Earlier this week, the spokesperson for finance ministry noted that in case of surplus sugar production in the (just starting) cane crushing season, federal government will not repeat past errors, and shall maintain the ban on sugar export. Instead, it plans to procure any surplus sugar produced – likely through TCP and provincial food departments – to build domestic strategic reserves. Are the policymakers finally doing things right, putting a stop to the seemingly endless bickering over exports, subsidies, price controls, and crushing dates?
BR Research had earlier predicted that the PTI government may adopt the proposed strategy, given several statements by cabinet members laying emphasis on the need to build reserves for food security. On its part, the industry may also no longer prefer export quotas, considering how unpopular those have become in the aftermath of NAB/FIA inquiries. The inquiries had also put a question mark on the fate of [partially] unpaid subsidy dues, that had prompted exports in the first place.
But history suggests that in absence of permission to export, surplus sugar production leads to decline in market prices that in turn delays both – payment of supplier (growers) dues by mills, and commencement of subsequent crushing season - setting off a vicious cycle. To that end, government’s decision to procure surplus output seems like a wise choice. Sadly, it is anything but.
If ex-factory price indeed falls, should the government bail out mills through public sector procurement operations – ala wheat - to avoid a future crisis? Here, it is worth emphasizing that the damage - caused by sugar price spiral of the past two years - is already done in the form of higher prices of value-added goods. Increase in price of value-add products, whether sugar-based beverages or mithai, are usually irreversible (think of Rooh Afza). What point is there then to protect mills against a sharp decline in local prices in case of surplus output, when it will yield little benefit for the consumers?
Nevertheless, a decline in local market price will take the pressure off the government it is currently facing due to runaway increase in price level observed over the past two years. PTI must use this window of opportunity to bring much needed reforms to regulatory framework currently governing the sugar value chain if it hopes to break the endless cycle of surpluses and deficits that lies at the heart of Pakistan’s ‘sugar problem’. This would require true grit and will to introduce politically risky legislation, but at the same time shall build PTI’s credentials as the party with a robust reform agenda.
To make that happen, those in charge must demonstrate courage and begin by asking unorthodox questions from all stakeholders: farmers, millers, environmentalists, and policy advisors. Questions such as what is so unique about the sugar value chain that almost every aspect of its operation: from license to establish or relocate mill; capacity expansion; decision to import or export; purchase price of sugarcane; zoning of cane cultivation area; beginning of crushing season; to fixing of ex-factory, and even retail price; all require some form of government intervention? No other crop – not even wheat – faces so much administrative interference. Interference, that results in little to no public welfare, as evident by volatility witnessed both in market price of sugar, and industry’s output.
For their part, both the media and policy analysis community - especially economic commentators who champion administrative intervention - must explain why sugar industry takes up so many manhours of public policymaking. From district price controllers to MPAs, cabinet members, and finally - even the prime minister, spend their valuable manhours – all paid for by the taxpayer - trying to manage the ‘sugar market’, with little success. Although sugar industry’s contribution to the economy is much appreciated, it is indeed a 20th century industry, as often noted by PIDE’s Dr Nadeem ul Haque. Why then must there be an Office of Cane Commissioner – a relic of British Raj; price monitoring committees; consultation boards in every province; and a Sugar Advisory Board at the federal level? And to what effect?
Second, the ruling party (as well as Pakistan’s policymaking community in general) must give up its parochial obsession with achieving ‘self-sufficiency’, at least so far as sugar is concerned. Contrary to popular notion, sugarcane is a cash crop, not a food crop. By any measure, sugar is not an industry of strategic importance to national security. Although the industry certainly does not deserve to be persecuted in the name of accountability, neither does it deserve protection from foreign competition in the name of ‘industrialisation’, ‘import substitution’, or ‘farmer welfare’. Nor should it be afforded the opportunity to sell surplus output to state agencies, when instead it should compete in export market on purely commercial terms.
At current peak global commodity prices, national consumption of sugar would cost no more than $3 billion in imports. The argument of course is not to put local sugar industry out of commission through force, but to stop the asinine attempts to regulate its output. Instead, government must let private sector importers anticipate, and fill in supply gaps as and when they arise. Remember, the country imports more than fifty percent of locally consumed dals and pulses. Has anyone ever needed to know where those imports come from, who fixes their prices, or the identity of the importers?
Third, if the incumbents are truly committed to reform, they must speak the whole truth, and also persuade the opposition parties to do so. Yes, the industry suffers from excessive political footprint which is a function of the economic returns and employment it generates in the rural areas. Ensuring higher prices for producers (both farmers and millers) means consumers must get the short end of the stick. Of course, it is a zero-sum gamble, but one that pays off in following election cycle, as rural elite are a crucial constituency in electoral politics. If policymakers truly wish to break this nexus, they must eliminate the perverse incentive structures that enable this behaviour.
For this to happen, the first step must be to remove excessive regulation. Ban on establishment and expansion of sugar mills is not only anachronistic, but it also reveals a complete lack of imagination on part of legislators. If private businesses see commercial sense in establishing (or expanding) mills in ‘erstwhile cotton belt’, allow them to do so. Greater competition will not only increase output, but it will also reduce the bargaining power of the chosen few who currently control the levers of both production and politics.
Similarly, the ban on intra-provincial relocation of mills is inherently uncompetitive and must be eliminated. If cane cultivation renders land barren – as some environmentalists would have us believe - impose levies on its cultivation for the negative externalities it causes. If cane is more water-intensive than other crops, price in the excessive water consumption at farm-gate. Let technology be your guide to determine if it is truly the case.
It must also be acknowledged that every political party (or their stalwarts) have abused these poorly designed laws for own benefit. When the Sharif Group in 2016 obtained special NOCs to relocate its mills to south Punjab, it was wrong as it violated principles of equity (favoured one party over others). Yet, when JDW et al, took to court to stop this relocation - which had hoped to benefit from the higher quality cane grown in Rahim Yar Khan region - that was wrong too, as JDW sought to eliminate competition using legal manoeuvring, not fair contest.
If mills in some areas are no longer financially viable as the cane grown in home region is of low quality, let them die out. If farmers are paid less than an arbitrary floor price due to low sucrose content of their crop, let it be the case so they may shift away to more viable crops in subsequent seasons. It has already happened in central Punjab; just conduct a survey of profitability of ex-cane farmers who shifted away to maize and basmati rice out of free choice. Give up the antiquated obsession with crop zoning. And finally, ask yourself why Pakistan imports sugar from Al-Khaleej Refinery in UAE – a country with no indigenous sugarcane cultivation. That’s because nations with progressive outlook long ago established local industries based on the concept of sugar tolling – where raw sugar syrup is imported from as far as Australia – and refined in UAE locally to produce and re-export white sugar and other value-added products.
If sugarcane has truly damaged cotton or wheat cultivation prospects so much, allow progressive businesses to setup tolling operations in the country, so that local cultivation is no longer encouraged, a consequence of high tariffs on import. In future, if higher sugar prices prompt product substitution, let that take place as well. Commercial consumers for example, may one day find it cheaper to use high fructose corn syrup (that can be manufactured locally). Corn crop has performed tremendously in recent years, away from the watchful eye of overzealous regulators.
Take away the clutches – both from farmers and from the milling industry – and let them compete. Currently, the regulatory framework of sugar industry is neither free nor fair. Stop regulating, stop subsidizing, and definitely – do not turn sugar into a state procurement operation like wheat. As if Food departments have a stellar record in preserving wheat stocks, that we would want to entrust them with another commodity, only to bleed the exchequer dry?