Pakistan’s rural economy needs rescuing from its own govt

Pakistan’s economy has struggled to find sustained growth momentum over the past two years, held back in part by depressed farm incomes and the resulting weakness in rural demand. The modest manufacturing recovery in FY26 has been driven largely by urban consumption and remittance inflows, while rural Pakistan has contributed much less.

There are now early signs that this may be changing. Agricultural commodity prices have begun to rise, improving the economics of farming and putting more cash into rural hands. That is welcome, but it should not obscure what came before: the government’s confused agricultural policies amplified the damage from the commodity-price downturn of 2023-25 and prolonged the squeeze on farm incomes.

The contradiction has been apparent throughout. On one hand, the government sought to reform agriculture by dismantling the wheat support-price regime and retreating from large-scale procurement. On the other, it continued behaving like an interventionist state whenever food inflation became politically uncomfortable, importing wheat when international prices were low and subsequently releasing public stocks to suppress domestic prices.

That approach was neither a functioning support-price regime nor genuine liberalisation. It amounted to price management without accepting the corresponding obligation to protect producers from the consequences of government intervention.

The contrast with 2019-22 is instructive. Domestic support prices rose sharply while global agricultural prices surged following Covid and Russia’s invasion of Ukraine, lifting farm margins substantially. Farmers spent more on vehicles, housing, clothing, agricultural machinery and consumer goods, with the benefits spreading through rural supply chains and contributing to the broader demand conditions that accompanied two consecutive years of 5-6 per cent GDP growth.

The 2022 floods disrupted that momentum, after which international commodity prices reversed and a series of domestic policy mistakes compounded the damage. Rather than allowing local prices to adjust through the market, the authorities increasingly treated cheap agricultural commodities as another instrument for controlling inflation.

Wheat provides the clearest example. The caretaker government allowed large quantities of wheat to be imported during 2023-24, with shipments continuing as the political transition took place. By the 2024 harvest, Pakistan was carrying abundant supplies just as domestic farmers brought their crop to market, while Punjab retreated from procurement at the previously announced support price.

The consequences extended well beyond a single harvest. By 2025, wheat prices had fallen dramatically from their earlier peaks while many input costs remained elevated, forcing farmers to absorb much of the loss. Traders with storage capacity were able to accumulate grain cheaply, while the state continued sitting on substantial stocks acquired under the old procurement model.

The 2022 floods were an external shock, but much of what followed was not. The state failed to rehabilitate agricultural production and productivity with sufficient urgency, while restrictions on trade through the Afghan border weakened an important outlet for agricultural exports and added further pressure on domestic prices and farm incomes.

More fundamentally, repeated climate shocks have exposed how little progress Pakistan has made in modernising agriculture and building mechanisms that allow farmers to manage risk. Crop insurance remains shallow, technology adoption uneven, water management inefficient and productivity growth weak. Extreme weather cannot be prevented by government, but leaving farmers repeatedly exposed to it without credible insurance, adaptation and productivity-enhancing reforms is a policy failure.

The result was therefore not simply a run of bad luck. Falling global commodity prices interacted with poor domestic policy, weak rehabilitation after the floods, restricted market access and the absence of a coherent agricultural modernisation strategy. Government intervention then compounded those failures by using lower farm prices as an instrument of food-price stabilisation, effectively transferring much of the adjustment burden onto producers.

The cycle is now reversing, largely without much help from the state. In 2026, agricultural commodity prices are recovering, while domestic wheat prices have risen particularly sharply as government inventories have declined and private trade has regained a larger role in price formation. Traders who accumulated grain cheaply benefited first, but higher market prices are increasingly improving the economics for producers as well.

The other side of the farm-income equation is also becoming more favourable. Input costs have not risen nearly as quickly as output prices, domestic urea supply remains relatively comfortable, and DAP prices have not moved in tandem with crop prices. Meanwhile, rapid solarisation has reduced the exposure of many farmers to diesel and electricity costs for irrigation, helping improve margins further.

That improvement matters far beyond agriculture. Farmers are unusually important marginal consumers in Pakistan, and when crop incomes collapse, spending on motorcycles, appliances, clothing, construction materials and packaged consumer goods falls with them. When agricultural liquidity improves, the effects travel quickly through small towns and into the manufacturing and services businesses supplying them.

There are already tentative indications of that transmission. Wheat growers are in a better position than they were a year ago, while firmer rice and cotton prices could provide further support during the coming season. Motorcycle manufacturers and consumer-goods companies are also beginning to report signs of improving rural demand, suggesting that healthier farm cash flows may finally be feeding back into the broader economy.

The problem is that policymakers may once again be tempted to interrupt that recovery. The government is already under pressure after the sugar export-import saga, while the sharp increase in wheat prices is reviving concerns about food inflation. The familiar response would be to release stocks aggressively, facilitate imports or otherwise force domestic prices lower in the name of protecting consumers.

That would repeat precisely the mistake of the past two years. Pakistan does need a functioning mechanism to protect consumers from food-price shocks, but suppressing farmgate prices is an extraordinarily crude way of doing it.

If low-income households require assistance, they should receive targeted support rather than an implicit subsidy financed through lower producer prices. If the country requires strategic grain reserves, their accumulation and release should operate according to transparent rules rather than discretionary interventions timed around political pressure.

And if agriculture is genuinely being liberalised, trade policy must become predictable enough for farmers, traders and private investors to make production and storage decisions without constantly second-guessing Islamabad. A market cannot function properly when the state withdraws from procurement, manipulates imports, restricts exports, releases stocks opportunistically and still expects private participants to behave as though the rules are stable.

Agriculture remains one of Pakistan’s largest sources of employment and rural purchasing power. After two years in which falling farm incomes helped suppress domestic demand, improving crop prices finally offer the possibility of a broader recovery. The government should use that improvement to build a more predictable agricultural market rather than once again sacrificing farmers whenever urban inflation becomes politically inconvenient.

The rural economy remains only one climate shock away from another downturn. That makes this recovery fragile, but it also makes the policy choice unusually clear: Pakistan does not merely need higher farm prices; it needs a state that stops destabilising agricultural markets and finally starts building the institutions, technology and risk-management systems that a modern rural economy requires.

Copyright Business Recorder, 2026