THE World Bank has proposed a package of reforms to lower the price of wheat and wheat flour and incentivise farmers to switch to higher-value crops.

The reforms plan also suggests that the Punjab government should withdraw from the wheat market and allow the private sector to fill the trade gaps.

It estimates that the abolition of the current wheat procurement system would result in net annual savings of Rs26bn per year. In addition, the sale of excess wheat stocks would generate another Rs150bn, which could potentially be used to reduce the fiscal burdens being carried by the provincial government.

Wheat consumers would enjoy lower prices, producers would invest in value-added crops, and the provincial government would benefit from immediate cost savings overall lower costs

Nevertheless, farmers would no longer benefit from higher wheat prices. Besides, banks and manufacturers of gunny bags would also lose business.

The Punjab government operates the largest wheat procurement system in the country and releases it to registered flour mills. This system is financed with budgetary allocations and bank borrowing.

The World Bank report, circulated to the provinces’ policy-makers and other stakeholders, envisages replacing the existing system with one that combines a targeted income transfer programme; reducing procurement quantity and stock limits to a level required for an emergency reserve; the private sector assuming a leading role in the wheat market; a liberalised trade regime; and an incentive programme for farmers to diversity crops that would be financed from freed-up fiscal resources.

Farmers, negatively impacted by the drop in wheat price, would be compensated by a direct income transfer, based on the difference between the prevailing market price at harvest and the Punjab government’s previously announced procurement price. This transfer would be capped, both in terms of quantity and time duration, and would be made eligible to a broad range of farmers.

On the other hand, consumers of wheat across the country would enjoy lower prices, producers would be incentivised to invest in value-added crops, and the provincial government would benefit from immediate cost savings and the overall lower costs in the future.

Often deemed to be ineffective in stabilising prices and making wheat more affordable, the current wheat procurement system is plagued with patronage and rent-seeking, leaving the small farmers to bear the losses. The entire cost of the programme is enormous, with the direct costs of buying, storing and releasing wheat at a fixed price over the year estimated at Rs35bn annually.

Indirect costs are also substantial and include physical losses due to poor storage and high spoilage, pilferage, overproduction of wheat and under-production of other higher value commodities. Diversion of bank credit; and incentives for building storage facilities for other crops besides wheat is required.

Stating that the creation of a strategic wheat reserve would be adequate to meet needs during emergencies and disasters, the World Bank says the strategic reserve could eventually be held by the private sector on behalf of the government. But for the short-term, the government would need to build good quality silo storage.

Disposal of the existing wheat stock to the domestic market, either through open auction, setting a floor price or using a cascading price, would help avoid losses. With silo -based, and private sector managed near-farm storage of about 1m tonnes, the existing warehouses owned by the provincial food department would no longer be needed and could be sold or leased out.

The deregulation of the private sector wheat imports would allow traders to import wheat in times of domestic shortages. The government would not intervene in the domestic wheat market unless prices were to rise above the current level of Rs1,300 per 40kg.

In case of a sharp price rise, the Trading Corporation of Pakistan can import and release subsidised wheat into the domestic market. The current 60pc regulatory duty on wheat imports since September 2016 should be gradually phased out over a three-year period, which would coincide with the phasing out of the proposed compensation to farmers.

Published in Dawn, The Business and Finance Weekly, June 5th, 2017