The ultimate failure of the industry to discharge its financial obligations would adversely affect the financial sector

May 08 - May 14, 2006

Most of those, who witnessed sugar crisis during President Mohammad Ayub Khan's regime, are stunned at the sugar crisis looming in the country for many years. They fail to understand apathy of the economic managers. They are also surprised at the indifferent attitude, which is causing losses to the sugar industry, adding to the miseries of common men and above all adversely affecting the rural economy. Though, it is not apparent so far, the ultimate failure of sugar industry to discharge its financial obligations would adversely affect the performance of the financial sector in the near future.

It is difficult to count for how many years Pakistan has been going through 'self inflicted' sugar crisis. It is sufficient to say that economic managers have been failing in playing their due role. Either they are not able to understand the 'sugarnomics' or are being grossly influenced by the various pressure groups. There are three major pressure groups, which certainly do not include consumers. The two strongest groups are that of sugar mill owners and sugarcane growers. Since both of these enjoy access to power corridors they are able to influence the whole policy making process. Yet another pressure group emerging lately comprise of traders. On top of every thing the delay in decision making further complicates the issue, which is otherwise very simple to resolve.

The issue is very simple i.e. sugar industry has not been able to produce the required quantity and the shortfall has to be met through import. There were two options 1) import raw sugar and process it and 2) import refined sugar. Each option has its own merits and demerits but generally the first option was considered more prudent. The reason being millers could import sugar in bulk and up to the desired quantity. First there was delay in announcing such a decision and ultimately permission to the traders to import raw sugar added to the problems, sale of unsuitable sugar for human consumption in the retail market. As the crisis intensified many hurriedly made decisions further aggravated the situation. When the potential shortfall was identified international sugar prices of refined sugar were around US$ 250/ton and now the orders are being placed at US$ 500/ton. The landed cost would be far higher than the locally produced sugar and the government would have to provide the subsidy, even to ensure its sale at currently prevailing higher prices.

Analysts are often forced to draw the conclusion that sugar consumers come on the lowest priority of the policy planners. The statement may sound absurd but the fact is that sugar industry is capable of producing 5.5 million tons sugar annually. However, the average production has been hovering around 3.2 million tons. The sole reason for the poor capacity utilization is less than required production of sugarcane in the country. It is mainly because per acre yield of sugarcane is pathetically low in Pakistan, almost half of the yield attained in India. On top of this due to annual increase in sugarcane support price the cost of production of sugar has been going up.

No one can deny that sugar industry is the driving engine of rural economy. Sugarcane is the second most important cash crop and sugar industry is the second largest industry of the country, after textiles. Since all the sugar mills are located in the rural areas they provide employment to hundreds and thousands of people directly and indirectly. However, the tussle between the millers and the growers has often created law and order situation. Since both the groups enjoy political clout, they are interested in maintaining crisis-like situation to attain political mileage. However, it is true that while some of the feudal lords and owners of sugar mills are reaping unprecedented benefits most of the small growers are forced to live in constant state of uncertainty.

According to some latest news India is offering sugar at Rs 12/kilo. It is only because the country follows a comprehensive sugar policy. India allows the mills to import raw sugar on a condition that they would process it and also export, if production more than the demand. As against this Pakistan has not been able to formulate any policy to address the issues relating to the sugar industry. In the recent past Pakistan has exported sugar and the country can do this again if supportive policy is implemented in letter and spirit.

The suggested policy revolves around three basic parameters 1) increasing sugarcane output, 2) improving yield and 3) discontinuing fixing sugarcane support price. However, in the mean time zoning system has to be implemented for creating better understanding between the growers and the millers. While the confidence building measures (CBMs) are going on the government should allow the mills only to import raw sugar. Import of refined sugar has to be discouraged. The government should also link import of raw sugar with the export of refined sugar, as is being done in India.

Currently a number of federal and provincial ministries are involved in the policy making process. This often complicates the issues rather than solving them. It is therefore, suggested that an autonomous Sugar Board be constituted comprising of members representing the growers, the millers and the technocrats as well as representatives to protect the interest of consumers. The first and the most important item on the agenda should be to produce exportable surplus and optimisation of cost. Why not usher in green revolution by doubling sugarcane output in the country? Industry has the capacity to crush even double the quantity. It will help in achieving economies of scale and bringing down cost of production. Additional production of molasses would also bring in extra foreign exchange into the country. Pakistan has already established some large-scale refineries to produce ethanol from molasses. Production of petro-alcohol can also help in containing POL import bill. This is not a novel idea because such a fuel is being used in many countries.