How much is a dollar worth? The response may vary depending upon who is answering. An importer for example, may price in expectation of future devaluation and give a forward rate. But for sugar millers last year, a dollar worth of exports earned twenty-one rupees above the exchange rate. Here’s how.
Fifty-five out of total 82 (operational) mills in the country raked in $522 million in exports during MY18 (Oct 17-Sep 18). Millers were able to make these exports as a result of two million metric tons allowed by MoC in September 2017, with a subsidy of Rs10.70 per kg.
Thus, at MoC estimated per kg price of sugar of Rs54.87, and average exchange rate of Rs114.5 per dollar during the period, average exporter received at least Rs21.4 in freight subsidy for every dollar worth of export.
According to data published by exchange policy department at the central bank, it received requests for approval of 2,062 export orders until the quota was fully exhausted by June 2018. PBS numbers also corroborate this story, at least partially, given the delay in regulatory approval and actual shipment. Between Oct 17-Sep 18, close to 1.6 million metric tons of sugar was shipped, roughly three-fourths of allowed amount – with no additional exports in the following two months. It thus may be inferred that allowed quota was not fully realized.
So how much did half a billion of exports cost the ex-chequer? Between Rs17 billion and Rs21 billion, depending upon whether you take actual PBS export figures or orders approved by SBP as proxy. To put the number into perspective, subsidy availed is equivalent to whopping 28 percent value of exports (based on the conservative PBS estimate)!
As a result, mills that managed to rope in export orders reveled in a dollar bonanza, not seen in at least past three years. Additional gains were made on exchange by delaying realization of export proceeds, a routine matter for export-oriented businesses. If sample drawn from annual accounts published on PSX so far are any guide, even mid-sized players such as Al-Abbas Sugar focused all energies on export markets, with up to 90 percent of sugar segment revenue drawn from export sales. Top beneficiary of subsidy was JDW, with over Rs2 billion raked in based on export orders reported to SBP. But given company’s share of 11 percent in overall sectoral output that number should come as no surprise.
But notice how exports went completely dry in PBS figures for October and November 2018, once the budgeted subsidy was fully utilized. Is this how the government wants to earn dollars and at what cost? Twenty-eight cents per dollar, it turns out.
This season, the sector is seeing a repeat of 2016-17. Encouraged by export orders, the millers had ramped up production, building inventory in anticipation of another round of subsidy. However, reluctant to once again support an uncompetitive sector at the cost of public money, the government has announced export quota of 1.1 million tons but has declined to offer subsidy.
As a result, the sector managed to export a little over $19 million in Dec-18, compared to exports of $53 million in Dec-17. Given the inability of millers to meet export orders in absence of subsidy, the sector may see another cycle of surplus stock build up. Millers may resort to time-tested tactics of forcing government’s hand by refusing to procure sugarcane from farmers until export subsidy is announced.
Are millers to blame for sector’s faults? Not necessarily, as their strategy is only a reaction to indicative pricing of sugarcane, which is held artificially high, due to political governments’ undying desire to play to the “farmers’ gallery”. This supply-side distortion incentivizes farming sector to continue planting more sugarcane, resulting in increase in area under cultivation year after year.
On the flipside, millers are forced to produce more white sugar, as “crushing at full capacity” is usually one of the pre-conditions to avail export quota. And thus, continues a vicious cycle, in which all parties feed off each other, yet cry foul for being a victim of others’ tunnel vision thinking.
This diagnosis is not without basis. During MY18, total supply of white sugar exceeded 8 million tons, a surplus of 45 percent over domestic reported demand of 5.5 million tons, when the government finally yielded with an exorbitant budgeted subsidy of Rs21 billion.
Is this how the government wishes to run the sector? In its annual report on State of the Economy, even the central bank has spoken against the support price mechanism and asked the government to review it. The policy is reactive and makes sure that no one takes responsibility for the mess. Farmers complain that millers delay procurement and refuse to pay the government-set rate, whereas millers point to the accumulated losses on their balance sheets as proof that they are a victim of bureaucratic myopia. And government loses an odd twenty billion rupees.
The inter-ministerial committee of MoC, MNFSR, and MoIP meets every month to review sugar situation in the country. If review of support price mechanism is not on the agenda, then what is?
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