Pull the other one its got bells on it
Iqbal Mustafa
Printed in NEWS 30 May, 2004

Following up on last weeks column in which I had traced the history of wheat production and prices in the country with all the various vectors pulling in different directions to create a serious crisis presently, this week I will try to synthesise the core issues involved.

While there are larger problems looming on geo-political and economic horizons, I have dedicated two columns to wheat because it cuts deepest to the bones of an average person in the street. I was at a gathering of the Concerned Citizens Forum where eminent scholars and community leaders spoke on Pakistan's political adrift ness - the one which everyone except the PML-Q and its sponsors are acutely cognizant of. To my surprise, after the session, around refreshment tables most journalists approached me with questions about wheat crisis. I could sense their utter perplexity in asking, "Why are there wheat shortages and high flour prices right in the harvesting season?" Normally the journalists have pre-formed opinions and throw questions either for confirmation or for provocation. In this case there was utter frustration for a logical answer. Not only has the government created a confusion in the market, it has failed to provide a coherent explanation.

Wheat being the staple diet here adopts a symbolic significance of survival - Roti, the primal source of sustenance. With all the other uncertainties knowing at the guts of the people when the housewife in the kitchen has to face flour shortages in the shops and steeply rising prices it provokes a subliminal paranoia of starvation. The psychological impact is ravishing. I think the powers that be, with their lavish cuisines, loose site of the fact that 70 percent of the people in the country live at subsistence and poverty levels where the availability of Roti is just one notch below breathing air. No amount of political rhetoric, tidings of economic good times, half page newspaper ads flaunting leadership kudos and inane TV shows with house trained critics trying to lead the public up the garden path will assuage the paranoia that flour shortage creates. If for nothing else but their own political fortunes the government should take a heed of such fundamentals rather than living up in the clouds.

Since 1958 wheat was subsidised by the government, apparently for political goodwill, but in reality as a part of a broad policy decision to institute resource transfers from agrarian sector to other sectors. Cheap raw materials from agriculture sector serve three functions. 1) Provide cheap raw materials for industrial development, 2) Keeps Critical Price Index (CPI) lower for urban consumers who are politically more vocal, 3) Wages in industrial and service sectors can be kept lower because of cheaper food and clothing.

The impact of resource transfers was offset partially with subsidies to agriculture inputs. It is universally accepted that subsidies, in the long run, distort markets and reduce competitiveness apart from wasteful leakages through intermediary rent seekers. Apart from sugar which has always enjoyed political pricing, the prices of all other agricultural commodities were kept well below international prices either through support prices or direct market interventions. Sugar mills, flour mills, ginning factories, spinning mills and rice factories flourished under this resource transfer policy hostile to agriculture.

The intervention of the Sectoral Adjustment Programs of the World Bank (SAP - 1 and SAP -2) during the eighties enforced a withdrawal of subsidies to agriculture and movement towards market economy. As agricultural subsidies were withdrawn, production costs went up and a stagnation set in the agriculture sector in the nineties. In 1993, Benazir's second term in office inherited a conditionality of IMF to withdraw tax exemptions to the farm sector - income as well as wealth tax exemptions. A Task Force was set up to find a politically palatable way to introduce the agriculture tax bills - repealing tax exemptions - in the assembly where Peoples Party had come in majority with the farmers from Sind and south Punjab. I played a key role in that Task Force with Shah Mahmood Qureshi, the new entrant to PPP and the Chairman of the Task Force. We negotiated a quid pro quo with the Ministry of Finance: To impose tax on agriculture in lieu of removing resource transfer instruments in fiscal policy. The draconian export duty on cotton that had provided windfall profits to the spinning industry were removed for ever. Since then cotton policy has steadily maintained a free import and export regime. State control through Cotton Export Corporation was dismantled. Similarly, a jump in wheat support price was negotiated - from Rs. 143 to Rs 160 per 40 Kg but support price mechanism and State interventions were retained.

It took the textile industry ten years to recover from the after math of the shocks of free market where lint prices rose steeply specially due to reduced production caused by Leaf Curl Virus. Cotton is another story, but returning to wheat, the process of reducing differential between international and domestic prices began in 1994.

Stagnating wheat production and farmers lobby compelled the government to radically increase the support price of wheat in 1998 under Nawaz Shareef's government - from Rs 240 to Rs 300 per 40 kg. Wheat production that had been stagnant around 16 million tons jumped to 21 million tons in one year (1999), showing a high response of production to price. After that initial response wheat production stagnated, actually decreased, in the following years as input costs were constantly rising. The increase in support price of wheat brought domestic prices at par with international prices, and in fact higher as compared to imported wheat with transport costs. When Pakistan had a surplus one year in 2001 export had to be subsidised. Smug with a feeling of self-sufficiency, the government decided to yield to the pressures of donors to privatise wheat trade with an open market policy. Private sector was given permission and incentives to get into wheat purchase and storage. BPD Circular No. 02 17th January, 2003, permitted banks to finance wheat trade by setting margins of 10 percent for flour mills and 15 percent for traders and farmers. However, PASCO and Food Departments (Provincial) were to continue purchasing at nominal support price for strategic reserves. For the first time, in 2003, farmers received prices closer to the support price because of private sector competition.

This year, international prices have risen and private sector entered wheat trade in a big way. Government had increased the support price to Rs 350 to stimulate production. PASCO and Food Departments could not compete with the private sector that purchased wheat generously to earn profits in anticipation of higher international prices. The Government panicked and reversed all steps to encourage the private sector. State Bank slapped margins of 50 percent retrospectively and time bound till 15 August; Punjab government imposed section 144 on movement of wheat between districts and provinces. So just as wheat was being harvested, the government agencies and private sector traders (now being labelled as hoarders) began to stockpile - private sector for profits and government for maintaining strategic reserves.

Artificial shortage was created because of supply lines for flour mills dried up. Opposed to the federal government and State Bank policy, the Provincial Food Grain Act kicked in where flour mills cannot hold more than 24 hour wheat supplies. Food department was busy moping up wheat and private sector was holding it for future sales at higher prices in line with Punjab government's cascading price system - meaning prices rise with storage period. No wheat in flour mills meant no flour in shops, simple as that.

Now to simplify the confusion for the baffled readers, the simple reality is that when the government decided to open up wheat trade it meant that domestic prices will get linked to international prices and gain equilibrium somewhere slightly higher than landed price of imported wheat. And strategic reserves will have to be purchased at that equilibrium price. Since international price increased - from US $ 117 dollar per ton in 2000 to US $ 160 per ton in 2004 - support price of Rs. 350 became meaningless. The government has to pick up the tab for price differential and inefficiency of storage in the hands of state agencies (which are considerable) if it wants to impose a stable and manipulated wheat price in the country. It has already decided not to pick up the tab in future but expects the private sector to fill up government's previous role of wheat storage.

In essence government is expecting private sector to subsidise price of flour when international prices rise for political and welfare purposes. As a droll Englishman would say, "Pull the other one mate, its got bells on it."

Iqbal Mustafa
1450 words
29 May. 04