FACTORS CONTRIBUTING TO FOOD INFLATION

SMUGGLING OF VARIOUS PRODUCTS DEPRIVES THE COUNTRY OF FOREIGN EXCHANGE AND ALSO FUELS INFLATION IN THE COUNTRY.

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

May 7 - 20, 20
12

A review of policies being followed by the government of Pakistan indicates changing stance to industries from agriculture. In an attempt to rev up GDP growth rate, focus has gradually shifted away from agriculture to industry.

However, the fact remains that Pakistan continues to import over US$2 billion edible oil annually, two of its large industries textiles and sugar remain the driving engine, and proceeds from export of textiles and clothing still constitute over 60 per cent of the country's total exports.

Sugar industry often termed the driving engine of rural economy continues to produce sugar and has not been able to exploit the advantage of baggase and molasses. The contribution of cotton and sugarcane would have been much higher had the government as well as industrialists focused on achieving higher value addition, economies of scale and improving productivity of workers.

According to the experts, there has been a persistent increase in support price of different crops but no corresponding increase has been achieved in production/yield of cotton and sugarcane. The average yield of various crops in Pakistan is far below the global average and even the yield achieved in India. The natural outcome is higher cost of production. Experts say that production of major crops can be doubled without increasing area under cultivation. This requires use of quality seeds, efficient water management, application of appropriate dosage of fertilizers and above all a decent return to farmers. At present, the growers get a nominal return, whereas intermediaries make the most. Another important factor is non-availability of appropriate storage facilities.

Sugar industry can be termed single product industry. At the best, it burns baggase for running in-house power plants and a small percentage of molasses is used for producing alcohol. If judicious use of baggase and molasses is done, millers can afford to pay even double the price of sugarcane and price of refined sugar can also be reduced to half. If sugar mills are given status of IPPs and all the molasses produced converted into alcohol for producing E-10, Pakistan's oil import bills can be reduced substantially.

One of the most contentious issues is that all the land reforms undertaken by the successive governments have failed in yielding the desired results. Feudal lords still own thousands of acres, bulk of which is not used for cultivation.

Most of the landholding has been rendered uneconomical due to fragmentation over the years. Therefore, there is need for undertaking two types of land reforms simultaneously: 1) recovery of land owned in violation of the rules and 2) consolidation of smaller holdings into economic units.

Low yield is the mother of all evils. On one hand, it does not allow the growers to get decent return of the produce and government is forced to increase support price of various crops every year on the other, hoping that farmers will increase production and productivity in the following years.

It is on record that since the government has started curtailing gas supply of fertilizer plants, price of urea has almost doubled. Hike in fertilizer prices does not allow farmers to apply appropriate dosage of various types of nutrients. In the past when DAP price was hovering at record levels, wheat and corn output came down because farmers didn't apply required quantity of this type of fertilizer.

It is on record that by keeping DAP price at affordable level, government has succeeded in enhancing production of wheat and Pakistan has emerged an exporter of the commodity.

Some of the critics say that price of wheat has gone up too high in the domestic market because of persistent increase in its support price. It is one side of the story as they ignore that this has helped in making Pakistan self sufficient in wheat. In the past, some of the governments were not willing to increase support price but spending huge foreign exchange on import of expensive wheat.

Now the country does not spend even a dollar on import of wheat. Last year, the country could have exported over half a million tons wheat had its smuggling to Afghanistan and other countries been stopped. In the recent past, wheat flour price in Afghanistan was almost three times the price at which the commodity was available in Pakistan, which was a big incentive for the smugglers. Lately, the difference has shrunk because India has been sending free of cost wheat to Afghanistan.

Inadequate storage facilities are also one of the major reasons for higher prices. Experts say from 30 to 50 per cent of different produces go stale due to absence of appropriate storage facilities.

The most quoted example is that Pakistan is among the top five largest producers of milk in the world but still imports huge quantities of milk power. Only three per cent of total milk produced is packed in tetra packs. If Pakistan can preserve even half of the total milk produced daily, the country could earn not only millions of dollars by exporting it but livestock population could also increase substantially. This will also help in bringing down price of meet/beef in the domestic market and also increase availability of hide and skins used for producing leather.

It may not be wrong that many developing countries often encourage/condone smuggling of certain commodities and Pakistan cannot be an exception. Pakistani wheat is smuggled to the neighboring countries only to receive some of the products on which heavy import duty is charged or import is banned.

Some experts say that the country does not have to spend any foreign exchange on import of these commodities but never realizes that huge foreign exchange can be earned by exporting these through official exports. The latest example is that delay in granting permission to export sugar has led to smuggling of half a million tons sugar.

Therefore, one can draw the conclusion that following prudent policies can not only help the country in achieving self-sufficiency but also bring down cost of production. Allowing export of wheat and sugar can help in earning extra foreign exchange and more importantly bring down prices of these commodities in the local market.