Sugar inquiry: some honesty might help

All eyes are set on the telly for the release of sugar industry’s forensic audit report due to be submitted on April 25. In this game of chess, all sides are ready to eviscerate each other, as if the producers, consumers, and the watchmen – regulator & the media - belong to rival teams. If sanity is to prevail, the truth must be set free.

Meanwhile, Pakistan Sugar Mills Association (PSMA) has issued a detailed rejoinder to the inquiry report yesterday evening. Among other assertions, PSMA categorically notes that there is no shortfall in domestic supply; that the commodity is readily available, and that the export has allowed the price to return to equilibrium level.

First, a caveat. It is not for a newspaper column, nor a criminal investigation agency to determine what equilibrium price level should be for any commodity. It is also appreciated that no firm or industry be forced by the government to operate below cost of production for long intervals. Thus, while an increase in domestic price of sugar may not have been the stated objective of the export policy of 2019, it was very much a foreseeable outcome since the onset.

Why? Because back in Dec-18, the MoC notification for export quota of 1.1 million tons was not accompanied by a subsidy announcement. As international price trailed domestic cost of production at the time - $370 per ton against $400 per ton -  the logical outcome of export would have been to ease domestic carryover stock position, leading to increase in domestic market price, thereby allowing mills to return to profitability.

Going by any metric, that objective was neatly fulfilled. Is it then unfair to put PSMA members on the stand? It may be helpful to remember that the first MoC notification came out in Oct-18, stated that the “Inter-Ministerial Committee will meet fortnightly to review sugar stock, export, and price situation.” And goes on to add that “in case of any abnormal increase in the domestic price of sugar, the Committee would recommend to the ECC of the Cabinet for discontinuation of further exports”.

Will the PSMA agree that a 36.3 percent increase in monthly retail prices during the intervening months when export was permitted qualify as an abnormal increase? The bulk of that increase, 27 percent, had already taken place between Dec-18 and Jun-19, as rightly noted by the FIA inquiry. Will the inter-ministerial committee please raise its hand and comment whether its job was done well?

PSMA may be within its rights to point out that over the long term – it uses all of last decade as reference – average retail price of sugar has increased by only twice, when price of other kitchen essentials such as wheat, ghee, rice, and milk have increased by as much as four times. But it does not take econometric analysis to conclude that price volatility of necessity goods hurts the wallet of the poorest worse than general increase in price level over time. To put things in perspective, food inflation during the same thirteen-month period stood at 22 percent, when price of sugar increased by over a third.

None of this may be interpreted that the end-consumer price of sugar is not driven by demand-supply; nor to insist that the price increase is due to hoarding. PSMA rightly notes that price increase by Jun-19 was indicative of depressed crop outlook for the then upcoming crushing season of 2020.

But that only raises further questions: were the authorities, from provincial Crop Reporting Department, Food Ministry, to MNFS&R, MoC, and ECC not aware? Note that Economic Survey published in Jun-19 had already noted that the crop output had fallen by 20 percent in the preceding season, while SBP’s quarterly State of Economy reports predicted an even grimmer outlook for the following FY20 season.

If the wrongs are to be set right, it is best that the PMO should avoid engaging in witch hunts, and instead address the regulatory challenge that have long engulfed the sector. For its part, the PSMA should also stop playing the damsel in distress by insisting that it exercises no political clout. To seek evidence to the contrary, just note the difference between the first line of Oct-18 and Dec-18 notifications: while the first barred both federal and provincial governments before extending any subsidy/freight support, the second suspended this condition, allowing provinces to extend subsidy if they may deem so appropriate.

Also note that between Oct-Nov 2018, export quota of 1 million tons remained unutilized, until the subsidy was announced. Sugar mills may not be politically influential, but as lobbies go, they know very well how to exploit MoC’s thirst for foreign exchange.