PTI’s Dar moment

And no, it’s not the dollar. Between FY19 – FY22, the ruling party has burned a hole of over Rs200 billion in the provincial governments balance sheets (excl. Sindh), in a failing attempt to manage price of wheat flour. The outcome? A commodity market that has perpetually remained in turmoil and prices that now stand at the brink of another upward spiral.

Consider the following. According to Punjab government’s budget documents, between FY19-FY22, Rs180 billion have been budgeted by the provincial government as interest payments for “state trading in grains”, primarily wheat. The debt servicing is accrued against annual commodity procurement operations, financed through borrowing from commercial banks. Commodity debt is ostensibly incurred to bridge the gap between procurement and issue price; prices at which wheat is purchased from farmers (i.e. minimum support price), and sold to flour mills (i.e. release price).

But here is the kicker. Although MSP is supposedly fixed at above-market rate to support farm income, provincial governments release grain to flour mills at a mark-up, to cover the cost of incidentals (storage etc). In return for supplying grain at a fixed price to mills, provincial governments fixes price of flour (low/average quality) at retail level, aimed at stabilizing staple prices for the general population.

Is the policy working? Seemingly, especially if one goes by the flour prices reported by PBS in the weekly SPI index. At Rs 550 per 10kg bag, price of average quality flour in major consumption centres of Punjab and other PTI-led provinces is currently lower than wholesale price of wheat. That would indicate that the consumer welfare program is delivering on its objective, never mind whether PBS reported prices are reflective of average prices on the ground or not (spoiler alert: they are not!).

What is the cost of this program? Between Sep-21 and Nov-21, provincial commodity debt witnessed the sharpest fall in recent memory, falling by Rs60 Bn in just 60 days. This decline coincided with the beginning of wheat release to flour mills at sarkari rate. In turn, 10kg bag flour price in Punjab fell from peak of Rs590 to Rs550 in Oct-21 and has since stayed firm (as per PBS).

But twice under the PTI tenure have prices proven that they listen to no one. Between Sep 2019 and Oct 2020, flour price was artificially held at Rs 410 per 10kg, before it rose over Rs500 in June 2020. Later, administrative coercion brought retail price flour back to Rs430 per kg in late 2020, before it finally spurt of control to over Rs530 by March 2021 (remember, these are SPI prices; never mind whether flour is actually available at these prices on ground).

So, why are provincial governments constantly engaged in a game of whack-of-mole with flour prices? Clearly, administrative tactics can only keep market prices below equilibrium for so long. In order to keep the delta between MSP and retail price within range, governments would be forced to keep MSP constant. Except, if MSP is not raised in line with international prices, farmers switch away to more profitable crops, lowering output. On the other hand, when the MSP is raised, retail price must rise as well (to reduce fiscal bleeding), eventually bringing market rate closer to equilibrium, only with an unnecessary lag. And the vicious cycle continues ad nauseum.

In between, provincial governments keep borrowing endlessly from commercial banks, not quite different from a gambling addict. Policymakers know it’s a game they are going to lose sooner or later, as local prices must play catch up with international prices if the administration is to avoid a domestic shortage. Afterall, abnormally lower local prices make smuggling more attractive, never mind the ‘more-than-95-percent’ diligently fenced western border.

So, is the whole nation losing for the benefit of a small farming lobby? Hardly, if you consider that if Pakistan had functioning commodity markets and well-oiled supply chain, farmers would have fetched a higher price for their produce in the international markets (than they did at the price paid by governments) for past two seasons – and possibly in the next season as well. But wheat farming is not a free enterprise. As the buyer of one-fourth of total domestic output, government-fixed MSP sets a base price for the market. Thus, even private buying takes place within the same price range.

Meanwhile, the delta between government’s cost price (cost of procurement + incidentals) and MSP has only widened in the past four years. That’s euphemism not for farmer welfare, but rather the rents paid to commercial banks against the mounting commodity debt.

With a shortage of urea during the ongoing cultivation season, the steep fall in provincial government stocks in the last quarter; and, the relentless rise in international wheat prices, the deck is already rigged against wheat prices during 2022. Yes, yields can throw in a surprise. Yes, international prices may finally calm down. But will the farmers please stand up, and put an end to the day light robbery conducted in their name?