Asian Development Bank (ADB) has asked Pakistan to ensure that consumer wheat subsidy will be given only to vulnerable and poor households instead of a blanket subsidy for all wheat consumers.
The government will also develop a mechanism for ensuring that the issue price moves toward the guaranteed minimum price (GMP) plus storage, distribution, and management costs under the last phase of the Agriculture Sector Program Loan-II.
According to ADB sources, in the past, the government maintained a consumer subsidy by setting aside large amounts of strategic and operational reserves of wheat and by fixing a Guaranteed Minimum Price (GMP) for wheat growers.
Usually below the import parity price and an issue price for flour millers equivalent to GMP plus a subsidised rate that does not fully cover the storage, distribution, and management costs of the government but assures an affordable price to flour consumers).
Through these methods, the government provides a blanket type of consumer subsidy, meaning that all consumers technically benefit from the low prices of wheat and flour. Under the new phased wheat policy, adopted on April 2005, the government is moving toward eliminating the consumer subsidy in two ways.
First, it is moving to reduce the size of the operational wheat reserve and to use the reserve for targeted distribution at a subsidised price to disadvantaged or vulnerable groups. Not only has the blanket subsidy proved to be expensive to the government, it has also resulted in large leakage, as the vulnerable groups do not benefit.
Several studies including the latest restructuring studies show that only a fraction of subsidies actually reaches the consumers-bulk goes to intermediaries such as flour mill owners and public officials.
Although leakage is still possible even in a targeted food subsidy, some schemes (like food stamps and food for education) have worked effectively and efficiently in other countries and can be tailored to the socio-economic-political landscape in Pakistan.
The restructuring studies suggest variations of these targeted subsidies and also provide detailed guidelines to make the directed subsidy program more effective, equitable, transparent, accountable, and efficient.
Moreover, the phased wheat policy will reduce the need for operational reserves as market forces operate within the price band, so that effectively, only strategic reserves will have to be maintained.
The second evidence that the government is moving toward a market-based sale price for wheat is its phased plan to develop a price band for wheat, a common food pricing policy applied by many developed and developing countries to balance the needs of food producers and consumers.
The lower end of the band will be the GMP, which will provide incentives or insurance to wheat growers (by removing the risk of price collapse leading to an unprofitable price). In determining the GMP, border prices will be considered in the future to encourage wheat producers to become as competitive as their foreign counterparts.
The GMP essentially triggers wheat purchases from the market by the government to maintain a minimum price level. The upper band (ceiling price) is determined with the interest of consumers in mind but must also take into account the cost to the government (GMP plus storage, distribution, management, and finance cost or market-based sale price) in making the wheat available to the flour millers (defined in Pakistan as the issue price).
The upper band is essentially the trigger point for the release of stocks to the market to keep the price below the ceiling price. Minfal expects to define the band somewhat widely within the band, the private sector will operate without any market interference from the public sector except for a directed subsidy program.
However, the government would keep watch on wheat supply and price trends. So far, while the GMP is expected to move in the direction of the border parity price for wheat, the ceiling price (reflected until now in the issue price accorded to the flour millers) has yet to be determined.
The issue price has fluctuated since 2001, coming close to the market price in some years and dropping below the latter in other years, implying that the government sold the wheat to flour millers at a loss.
Although the full-scale implementation of the targeted food subsidy policy is still a work in progress, the combined effects of a phased implementation of the targeted food subsidy, the liberalisation of wheat importation, greater mobility of wheat within the country, and the leeway given to the private sector to operate within a price band and to compete with the public sector have eased the need for the government to implement a blanket type of consumer subsidy and facilitated the market provision of price incentives to farmers for their produce and affordable wheat and flour prices and timely delivery to millers and consumers.