Commodity operations: government making a big mistake

Some of the economic problems of the country owe their origin to poor policy formulation in the past. One of them is the continuous intervention of the government to influence the price behaviour of various agricultural commodities in order to please certain sections of society and utilise bank credit for the purpose.
Started initially on a modest scale to protect the economic interests of agriculturists and check their exploitation, the scheme of commodity operations managed by the government has been enlarged over the years to an extent that it is now posing a serious threat to the budgetary outcome, as well as the financial system of the country.
According to an official of the Finance Ministry, the outstanding debt against commodity operations at present stands at around Rs 382 billion, out of which the share of wheat is Rs 300 billion but the most serious issue was to arrange financing for the next crop that will start arriving in the market from next month.
With Rs 300 billion still outstanding against the previous stocks, the Economic Co-ordination Committee (ECC) of the cabinet is likely to decide that the provinces and Pakistan Agricultural Storage and Services Corporation (Passco) should procure 6.57 million tons of wheat this season if prices in the domestic market fall below the support price of Rs 950 per 40-kg.
Punjab was expected to procure 3.5 million tons while Passco and Sindh would be asked to procure 1.3 million tons each. KP and Balochistan would, however, be directed to purchase only small quantities of 0.4 million tons and 0.07 million tons, respectively. Huge stock of debt against wheat could have been retired if its price in the international market was high enough to make its exports a profitable proposition. Unfortunately, the federal government allowed the export of wheat at a late stage and the country was able to export only 0.6 million tons of wheat in the last three months.
The most practical solution now is to speed up wheat exports but the main issue was that prices in the international market are likely to decline after about six weeks as the wheat crop will start arriving in the market in all the wheat growing countries of the Northern Hemisphere by that time. Pakistan is also estimated to produce between 24-24.5 million tons of wheat this season, while local consumption is around 22 million tons.
While the Pakistani crop is also expected to hit the market after about two months and the procurement operations will be put in place at that time, official agencies still have outstanding stocks of 5.5 million tons, including 3.82 million tons with the Punjab government and 1.10 million tons with Passco.
Overall, the situation now unfolding suggests very clearly that the unsold stocks, accumulated through commodity operations, would continue to pile up and a huge amount of bank credit would continue to remain locked in a single commodity, without contributing to the real productive potential of the economy and enhancing the level of employment in the country.
The existing situation is also disturbing for a number of other reasons. If the old stocks of wheat are held for too long, there are chances of their rotting, with no benefit to either the consumers or the economy. However, if these stocks are sold speedily and exported at whatever price is available in the international market through the provision of subsidy, it could involve a huge burden on the budget.
On the other hand, a serious lack of action on the part of the government and sticking to the old policy framework would, in all likelihood, lead to further accumulation of debt stock against wheat, leaving little room for credit expansion to the productive sectors of the economy and complicating the task of monetary policy formulation. The irony is that the policy of support prices is also not serving the intended purposes.
The only beneficiaries of this policy are the relatively affluent agriculturists who have excess wheat crop at their disposal but pay no taxes while subsistence farmers do not generally have any surplus to sell in the market. Besides, the policy of fixing the support prices of various commodities by the government is against the principle of letting the country reap the benefit of comparative advantage in the international market because such a policy distorts the price signals.
It also does not behove the government to be in a business, which is purely commercial and could better be handled by the private sector. It would be better for the government to concentrate on subjects like law and order, good governance and defence of the country. Further, the financing of commodity operations was supposed to be self-liquidating but that is not the case anymore.
Keeping all these factors in view, there is an urgent need to revisit the policy of the government's commodity operations thoroughly as it is increasingly complicating the financial situation of the country and not properly serving the purpose for which it was intended. Letting the market forces determine the prices of various commodities freely, which could also lead to optimal utilisation of factors of production, could be a preferable option for the long-term interests of the country.