OVERCOMING FOOD INFLATION
ECONOMIES OF SCALE CAN BE ACHIEVED BY IMPROVING EFFICIENCY AND PRODUCTIVITY OF WORKERS.
SHABBIR H. KAZMI
May 7 - 20, 2012
Experts are of the consensus that Pakistan is a victim of cost pushed inflation. In the recent past, prices of key commodities like crude oil, wheat, sugar, fertilizers and edible oil touched record high levels. Depreciation of rupee against all the leading currencies also added to woes but the real culprit has been rampant smuggling of these commodities to the neighboring countries. Over the last couple of years, Pakistan has been importing huge quantities of urea and also paying billions of rupees subsidies to facilitate local farmers, but a substantial quantity was smuggled to Afghanistan. Along with this, huge quantities of sugar and wheat are also smuggled to neighboring countries.
At an average, Pakistan spends around US$2 billion annually on the import edible oil and its domestic prices move in tandem with international prices. While hike in price is most common, one rarely sees any reduction in its price, when international prices come down. Trade and industry attributes this phenomenon to persistent hike in cost of doing business in Pakistan.
The three most quoted factors are 1) persistent hike in energy cost, 2) extended outages of electricity and gas and 3) poor law and order situation.
The government has also failed in containing smuggling of food items to the neighboring countries. The failure is often attributed to highly porous borders but experts call this the outcome of bad policies. The rule of thumb is that price difference is the key incentive but in case of Pakistan, myopic policies provide reasons for smuggling. One of the most recent examples is the delay in granting permission to export sugar, providing an opportunity to smuggle out nearly half a million tons sugar that could have helped the country in earning US$300 million. While some experts call it a policy snag, others call it prevalence of groups having vested interest.
It is often said that increasing yield of different crops has become inevitable but the progress made is disappointing. Analysis of yields achieved in last ten years show almost a flat trend.
The key factors said to be responsible for the prevailing situation are 1) floods/drought like situation, 2) use of low yielding varieties, 3) imbalanced use of fertilizers and 4) growing role of the intermediaries. Ironically, only government can be held responsible for the all these adversities. The government has failed in constructing new water storage facilities as well as maintaining irrigation system that enjoys the recognition as one of the largest manmade system in the world.
Experts say if the government is serious in bringing down cost of production of various crops it will have to bring down cost of inputs. However, a dilemma is being created by people having divergent and often contradictory viewpoints.
Over the decades, it was said that fertilizer plants were getting gas from Mari field at a discount. This impression was incorrect because it was selling low quality gas at a discounted price.
Units getting gas from SSGC and SNGPL had to face load shedding of gas during winter, but now almost all the manufacturers face mandatory closure and reduction in gas supply. As a result, manufacturers were forced to increase price, almost doubled in less than two years.
It is true that due to double-digit inflation prevailing in the country, cost of everything has been going up including agri inputs and implements. This issue can be resolved partly by increasing lending to farmers. Agriculture contributes nearly 25 per cent to total GDP and provides basic raw materials for textile and sugar industries but annual disbursement of loans has been less than Rs300 billion. The efforts by the State Bank of Pakistan to increase lending to farmers are fully supported by most of the commercial banks and less than half a dozen insurance companies but some of the players are not playing their due role.
Over the years, experts have been demanding constructing of specialized/appropriate storage facilities. Lately, the central bank also announced a scheme for financing construction of storage facilities but response from the private has been lukewarm. Construction of farm to market roads and modern warehouses can help in preserving products for longer time as well as value-addition.
Focusing on construction of modern storage facilities for mango and citrus fruits, close to areas of production, can help in maximizing utilization of produce and value addition can help in earning foreign exchange.
Pakistan is among the top five largest producers of milk but less than five per cent is preserved in tetra packs. Though efforts are there to preserve more in tetra packs. Any improvement in livestock numbers and earnings will have a positive impact and help in bringing down cost of production and ultimately prices of dairy products as well prices of meat and beef.
Pakistan's top two industries are agro-based that need improvement of capacity utilization. While textiles and clothing units are forced to operate between 3-5 days because of energy crisis, sugar mills have the capacity to supply up to 3,000MW electricity. This objective has not been achieved because the government is not ready to give sugar mills IPP status. If income of sugar mills is augmented by selling electricity, the sponsors will also be able to pay higher price to sugarcane growers.
To bring down cost of production, it is necessary to improve productivity by operating manufacturing units at optimum capacity utilization. Along with this, efforts should also be made to increase productivity of workers by imparting training. These refresher courses/training programs should start from grass root level and go up to supervisory and management levels. Trade association must hold awareness and training programs with regular intervals.
In open market economy, charging higher prices is discouraged by the government and rejected by the consumers. The time has come that consumers should stop buying or curtail its consumption whenever producers/manufacturers indulge in profiteering.