation also often runs into snags. Since sugar industry supports rural economy and situation in real grim, the decision must come immediately and ensure protection of interest of all the stakeholders. No stakeholder should be allowed to benefit at the expense of another stakeholder, no matter how small it may be or lacks political clout.