SUGAR CRISIS THE OUTCOME OF BAD POLICIES

WITHOUT UNDERSTANDING SUGARONOMICS THE ISSUE CAN'T BE RESOLVED

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Mar 1 - 7, 2010

Sugar crisis being faced by Pakistan can be conveniently termed the outcome of bad policies. Politicians have a large stake in this industry, which often leads to favoritism as well as victimization. On top of every thing, overindulgence of certain authorities not only disrupts market mechanism but consumers emerge as the worst sufferers.

It is on record that despite 1) Supreme Court fixing retail price of sugar at Rs40/kg, 2) Competitive Commission of Pakistan imposing penalties on mills for cartelization, 3) raids of law enforcing agencies on the mills and warehouses of wholesalers for the recovery of allegedly hoarded sugar and 4) arrest of staff of staff of the mills and traders, consumers had to run from pillar to post in search of the commodity and pay double the price fixed by the apex court. It is also believed that huge quantity of sugar was also smuggled to neighboring countries, particularly to Afghanistan. All this happened despite the fact that the country had ample stock of sugar.

The situation has not changed this year; the commodity is being sold around Rs70/kg, with improved supplies. The Trading Corporation of Pakistan (TCP) has been given the mandate to import half a million tons sugar. Most of the tenders have been scrapped on technical pretexts and only one order has been placed for the import 50,000 tons sugar at US$585/ton C&F Karachi.

There is huge difference between high and low prices. The TCP is given the task to import refined sugar at a wrong time and it is likely to get higher quote. Experts have already said that if March delivery costs US$750/ton August delivery would be as low as US$450/ton. Instead of recommending to the government to defer import of sugar certain quarters are alleging that its import is being sabotaged. The mess could be summed up in one sentence 'novices are spoiling the curry'.

It is often said that the policy planners in Pakistan don't understand 'sugaronomics'. The basic reason for lower production of sugar is inadequate sugarcane supply. The persistent increase in sugarcane support price has not helped in enhancing the supply but given birth to 'brokers' exploiting both the millers and the growers. Most of these brokers enjoy access to power corridors and can only be termed 'blood suckers' at the best because small farmers are not benefiting from higher price of sugarcane. Mills in Punjab owe billion of rupees to growers only because owners of most of the mills are sitting on the treasury bills or are the beneficiaries of 'friendly opposition'.

According to industry experts Pakistan is capable of producing above nine million tons sugar annually. Against this average production has hovered around 3.5 million tons. It is beyond comprehension that how mills can operate efficiently and also earn profit if average capacity utilization is around 40%. Persistent hike in sugarcane support price (almost 75% of total cost of production) and higher interest rates and utilities charges are the reasons for higher cost of production. Why can't the government let the market forces fix prices of sugarcane as well as refined sugar? The government has stopped fixing support price of cotton more than a decade ago why is it adamant on retaining the prerogative of fixing support price of sugarcane? It seems that millers are accused of forming the cartel but the real culprits are the sugarcane growers. According to some insiders politicians turned industrialists are also the sugarcane growers and racking up money classified as 'income from agriculture'. They are least bothered if their mills are incurring huge losses as they have already sucked their equity holding from these entities.

INTERNATIONAL PRICE

It must be kept in mind that domestic prices of any commodity cannot be fixed in isolation but are linked with the international prices. If international prices are high the government often provides subsidy for the protection of consumers. Often international prices of raw sugar are very low because of the commodity being classified as byproduct in Pakistan is the product. Therefore, a workable option is to import raw sugar to overcome short supply of sugarcane. While India has been importing raw sugar to improve efficiency of mills, its import in Pakistan is being resisted by the feudal lords occupying key positions in the government.

In many countries ethanol (motor gasoline blended with ethyl alcohol) is used. This requires massive production of ethyl alcohol produced from molasses. Therefore, raw sugar becomes a byproduct requiring mills to get rid of this at the earliest. India offers an incentive to mills to import as much raw sugar as they like provided a specific percentage of total production of refined sugar is exported. It is a time tested business model in India, why can't we emulate this in Pakistan?

It is difficult to swallow the bitter pill that managers of Pakistan's economy are not aware of the sugar industry dynamics. One could only say that people having vested interest prevail only because of 'sleeping watchdogs'. A Sugar Board has been constituted in the country but it has not come up with policy recommendations to improve sugarcane supply. The rationalization that sugarcane support price has to be increased every year due to rising cost of inputs is completely sham. In fact cost of input is not high but yield is pathetically low and the farmers should try to improve yield rather than soliciting increase in sugarcane support price.

The erratic policies are resulting in accumulation of huge losses of the mills and delays in payment to small growers. Prudent decision making can enable the sugar industry to the role of power plants and supplier of bio-fuel. The choice is ours.