TCP must not be employed as a tool for subsidy

Trading Corporation of Pakistan has invited bids to import 225,000 tons of urea, estimated to cost Rs 8 billion, says a report in this newspaper. The gap between demand and supply was bound to be more than envisaged earlier because of non-supply of committed natural gas for Engro's Urea expansion project.
Non-performance of committed gas forced the government to allow Engro to raise its ex-factory price by 28 percent to enable the company service the debt undertaken for the increase in capacity. As a consequence, the other urea manufacturers also increased their retail price of urea - though the domestic cost is still lower than the imported urea price.
The TCP was created in 1967 as a public sector trading house for export of agriculture produce and for import of essential commodities. Once private sector was permitted to reenter the cotton and rice export business; the government-run Cotton Export Corporation (CEC) and Rice Export Corporation (RECP) could not compete with them. The two corporations' activity was merged with the TCP in 1996 and both corporations were officially disbanded in 2000.
After 2000-01, the TCP's mandate was restricted to stabilise the prices of key commodities like wheat, sugar and urea. The substantial storage capacity inherited by the TCP from the CEC and RECP largely consists of substandard warehouses. Rampant pilferage, wheat stock unfit for human consumption and discoloured sugar lying with the TCP are common complaints. Hence, banks are not willing to lend to the TCP against stock pledges - unless the loan amount is backed by firm government guarantees.
At present, the TCP faces a huge receivable problem as subsidy payments on account of the sugar sold to the Utility Stores Corporation; CSD and the armed forces, as well as urea sold to the Ministry of Food and Agriculture. TCP books, as of 31st December, show clean financing of Rs 68.3 billion from banks with no underlying stocks, and receivables of Rs 67.8 billion.
The TCP is paying 2.75 basis points above Kibor, ie around 16 percent on its overdraft of Rs 110 billion. A second circular debt (first relating to oil, gas and electricity) is in the offing. Banks have lent an aggregate amount of Rs 250 billion towards commodity operations, ie, for wheat, sugar, fertiliser to the provincial food departments (especially Punjab), Passco, TCP etc. Sensing the government's fiscal difficulties banks have very little appetite left for further lending for commodity operations. The delays in obtaining receivables mainly on account of the weak fiscal position has made the TCP commercially unviable.
As a corrective measure, the government needs to give cash subsidy to end-users, ie, small and marginal farmers, for urea instead of an across-the-board subsidy to rich farmers. Targeted subsidy for sugar, wheat and edible oil, through the Benazir Cards, is a more sustainable option than selling these on subsidised rates through the USC.
The TCP's role should be restricted to market intervention to prevent hoarding and forming of cartels by the private sector, instead of being used as tool for subsidy. If the GoP's intervention policy is properly specified for essential commodities, especially food items and done in a timely manner - a pre-requisite to check commodity prices only, then the private sector may not shy away from playing their due role.
Consistency in government policy and a realisation that the private sector cannot be expected to subsidise will restore the confidence of credible importers to step forward, be proactive and earn through the inter-play of market dynamics, instead of indulging in unethical practices.