The sugar industry in Pakistan has long been a textbook case of market distortion. For decades, it has operated under a complex web of government intervention, protectionist policies, and political influence, shielding itself from the fundamental forces of supply and demand. The industry, dominated by a small number of politically connected families, has enjoyed subsidies, guaranteed minimum support prices for sugarcane, and protection from competition, both domestic and international. This regime of artificial incentives has fostered inefficiencies, restricted competition, and distorted price signals, ultimately burdening consumers and the broader economy. However, after 75 years of coddling, the government has finally taken a decisive step towards liberalizing the industry, marking a rare moment where policy reform has aligned with economic rationality.
This shift, long advocated by economists and independent analysts, has also been shaped by external imperatives. The recent agreement under the latest IMF program, initiated in the fourth quarter of 2024, has played a significant role in pushing the government toward market-oriented reforms. The IMF’s structural adjustment requirements have, once again, forced policymakers to confront the inefficiencies within the economy, particularly in sectors where rent-seeking behavior has historically flourished. The sugar industry, with its history of protectionism and politically motivated interventions, was an obvious candidate for reform. The IMF’s insistence on market discipline, combined with Pakistan’s worsening fiscal constraints, has compelled the state to finally withdraw from micromanaging the sector.
The impact of these reforms is already unfolding. As of December 2024, the latest crushing season has commenced without the announcement of a minimum support price by any of the provinces. While provinces still reserve the right to impose an MSP if deemed necessary, it is currently not being enforced. For the first time, sugarcane procurement and trading are taking place at market-determined prices. Farmers and millers are now negotiating directly, and the market rate for sugarcane is currently about 15 percent higher than it was during the same period last year. This represents a significant break from past practices, where government-imposed price floors often led to artificially inflated costs for millers, which were then either passed on to consumers or used as a justification for subsidy demands.
In tandem with domestic price liberalization, trade restrictions have also been eased. The government has not imposed explicit restrictions on sugar imports, and the industry has exported over 700,000 metric tons in the last seven months, at an average export price of $540 per metric ton—higher than the prevailing wholesale price of refined sugar in local markets. This policy shift has allowed millers to capture value from international markets and improve liquidity, a stark contrast to previous years when export quotas were granted in an ad hoc manner, often favoring select industry players.
However, the consequences of this newfound liberalization are now becoming apparent, and not all of them are positive. Over the past 90 days, sugar prices have surged by more than 16 percent, reversing a 17-month-long decline. This development is creating nervousness among policymakers, as sugar price hikes have historically triggered inflationary spillovers into other essential commodities, particularly wheat and flour. At its peak in November 2021, rising sugar prices accounted for nearly one-tenth of overall food inflation in the Consumer Price Index (CPI), underscoring the commodity’s outsized impact on broader price levels.
Some of these price increases are seasonal. With Ramadan and the summer season approaching, commercial and industrial users are stocking up, leading to a temporary demand spike. Yet, the broader concern is that sugar prices are rising even during peak crushing season—December to February—when they historically decline due to increased supply. This anomaly suggests that either a genuine supply shortfall is brewing or that speculative profiteering is at play. If the latter proves true, it risks undermining the very foundation of the market liberalization effort.
The government, despite its newfound commitment to deregulation, is unlikely to sit idly by if inflationary pressures mount. While it may not immediately roll back market liberalization, the temptation to intervene will grow as political pressures build. Provincial price monitoring and control committees, long a tool for ad hoc intervention, could soon be activated to rein in perceived profiteering. Policymakers have spent the past two years painstakingly bringing inflation down from crisis levels, and they will be wary of allowing a sugar-driven price spiral to undo those gains. If sugar prices continue their upward march, there is a real risk that the state will relapse into old habits, imposing price caps or trade restrictions that would reintroduce distortions into the market.
Yet, the surge in sugar prices is not fully justified by rising raw material costs alone. While sugarcane prices have increased, they do not account for the full magnitude of the recent spike in retail prices. More critically, the broader financial environment has shifted in ways that should theoretically ease cost pressures for millers. Interest rates have halved, significantly reducing the inventory carrying costs for the industry. The argument that high financing costs necessitate elevated sugar prices no longer holds the same weight. The more plausible explanation is that, in the absence of government controls, industry players are now testing their pricing power, capitalizing on their dominant market position to extract higher margins.
This behavior carries risks. Millers have fought long and hard for deregulation, and they have, for now, succeeded. But if they abuse this newfound freedom, they may find themselves facing a government that is all too willing to push back. Policymakers, already attuned to the public outcry over food inflation, may see excessive profiteering as grounds for re-imposing price controls, trade restrictions, or other forms of regulatory intervention. If the industry wishes to avoid a reversion to the old regime, it must exercise restraint and price responsibly, ensuring that market liberalization does not morph into an opportunity for unchecked rent-seeking.
At the same time, policymakers must recognize that the only sustainable way to dilute the market power of the sugar industry is to introduce genuine competition. The first and most immediate step is to create a level playing field for sugar substitutes, particularly high fructose corn syrup (HFCS), which is widely used in industrial and commercial applications globally. For years, HFCS has faced regulatory and tariff barriers in Pakistan, largely due to lobbying by the sugar industry. Removing these barriers would not only offer consumers and businesses alternative sweetener options but would also weaken the ability of sugar millers to dictate market prices.
Beyond fostering competition among sweeteners, the government must expedite efforts to introduce refined sugar commodity futures trading through Pakistan’s commodity exchange. Futures markets play a critical role in price discovery, allowing both producers and consumers to hedge against volatility while reducing uncertainty in supply chains. In the absence of a minimum support price, growers need a mechanism to forecast potential earnings before planting season. The introduction of sugar futures trading would bring greater transparency to the market, reducing the likelihood of sudden price shocks and speculative excesses.
The liberalization of Pakistan’s sugar industry represents a pivotal moment in the country’s economic policymaking. For the first time, the government has demonstrated the political will to dismantle entrenched protections and allow market forces to play a decisive role. However, the transition is fraught with challenges. The early price surges are testing the patience of policymakers, and the specter of government intervention looms large. The sugar industry, having secured the deregulation it long sought, must now act responsibly, lest it provoke a regulatory backlash.
Ultimately, the success or failure of this experiment will not be determined by short-term fluctuations but by the government’s ability to stay the course and push forward with complementary reforms. Ensuring open competition for sugar alternatives and establishing a well-functioning commodity futures market are critical next steps. Pakistan has a rare opportunity to correct a historical policy misstep and build a more efficient, market-driven sugar sector. Squandering it would be yet another self-inflicted wound in the country’s long struggle for economic stability.
Comments