Food prices have started crawling up ahead of Ramazan, showing the real and/or perceived impact of sales tax on retail outlets, and reflect changes in the market dynamics due to sizzling summer.

While the Rs2 billion Ramazan package announced by the federal government is being used to provide 5-10pc subsidy on 1500 food items through Utility Stores Corporation outlets, it does not set the open market trend.

Prices of rice, pulses, wheat and gram flour, cooking oil, packaged milk, tea and fresh dates are substantially subsidised under the Ramazan package. But interestingly, all these items minus tea and wheat flour have become costlier in the open market.

“The reason is obvious,” says a pulses dealer at Jodia Bazar. “Businessmen know that the prices displayed on USC price lists soon lose creditability because the items sold on those prices are inferior in quality or because some items simply remain out of stock.”

General Secretary of Karachi Retail Grocers Group Farid Qureshi says retail food prices are rising not because of short supply of commodities but due to arbitrary pricing by food processing companies and also due to imposition of 5pc sales tax on retailers.

In the FY15 budget, the federal government has levied 5pc sales tax on retail outlets with their monthly electricity bills up to Rs20,000. For those affording higher electricity bills, the tax rate is 7.5pc. Retailers are passing on the impact of this tax on prices of the stuff they sell. And in so doing, most of them are exaggerating, a market survey reveals.

Thanks to a bumper wheat crop of 25.2m tonnes this year, prices of wheat flour have come down in June despite the fact that flour millers are currently buying wheat entirely from the open market. Supply of subsidised wheat from provincial food departments is likely to begin in August.

However, rice prices are up in spite of higher production as exports-led buying is brisk and as its demand is strong due to summer season. “Rice prices could have come down or at least remain stable had the government been able to offload more than 2m tonnes of stocks in time,” says a Jodia Bazar based trader.

About a month ago, Pakistan Agricultural Storage and Supplies Corporation had to reject bids for some two million tonnes of rice because bidders had quoted below-par prices. It has called for fresh bids to be submitted by July 2. Retailers say the old trend of loose rice selling is fading and people now prefer in buying rice, particularly Basmati, in retail packs being marketed by exporters and food processing companies. Their prices become a benchmark also for loose rice sellers, retailers say, explaining why rice prices are rising even when supply is adequate on the back of a bumper 6.8m tonnes production.

Prices of beef, mutton, poultry meat, pulses and cooking oil have started moving up as demand of these items are expected to pick up during Ramazan. “In fact, prices of poultry meat should be higher than what they are now,” says an official of Pakistan Poultry Association, adding that the recently budgetary withdrawal of tax exemptions on poultry meat and imposition of sales tax, coupled with prolonged power shortages, have increased the cost of production of poultry breeders. Retailers fear that the current per kg price of poultry meat would further gain as Ramazan begins, may be from June 30 due to sudden increase in demand.

Mutton and beef prices are on the rise not only in anticipation of higher demand in Ramazan but also because of withdrawal of tax exemption on animal feed and rising exports, market sources say. Cooking oil, on the other hand, has become a bit costlier due to static production and in anticipation of heightened demand during Ramazan. In ten months of FY14, output of cooking oil recorded a nominal 0.95 per cent increase over the year-ago period, according to the latest stats released by Pakistan Bureau of Statistics.

Retailers say prices of loose cooking oil also tend to rise when manufacturers of various brands of packaged edible oil announce rate hikes. They say whereas top brands of one-kg pouch of cooking oil are selling for Rs170-200, the average price of loose edible oil is much cheaper—around Rs140-145 per kg.

As expected, tea prices are on the fall as demand is low during the summer and may be even lower in Ramazan when most people keep fast during the day. Manufacturer of a popular brand of tea recently reduced the price of one-kg pack from Rs590 to Rs495. Average quality loose tea dust is available even at Rs450 per kg.

Food Prices

Items End-March Prices End-February Prices (per kg) (per kg)

Rice (Basmati super) Rs180-210 Rs180-200 Rice (Basmati broken) Rs 100-105 Rs 95-100 Rice (non-basmati) Rs 60-75 Rs 60-70 Wheat flour (Average quality) Rs40 Rs42 Wheat flour (premium quality) Rs48 Rs50 Sugar Rs54-55 Rs 54-55 Beef (with bones) Rs340-360 Rs320-330 Mutton Rs660-680 Rs 650-670 Chicken Rs250-270 Rs 230-250 Cooking Oil (pouch) Rs170-200 Rs170-190 Tea-black (loose) Rs450-500 Rs 450-550 Gram (white) Rs100-110 Rs90-100 Gram (black) Rs68-72 Rs62-66 Gram pulse Rs70-74 Rs66-70 Moong pulse Rs150-160 Rs140-150 Mash pulse Rs130-140 Rs120-130 Source: PBS, market survey

Published in Dawn, Economic & Business, June 30th, 2014