Cash margin on wheat

The State Bank of Pakistan belatedly stepped forward on 10th May, to lend a helping hand to the administration to counter the abnormal rise in the price of wheat. It imposed a cash margin of 50 percent on bank loans granted to the private sector for the procurement of wheat.
The banks have been further directed to ensure that advances provided, or to be provided, by them for purchase of wheat to the private sector are adjusted in full latest by September 30th 2004.
The decision has been taken, the State Bank said, "with a view to discouraging hoarding of wheat and to ensure stability in the prices of flour and wheat and their continued availability throughout the year, especially during the lean months, at affordable prices."
SBP directives would, however, have a limited impact, as banks can only make the borrowers adjust loans taken as a demand facility, and they are powerless against borrowings made on revolving basis or as an overdraft facility.
Nonetheless margin imposition by the State Bank is obviously well intentioned. It should be viewed as a step taken in exceptional circumstances and not as a reversal of its policies to let the banks determine cash margin limits on pure risk basis, varying from customer to customer.
It is now for the banks to read the signal from the central bank and discourage the manipulation of wheat prices by forces bent on taking undue advantage of the situation.
As is well known, the government had been the main source for the supply of wheat for decades and because of this only a few incidents of price hike took place in the past.
The entering of private sector in the procurement process in a deregulated environment last year produced unexpectedly negative results and led to an artificial shortage of the commodity.
With the prices of flour jumping by 80 percent from Rs 10 to Rs 18 per kg, the situation became so critical that the government decided to import wheat.
The rejection of wheat imported from Australia on the basis of laboratory tests, which found it unfit for human consumption, only compounded the problem.
However, with the arrival of the new crop, the flour prices slipped to Rs 12 per kg but only for a short period, and started moving up again when Punjab imposed a ban on wheat movement.
This provided a fresh chance to the private sector to increase prices to Rs 15 - Rs 17 per kg. Despite repeated pleadings and warnings from other provinces, Punjab appears adamant not to allow wheat movement until it is able to procure 3.5 million tons.
The ground reality is that the Punjab government has been totally out-gunned by the private sector which is making on the spot payment to the growers and also offering a higher price.
Farmers selling wheat to the government have to wait days to get the payment for their produce. And, every so often one has to pay speed money to expedite receipt.
The imposition of margin restriction by the State Bank is a selective credit control measure and would make it more difficult and expensive for the hoarders to stock wheat bought with the help of credit from the banking system.
With the reduced flow of financial resources to corner the stocks, more wheat is likely to be available in the market which would have a depressing effect on its prices.
The benefit to the consumers and political advantages of such a step are thus obvious. However, it needs to be added that this measure alone is not sufficient to bring long-term stability in the wheat market.
The present turmoil in the market was brought about largely by the inability of the government to make the right moves at the right time.
Particularly, it took too long to decide to ease the supply situation by importing wheat and ban its export.
The continuing tussle between the provinces about the cross-border movement of the commodity has further aggravated the crisis.
Since wheat is such a basic commodity, the need for long-term planning for maintaining enough stocks and stability in prices cannot be over-emphasised and the government must move quickly on this front.
Also, the State Bank needs to be more vigilant in monitoring price trends and be ready to take selective control credit measures in order to discourage the hoarders from manipulating the markets at the expense of the consumers.
In our view, the present measure was due when the signs of instability first appeared in the market. So much delay on the part of the State Bank is not understandable.
The State Bank also needs to review the whole situation, particularly that of foodstuffs including rice which may now be targeted by the manipulators. Institutions of the state need to act faster and in tandem to ensure price stability and adequate supplies at least of basic necessities of life to all the citizens of the country.