The challenges in managing sugar supply chain and controlling prices are not unique to Imran Khan. Such supply shocks have been recurring and are not just limited to sugar but have also hit other essential food and agri produce.
One of the core reasons why it is so difficult to manage demand and supply balance is that the agriculture value chain is mostly undocumented and fragmented.
Over the years, numerous task forces and donor-funded agencies have published studies identifying the issues – in particular the inefficiencies due to middlemen or as they are known locally, “aarthis”.
The Pakistan Mercantile Exchange (PMEX) could bring about a permanent solution to this challenge, which has now become a political nightmare for the government.
Here’s how it can be used to bring sugar trade into a formal network.
Instead of being sold at the mandis (markets), sugar output can be brought to the local commodity bourse. Here, it can be tested, measured, priced, stored and tracked.
Since the exchange provides live trading of the sugar contract, it reduces price volatility and provides transparency. The aarthi can become a broker on the PMEX and become part of regulatory coverage.
This could not only reduce price fluctuations but more importantly, by bringing transparency, it will end the need for the usual witch hunt that always follows.
PMEX has remained a marginalised institution because institutional investors such as banks and insurance companies are not allowed to invest in the contracts offered at the exchange and therefore it lacks the financial resources to market widely to retail investors.
Although PMEX offers contracts in multiple product categories such as precious metals (gold, silver, platinum), agricultural commodities (red chilli, rice), energy (oil), and equity index futures, the volumes have been disappointing due to a clear lack of market makers.
Even in international commodities such as gold, market markers struggle due to restrictions by the State Bank of Pakistan. There are also other regulatory and tax issues that have not allowed the PMEX to function effectively.
So, although it has contracts for sugar and other agricultural commodities, there is hardly any trading on them. Instead, the volumes have shifted to unregulated offshore forex brokers.
Let's look at India as an example. There are six commodity exchanges in India. The largest, Multi Commodity Exchange of India (MCX), has 636 registered members and 52,777 Authorised Persons.
It has a presence in 1,016 cities and towns across India – trading in a mammoth $15 billion worth of national contracts per day. In comparison, PMEX trades $67 million per day primarily because it lacks a national network and struggles to add new brokers.
PMEX can play a pivotal role for Pakistan, especially in the agriculture sector if we move towards de-regulation, financial strengthening through investment, and adoption of digital technologies. Even marginal and incremental improvements can make this dormant institution an effective tool for the Securities and Exchange Commission of Pakistan (SECP) and the government.
If nothing else, it can help avoid the hassle of getting the Federal Investigation Agency and the National Accountability Bureau involved in trying to untangle the Gordian knot of the commodity markets.
Ali Farid Khwaja, CFA, is the Chairman of KASB Securities. He lives in London with his wife and two daughters. He has worked in financial markets in the UK and Europe for over 17 years. He is an alumnus of Lums and was a Rhodes Scholar at University of Oxford.