EDITORIAL: The sugar export ban is back in the news with increasing sugar prices. This is not the first time when sugar prices are moving up to catch up with the international prices with local sugar stocks dwindling.
Such a phenomenon has taken place numerous times in the last 15 years. Interestingly, the sugar official exports over past two years are a mere 1.5 percent of the last two years’ production.
The culprit is smuggling, and the problem is across the entire agriculture value chain. Traditionally, agriculture products such as sugar and wheat are highly subsidised in Pakistan. There are direct subsidies in the form of support prices, and then there are indirect subsidies in case of urea due to availability of cheap gas, and availability of subsidised water and electricity for all farm produce.
Agriculture subsidies are not unique to Pakistan, and the rationale is to ensure food security. The debate should be on the mechanism of providing subsidies as indirect subsidies such as cheap gas to fertilizer manufacturers is not being fully passed on to farmers, and support price mechanisms usually benefit large and influential landlords. And not every subsidy is reflected in final prices of goods.
However, the elephant in the room is smuggling. A perusal of data for the last 15 years suggests that whenever the international prices are higher than the local prices, commodity smuggling out of the country becomes rampant.
Lately, especially in the case of sugar, international prices have significantly increased (crossed the post-pandemic peak) skirting around 2011-12 levels. This coupled with sharp depreciation of the PKR the profit margin or delta has significantly increased. These margins are extremely attractive, making smuggling very lucrative and tempting.
The other problem is unhinged inflation expectations and loss of confidence in the PKR. Dealers and investors operating in cash economy are better off by hoarding non-perishable products such as sugar in anticipation of price rise and as a hedge against the depreciating currency. Keeping negative real interest rates is making the case worse.
However, it is increasingly clear that hoarders, smugglers and their facilitators are behind the dwindling sugar stocks and rising prices. Urea fertilizer and wheat too face a similar situation and these commodities are being smuggled out of the country.
Smuggling of diesel from Iran into Pakistan is yet another instance of price differentials. Needless to say, loose border controls are promoting criminal practices, depriving the government of much-needed revenue and adversely affecting inward flows of foreign currency.
Unlike petroleum, smuggling of agriculture products is not on two-, three- and four-wheelers; it is transported through big trucks, which cannot cross the porous border in an inconspicuous manner. Yet our subsidised agricultural produce is being available in Afghanistan and Central Asia states.
Direct and indirect subsidies are provided to ensure affordable and ample supply of staple food to 240 million inhabitants of Pakistan, but we are transferring these subsidies through smuggling to other countries. In case of urea, we are smuggling out cheap gas and in return importing RLNG at three times the price, which is making the electricity expensive.
The country cannot afford this gross misuse of precious resources. Establish the writ of the state and stop condoning smuggling on the pretext that it is the only vocation that the local population of the border area has to make a living. This is a convoluted logic, which is creating serious problems for the state and its seemingly beleaguered economy that cannot absorb such cost. Fix the smuggling problem and slowly move away from price fixing and indirect subsidy mechanism.
These should not be subsidised and if any subsidy is to be given it should be targeted to vulnerable sections of society through schemes such as BISP (Benazir Income Support Programme).
The people at large are best served if the market is allowed to function in accordance with the supply-demand economic principle with vigilant monitoring against unethical and criminal practices. This would ensure that export revenue is no longer lost to smuggling. That smuggling is an obvious truth which is deliberately ignored by everyone is a fact. Smuggling has been the elephant in the room for years or decades.
Copyright Business Recorder, 2023