SUGAR INDUSTRY - DRIVING FORCE OF THE RURAL ECONOMY

SHABBIR H. KAZMI
Nov 30 - Dec 06, 2009

Pakistan has not been able to exploit the real potential of sugar industry so far. The level of disenchantment can be gauged from the fact that year after year country has been forced to spend millions of dollars on import of sugar.

Despite having more than ample stocks, sugar price is hovering around Rs75/kg in gross violation of the orders of the Supreme Court of Pakistan. The apex court had ordered the sale of commodity at Rs40/kg.

The prevailing disappointing situation demands in-depth analysis to find out the reasons for pathetically disappointing situation. Even a cursory look reveals some interesting facts and the level of conflict among the various stakeholders. The worst has been happening only because the policy planners and the regulators have been protecting the interest of various groups with vested interests.

The most surprising but disgusting fact is that as against an installed production capacity of 9 million ton, actual production has been around 3.5 million tons per annum. No industry operating at one-third capacity utilization can ever be profitable. This poor capacity utilization is because of acute shortage of sugarcane year after year. While new capacity was added over the years, growers failed in increasing sugarcane production in the country.

Like other developing countries, different groups influence government policies in Pakistan also. Feudal lords not only constitute a large percentage of the legislative members but also have access to power corridors. They have been playing an important role in the fixation of sugarcane support price. Over the years, they have prevailed over the millers. The hike in support price was solicited in the name of rising cost of inputs but least attention was paid to increase production and productivity.

Growers deliberately keep sugarcane production low and often succeed in selling their produce much above the support price fixed by the government. Shortage of sugarcane reduces number of crushing days and frequent disruptions are common due to inadequate supply. Mills are often forced to pay higher price. It is on record that due to shortage of sugarcane mills were forced to buy it at price much above the officially fixed price.

Last year millers paid Rs125 at an average as against an official price of Rs81 per 40kg. It was not too long ago that mills operated around 250 days. However, in the recent past crushing days were curtailed to about 120 days.

To improve capacity utilization and achieve higher production of refined sugar, millers have been demanding permission to import of raw sugar but the request was turned down due to farmers' pressure.

As against this, import of refined sugar is allowed and that is so while the sugarcane crushing is on. In an attempt to resolve the current sugar crisis, the government asked the Trading Corporation of Pakistan (TCP) to urgently import refined sugar.

The TCP has succeeded in arranging the supply but at a colossal price of US$676/ton and the landed cost works out to Rs65/kg. The paradox is while the apex court insists that sugar should be sold at Rs40/kg, sale on imported sugar would force the government to pay a subsidy of Rs25/kg. One fails to understand the logic behind paying higher price to foreign producers, spending millions of dollars on imports and bearing huge burden of subsidy. Can't a better and mutually acceptable price be negotiated with the mills?

Currently sugar is being sold at prices ranging from Rs50 to Rs100 per kilogram in different parts of the country. Even in Sindh that is always producing sugar much above its requirement and having ample stocks, the commodity is either not available at most of the grocery stores or a limited number of outlets are selling it at price at will. This is certainly in connivance with law enforcing agencies. This gives ample chance to the people belonging to law enforcing agencies to fleece money from the mills and traders but consumers' woes continue.

Sugar crisis did not break out this year, actually it has been an outcome of bad policies being followed year after year. This year thing got out of control for a number of reasons. The raids on sugar mills, confiscation of stocks, and disruption of market mechanism disturbed supply chain. While the apex court was prompt in turning down request of the federal and provincial governments to enhance ex-mill price, the decision is not being implemented by those who are duty bound to enforce it.

This lengthy story can be summed up in one sentence 'sugar crisis is the outcome of bad policies and paying no heed to the recommendations made by the stakeholders'.

While many ministries at federal and provincial levels poke their nose in the affairs, none has the comprehension and capacity to resolve the problems affecting 'sugar economics'.

Sugar industry is seasonal, has been operating for less than 150 days and selling the output throughout the year. Millers are forced to borrow heavily from the commercial banks for carrying sugar stock for longer periods. Meanwhile they also have to pay the farmers for the sugarcane procured. Often the cash crunch does not allow the mills to make timely payment to sugarcane growers, which affects wheat sowing and forces the growers not to grow sugarcane on larger areas.

Surprisingly, the government has been increasing sugarcane support price persistently but has always been reluctant in allowing corresponding increase in sugar price. The rationale behind this is higher sugar prices in Pakistan as compared to other regional producers. Policy planners completely ignore the fact that an industry, which operates at less than 35% capacity utilization, just cannot be efficient and competitive. If the government is serious in improving supply and bringing down sugar price, the twin objectives cannot be achieved without increasing sugarcane output in the country. Policy planners must keep in mind that sugarcane production can be doubled without bringing additional area under cultivation. What are we waiting for?

ISLAMIC BANKS' ASSETS GROW TO RS323 BN

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Syed Salim Raza, Governor State Bank of Pakistan has said due to active support of the central bank total assets of Islamic banking industry have grown to Rs 323 billion till September 2009 while their deposits reached to Rs 245 billion.

Speaking at a function held at a local hotel in connection with the launching of ten new branches of Dubai Islamic Bank in Karachi today, Mr. Raza said that in terms of market share total assets and deposits account for 5.3% and 5.5% of the conventional banking industry, respectively.

He said cumulative growth rate of Islamic banking industry has remained above 55 percent since inception despite a healthy growth in conventional banks. The growth rate has slowed down during 2008 and 2009 due to global economic downturn, however, when compared with their conventional counterparts it is impressive by all counts, he added.

SBP Governor said that last year central bank unveiled its Strategic Plan for Islamic Banking in Pakistan that broadly outlines the future direction of Islamic banking until year 2012. "Our target is to increase the share of Islamic banking in Pakistan to 12% of total assets of the banking sector," he added. He pointed out that branch network of six full-fledged Islamic banks and 13 conventional banks with dedicated Islamic banking branches increased to 560 branches.

The Islamic banking branches are spread over the length and breadth of the country covering 80 cities, he said.

SBP Governor said that the central bank is determined to ensure a level playing field for the Islamic banking industry and it has put in place a robust regulatory framework with a strong focus on Shariah compliance and competitiveness. He said State bank played a key role in issuance of government of Pakistan Ijara Sukuk, which has paved the way for effective liquidity management of Islamic banks. "We have also ensured a tax neutral regime for Islamic banking transactions through amendments in tax laws," he said.

He said that SBP has introduced a comprehensive Shariah compliance framework which includes the first-ever Shariah compliance inspection of Islamic banking by a central bank coupled with joint audit of profit distribution to depositors by the external auditors and Shariah Advisor of the bank. Each bank is also required to publish report of their Shariah Advisor on Islamic banking operations in annual accounts, he added.

At the end, Mr. Raza congratulated the management of Dubai Islamic Bank, which is one of the oldest Islamic banks in the world, and hoped that they will continue to work for the growth of Islamic banking in Pakistan.

Addressing the audience, CEO DIBPL, M.A Mannan stated, "I am thankful for the enormous support DIBPL has received from customers and business partners. We are one of the few banks whose performance is on an upward trend since 2008. DIBPL expects to post profit on a full year basis and will branch out with an addition of 30 new branches in 2010, our upcoming product offerings include branchless banking and SMS banking."

DIBPL, (a 100% owned subsidiary of DIB, UAE), has shown tremendous improvement in performance and posted a profit before tax of Rs. 280 million for the first 9 months of 2009 as compared to a loss of Rs. 301 million in the corresponding period last year. 2009 will mark the first full year of DIBPL's profitable operations in Pakistan.

DIBPL commenced operations in Pakistan in 2006 and offers an array of Shariah compliant, world class products and services catering to large corporates, SME's and individuals. DIBPL has an asset base of Rs. 32 billion and deposits over Rs. 25 billion.