The Competition Commission of Pakistan (CCP) has warned the government against fixing a sugar price and trying to make this commodity available at a low fixed price.
In the report that the CCP submitted to Supreme Court of Pakistan following apex court's orders to determine the cost of production and profit margins in the sugar sector, it has been argued that generally about 70 percent of sugar produced in Pakistan is consumed for commercial and industrial purposes. Domestic consumption forms a much smaller part of this consumption pattern.
"By fixing a price and trying to make sugar available at a low fixed price the government will in fact be subsidising the commercial and industrial users. Such a policy would not reflect sound macroeconomic thinking and would be simply untenable," according to CCP report.
In its analysis of the sugar crisis, the report says that it is the considered view of the Commission that the hike in sugar prices was not the real crisis that the media appears to have made it out to be. Rather, the nature of the crisis, as per the considered view of the Commission, is really the non-availability of commodity to the consumer.
In the developing world, availability of commodities is of the utmost importance. This crisis of non-availability was precipitated, in particular, by the actions of the government of Punjab in August 2009 when it sealed the sugar mills and seized the stocks lying with the mills. This contributed in a most direct manner to interference with the normal demand-supply linkages of the sugar market. The panic on the part of the provincial governments disturbed these linkages to the detriment of all stakeholders, especially those on the supply-side such as sugar mills, dealers and retailers, the report says.
According to the Commission, the incentive for making sugar available was taken away by the actions of the provincial governments as supply-side stakeholders feared that the fixed price would not allow them reasonable margins and to continue doing business. Whereas, the raids may have been motivated by a desire to ensure that trend of rising prices does not lead to hoarding of dealers' stocks lying with the mills the resultant policy measures were drastic. Punjab government imposed a fixed ex-mill and retail price, without carrying out the necessary analysis of the market and all the factors influencing it.
"Any retail price calculated in this manner will hurt the availability of sugar to the consumer. Mills, dealers and retailers alike will be hurt and will look to sell elsewhere. In fact, this is already happening," the report says and adds that Pakistan has porous borders with its neighbouring countries, particularly Afghanistan, and sugar is also smuggled to India where the prices of sugar are much higher. Hence, ensuring availability on the basis of a pre-determined retail price may not be viable. It is no secret that finding sugar in the market these days, at the retail level, is extremely difficult.
"A steep rise in the price of sugar, although lamentable because of the burden on the poor man's pocket, appears not inconsistent with the global trend. It is no secret that generally inflation in Pakistan has been on the rise. Factors relevant to the sugar sector cannot be ignored," the report says and adds that there has been a decline in sugarcane acreage. Input costs have increased in view of higher prices of fertiliser, oil and electricity shortage. Such decline in acreage and higher input costs at the farm level is reflected in the cost of production of sugar at the mill level.
The TCP did not have enough reserves of sugar to be released into the market to bring the price down. However, a competitive market where demand-supply linkages are not distorted can arrest rising prices by bringing more sellers to the market.
"The panic of the Punjab government at rising prices, its decision to seize stocks and impose a fixed ex-mill and retail price resulted in sugar being unavailable. Supply-side stakeholders were not willing to sell and lose their margins in the domestic market," the report says.
The fact that other provinces followed suit has apparently ensured that supply-side stakeholders have lost confidence in getting prices that protect their commercial interests. Hence, an inefficacious response to rising sugar prices precipitated the crisis we face today: the unavailability of sugar, according to the report.
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