Fresh financing required for nationwide procurement operations during the ongoing wheat harvest season may exceed Rs 300 billion, an increase of over 30 percent over last year. The rise in demand for fresh financing comes despite a 25 percent reduction in national wheat procurement target, according to an analysis conducted by BR Research. Have the policymakers learned the right lessons from wheat price spiral of 2019-2020?
Last year’s inquiry report on wheat/flour controversy claimed that “government stocks [of wheat] are utilized to ensure price stability and food security”. Nothing could be further from the truth. Instead, the primary beneficiaries of government procurement operations are a limited number of farmers that receive bardana (government issued gunny bags for sale of wheat), flour mills that receive wheat at lower-than-market-price, and commercial banks that provide financing for procurement at commercial rates (for more, read: ‘The murky origins of commodity operations debt, by BR Research, published on 08 April, 2021). Meanwhile, end consumers pay a higher price for a staple commodity, despite highest ever procurement and second-highest production in history.
Those who believe that the farming community receives the short end of the stick must pause and consider the following. Wheat-deficit provinces such as KP, Balochistan, and (to some extent) Sindh, have historically missed their procurement targets by a wider margin than Punjab. In fact, in at least four out of past five years, one or more of the smaller provinces ignored the procurement target recommended by federal government, and instead failed to allocate any funds for wheat procurement altogether despite low or nil carryover inventory.
In sharp contrast, Punjab – which is considered the breadbasket of the country and has historically produced a surplus output of wheat – bears the brunt of government procurement. In fact, according to the inquiry report, the government of Punjab owed over 50 percent of total national commodity operations debt outstanding. The federal procurement agency PASSCO also procures over 70 percent of its annual wheat requirement from Punjab in order to maintain “strategic national reserve stocks”.
At the same time, the inquiry report notes that “flour mills meet their requirements through purchases from private market”. If the flour mills fulfil their demand through private sector buying, why is a province self-sufficient in wheat production running a commodity operations debt equivalent to 10 percent of its annual budget, instead of letting the private sector fulfil provincial consumers’ demand?
Meanwhile, barring FY20, smaller provinces deficient in wheat production have not only reduced their procurement volume over time, but in some years have also failed to allocate any funds for procurement altogether, indicating that the private sector largely fulfils the consumer demand in these regions. Remember, the federal government is no longer responsible to maintain food supply in provinces since 18th amendment (except in the time of extreme shortages or emergencies). Whereas inter-provincial wheat trading is not only permitted but is also the norm, as governments of wheat deficient provinces (such as KP) may (and do) purchase wheat from the only province with a surplus, Punjab.
So what is truly going on? It should take no rocket scientists to connect the dots. Since 18th amendment, PASSCO, and wheat surplus provincial governments are using commodity operations to run a farmer welfare program by any other name. Between FY14 and FY18, PASSCO and governments of Punjab and Sindh spent a record Rs 180 billion each year to procure 6 million tons of wheat per annum, even as international price of wheat collapsed. By FY18, stocks available with the government had reached 50 percent of national demand, leading to significant debt build up at both centre and provinces.
According to NFS&R disclosures, wheat stocks had to be released into the domestic secondary market at lower-than-cost to ease the rising inventory. When this didn’t help, both GoP and provincial governments announced several rounds of freight subsidy on export of wheat which reached up to $100 per ton. Finally, wheat procurement in FY19 was severely cut back, resulting in closing stocks falling to less than a million tons by year end, after domestic releases and subsidized export. Just three months later, Pakistan was in the throes of its worst wheat price spiral in over a decade.
If this were any other country, government’s footprint in commodity operations would have been significantly curtailed if not altogether eliminated. Instead, because the program is used to shore up political support, subsequent governments make the unenviable decision of raising the purchase price year after year to keep the voter base charged and happy, never mind the direction international prices may take. When this increases the price of flour for end consumer, a subsidy is issued to flour mills to stabilize retail prices and fight off inflation.
Whether future governments can afford to run or even expand the procurement program will not only depend on available fiscal space but also on whether political gains made remain intact. But political parties, irrespective of their hue and colour, should do public a favour and stop pretending that the program has anything to do with price stability or consumer welfare.