If you want to make a muck of something, entrust it to the government. Starting in 2019, this will be the fifth consecutive season when administrative intervention (or lack thereof) has caused a disruption in the wheat market, turning minor bumps into hazards. But God forbid, can the servants of the republic leave the public alone.
Before we take a deep dive into what went wrong, let’s first get the juicy bits out of the way. First: who is to blame? Both the incumbent wise guys in Punjab and the caretakers in the Center. Two: was the decision to allow wheat imports a horrible idea? No, not at all. Three: was there any corruption involved? Could be. But always remember the cardinal rule of governance in Pakistan: if you are just the right amount of incompetent, ‘you don’t need any corruption’ to make a mess out of a perfectly valid policy. Fourth: are farmers making losses? Some, but nothing that still cannot be mitigated. And lastly, could this predicament have been avoided altogether? Yes, definitely.
We are here because of five predictable policy failures: i) successive political government’s penchant to procure excessive quantities of wheat in seasons leading up to general elections to secure farmer votes. ii) raising the minimum support price to the point where local production becomes uncompetitive versus the international market. iii) using high carryover inventory as an excuse to exit procurement without notice when debt servicing balloons are out of control due to high markup rates. iv) freezing procurement prices post-election, forcing farmers to take losses. v) lack of agility in decision-making and policy implementation vi) absence of transparency in governance, which turns even well-intended actions suspect.
Let’s be clear. We are not here because Pakistan had a bumper wheat crop or output exceeded the prediction. Wheat production during rabi 2024 is only 5 percent – or 1.5 million metric tons (MMT) – higher than last year. In fact, per the Federal Committee on Agriculture (FCA), Pakistan missed the wheat production target by 8 percent or 2.5 MMT. Wheat imports in the fiscal year to date, on the other hand, stand at 3.5 MMT. So, what is all the ruckus over 1MMT extra imports?
Hindsight is 20-20. But back in July or September 2023 (or even up to Dec), no market player or bureaucrat could have forecast – with any degree of confidence - where would local production land come in May 2024. Although no bureaucrat or policymaker would admit as much, the fact of the matter is that each time they present forecasts of national wheat requirement, their estimates take into account the leakages across the western border via smuggling.
So, yes, if you are a secretary in the Food department, and it appears that the country would once again miss production targets, you would absolutely endorse any summary to allow imports to build stocks during the off-season and ensure price stability. What went wrong then?
What the public servants did not see coming – and they never can – is the law of unintended consequences. Back when the first permits for wheat import were issued around September 2023, commodity smuggling across the western border was rampant, along with a currency in a downward spiral. Whenever the currency weakens, export or outward smuggling becomes lucrative. Look closely at the graphs and you will notice that despite the flow of cheap imports, prices in the local market remained strong up until January 2024. And since we don’t believe in exports, the pressure for smuggling only exacerbates.
But then another thing happened. As the currency began to find firm footing by year-end, wheat prices in the international market also fell. Meaning? It was no longer attractive to smuggle in a currency that was strengthening when cheaper wheat was available in the international market from other destinations. That was mistake number one, a failure to recognize that overall demand for grain in the country would drop due to currency stability and curbs on administrative smuggling. Let the PKR depreciate to 350, and you will soon find out that even the wheat already imported and produced isn’t enough.
The other thing that went wrong? The stasis in public policy. Google ministerial speeches, estimates, datasets, and forecasts of Pakistan’s national wheat requirement, and you would find it is based on a simplistic – and possibly, dated assumption: 125kg per annum per capita.
Never mind that in less than four years, wheat prices in Pakistan have risen by 3 times, at a rate higher than any other commodity. To assume that the government can double the wheat purchase price in the run-up to elections without any discernable impact on quantity demanded is downright dumb, pardon the French. As if consumption decisions are price inelastic as if consumers have no budget constraints when it comes to flour purchase. And to think the decision to allow imports, fix prices, or set production and procurement targets takes place at the highest forum of policymaking: the Economic Coordination Committee. Maybe leave it to the SIFC next time.
But let’s chalk that one out to judgment error. Still, does not mean that the series of unfortunate events that followed was unavoidable. While it is true that decision-makers do not have visibility on upcoming crop estimates till Dec, crop performance becomes increasingly better known by Feb end, when early harvest begins in coastal Sindh. The fact that wheat import has been allowed into April, with 0.7 MMT landing at Karachi port in March alone, shows how slow and inflexible decision-making is in the country.
The argument being made for slow public procurement right now is that wheat stocks from the past year are yet to be lifted from Food Department godowns. If the import of 2MMT by the private sector during Sep 2023 – Jan 2024 had caused a slowdown in the offtake of public sector wheat stocks, why was the situation not flagged immediately? Why was a summary not raised to immediately push the brakes on imports? We are all too familiar with this story, and it is often a mixture of incompetence, bureaucratic red tape, and malfeasance.
As of last week, the provincial government has taken a public position that it has decided to exit procurement because it leads to massive leakages, and causes a massive financial burden on the exchequer, with small farmers and consumers unable to benefit from the administrative intervention in the market. This is a commendable position but one that also reeks of malintent.
The history of public sector intervention in the wheat market dates back to pre-partition. Both the federal and provincial governments procure grain from farmers during the peak harvest season to stabilize market prices and build reserve stocks. Although the public sector procures about one-fourth of total domestic production, as the single largest buyer in the market it sets the base or reference price at which private sector participants also transact.
The decision to exit by the single largest buyer (which buys 25 percent of output) cannot take place in a vacuum in the dark of the night. During peak harvest in mid-April 2024, farmer groups across the country were still debating whether the government would raise procurement prices in the ongoing season or not. The complete lack of transparency with which the decision has been taken is downright criminal because it has directly contributed to the price manipulation in the secondary market, with grain prices collapsing some 20 percent, and falling significantly below the purchase price from last season.
And lest we forget, the public sector is not to be trusted. As explained earlier, a similar decision to lower procurement was taken under the Buzdar government in 2019, only to cause disenchantment among farmers, leading to a shortage in the following year. The shortage during the COVID year (2020) was so severe that the Food Department attempted to meet its targets by imposing Section 144 across the province and raiding private properties of farmers to secure grain. Readers would recall that farmers were prohibited from storing wheat beyond 25 maunds that year, less than the seed sowing requirement of most growers.
The public sector’s desire to plug the leakages in procurement by exiting the wheat market is one that many – including this author – share. But such substantive policy reform cannot be enforced in a cloak-and-dagger manner. The lack of transparency is only made worse by the lack of credibility, given the history of policymakers walking back on their decisions if the market position changes from a surplus to a deficit in the coming season. What is to say that without a clearly laid vision and publicly announced strategy to exit the procurement business, the public sector might re-enter if it suits the objectives of political masters next year, especially once markup rates also fall?
It is clear that today, PML-N’s political goals are best served by letting the grain prices fall, which it hopes shall eventually cascade into the lower price of roti at tandoor. Although the policy is clearly to the detriment of farmers, they might just accept it as fait accompli if thrown a bone in the form of input subsidies for upcoming kharif crops or lower tubewell tariffs, etc.
PML-N has made a political bet. However, if the end consumer prices of roti and bread do not fall in tandem, there better be hell to pay.
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