“Underlying price pressures from the demand-side should remain contained,” noted SBP in its monetary policy statement, released last Friday. ‘Hold my beer!’, cried provincial Food departments; and followed it up with an announcement of 28 to 42 percent(a) increase in wheat minimum support price for the harvest season Apr – May 2021.
As the “look-at-the-upside” economists community points out that food inflation in the country is mainly cost-push, the collective wisdom of PTI and PPP provincial governments has decided to put an additional Rs50 billion(b) in the hands of rural economy, seemingly impervious to the possible second-round effects of permanently increasing domestic food prices. Lest you wonder how PTI and PPP found common ground, remember that politics makes strange bed fellows, but pandering to rural vote, even more so.
According to the government’s own estimates, average cost of wheat production has increased by 19 percent over last year – from Rs 1,046 to Rs 1,242 per 40 kg.(c) Yet the MSP has seen a disproportionate rise, keeping in view the “import parity price, export parity price, market prices, and national reserves”. Does one detect a whiff of panic? To understand the fears and angst of policymakers, a recap of what transpired last year:
February 2020, pre-pandemic Pakistan. A nationwide spiral in wheat prices that had begun six months earlier recoded its first peak, with a 30 percent rise year-on-year. Wholesale price touched Rs 1,800 per 40kg, right ahead of harvest season. By mid-March, ECC announced an ambitious procurement target of 8.25 million tons but shied from raising government procurement price substantially(d) in face of inflationary pressures and a looming economy-wide lockdown.
What followed were a series of bureaucratic botch ups that would be comical were it not for the misery they inflicted. By May, delays in fulfilment of procurement triggered an administrative emergency, forcing Punjab Food department to invoke Section 144 and impose a cap of 25 maunds (or 1 ton) on private storage; in complete disregard of the widespread private storage required for on-farm consumption.
In a veiled admission of ignorance during a National Assembly session, the food security minister expressed surprise “over continued price increase despite highest ever procurement”. Middlemen and dealers, Pakistan’s favourite phantoms, were blamed for speculative behaviour. PASSCO and Food departments held on to 25 percent of national supply - procured to build “strategic reserves and planned release” - yet pretended to be clueless as to why markets were facing a breakdown.
Meanwhile, wholesale and retail prices continued their upward climb. Realizing that its administrative heavy handedness had crowded out private sector buying, Punjab Food department preponed its wheat release calendar from September to July, in an abortive attempt to stabilize price of flour.
By August, when news broke that subsidized wheat supplied to flour mills was being misappropriated and resold in open market, prices had climbed to Rs 2,300 per 40kg. Since international prices were still at a steep 50 percent discount, federal government finally admitted that it would be better off importing, and announced tender for 3 million tons to bridge the supply gap.
By October, cargo ships carrying 0.5 million tons of imported wheat began docking each month. Although domestic prices did not see the promised sharp decline, import sure put brakes on their relentless rise. But so did another baller move.
After kissing bottom during covid, global commodity prices began to spiral upwards around the same time as imports began to land at Karachi port. “Pakistan was importing expensive wheat at Rs 1,650 per 40kg, while farmers had been fleeced and forced to sell at government prescribed rate of Rs 1,400”, wailed the lobbyists. Surely, the farmers deserved recompense?
ECC yielded, but only partially. Minimum support price was raised to Rs 1,650 per 40kg for the then upcoming wheat sowing season. However, calls from ruling-party allies in Punjab to match price set by Sindh were rejected(a). Federal government held its ground, dealing a quick death to speculative activity that had earlier thrived in domestic markets. Between October-20 and February-21, national wheat prices have inched ahead by less than two percent, even as international price index marched forward by 13 percent, as more expensive wheat continues to land at port(e).
But much has come to pass since. International price parity has breached Rs 1,800 per 40kg, emboldening farming lobbyists to take a more aggressive tone. Meanwhile, Sindh’s unilateral decision to fix provincial MSP at Rs 2,000 per 40kg has gone unchallenged, perhaps because the national food security czar had once himself argued in favour of raising the MSP in ECC meetings – albeit unsuccessfully.
Now, Punjab has finally followed suit, announcing MSP at Rs 1,800 after “consultation with the PM”. The development has several possible interpretations and raises suspicions that demand clarity.
Scenario 1: Last year, the federal government tried every possible trick in the “administrative action” playbook yet failed to contain prices. An exorbitant MSP is literally the last trick up its sleeve to balance supply-demand. But consider that the latest revision in MSP is yet to be priced in by the open market and may increase flour prices by another 10 – 20 percent. Is the federal government no longer troubled by the knock-on effects it may have on food prices?
Scenario 2: Sindh government’s early manoeuvre forced the Centre to play its hand. Resistance to raise MSP would have made it wildly unpopular, especially in rural Punjab – while raising fears of flows to Sindh where sellers could fetch a better price. The loss of Islamabad’s Senate seat confirmed those suspicions, as FM’s iron fist over ECC decisions waned. But consider that the differential between MSP in Punjab and Sindh is still significant and may only partly resolve Punjab government’s dilemma.
Scenario 3: MSP revision has been announced through Punjab Food department to ensure that the “mismanagement by provinces” is held responsible for the food inflationary pressures that will eventually follow. Not the PM or the federal government.
Scenario 4: The federal government carefully chose not to challenge Sindh’s notification, because it seeks to exit the procurement business. Independent announcements by provinces have afforded it a unique opportunity, knowing it could have done precious little to contain inflationary pressures considering the global commodity price boom currently underway.
Over the past 12 months, federal government – under tight leash of the PM – has tried every trick under the sun to manage food prices, only for things to backfire. The best-case scenario right now may very well be to hope for ‘governance fatigue’ to set in, engendering a desire to no longer mess with the markets.
Has the PTI learned the law of unintended consequences the hard way? That may be asking for too much, especially If another “highest ever procurement target” is announced in days to come. But one thing is certain: by raising the MSP, PTI risks trading away its urban support in hopes of gaining rural vote. ‘Please the voter that you can’. The PPP has taught PTI few tricks, after all.
(a) MSP for 40kg bag has been fixed at Rs 1,800 in Punjab, and Rs 2,000 in Sindh for harvest season (Mar – May 2021), compared to uniform rate of Rs 1,400 followed nationally during FY20 (Apr – May 2020).
(b) Incremental cash injection calculated at 5-year average national procurement volume of 5 Mn tons, using Punjab MSP rate of Rs 1,800.
(c) Inclusive of opportunity cost for land rent
(d) MSP was increased by Rs 100 to Rs 1,400 per 40 kg in FY20, after gap of 4 years (MSP stayed at Rs 1,300 from FY14 to FY19).
(e)Weighted average cost reached ~Rs 1,750 per 40kg for total 3.3 million tons imported during Sep to Feb 2020-21.