ISLAMABAD: Saying that the wheat support system needs to be gradually phased down, the latest World Bank report observed that the wheat procurement system in Pakistan is regressive because it benefits mainly large and medium farmers, commercial banks, and millers, and the cumulative outstanding debt from wheat commodity operations is at nearly $4.5 billion creating a circular debt-like situation.

Officially released on Thursday, the World Bank report, ‘Country Climate and Development Report for Pakistan’ says the agri-food system is fraught with inefficient, costly, inequitable subsidies that are an economic burden and create a distorted incentive structure, which plays a significant role in the sector’s poor performance.

According to the report, poor smallholders benefit little because most of their production — about 95 per cent in Sindh — is for subsistence. The procurement system also incurs losses through poor storage, which costs Punjab an estimated $1.6 billion annually. Wheat remains the primary cereal crop, so its production inevitably absorbs large subsidies.

Given its dietary importance, steady growth in wheat output will remain necessary to maintain food security. However, this needs to be done through substantial improvement in productivity and less intensive use of chemical inputs, land, and water, rather than the further expansion of conventional production methods.

At the same time, for sustained improvements in human capital, a shift is needed in diets and agricultural production towards a more diverse and nutritious basket of foods, including vegetables and fruits, which could contribute to both higher productivity and greater health.

Phasing out the wheat support system, the report says, will reduce direct financial costs to the government and indirect economic losses, free up fiscal space, arable land, and irrigation water, and create the enabling economic environment needed to induce large-scale crop diversification and climate-smart agriculture.

Freed-up fiscal resources could be invested to improve wheat production systems and value chains. Modelling work indicates that removing support to wheat production could free up 1.4 billion cubic meters of irrigation water per year. This could be used to grow higher-value crops to substitute for agricultural imports for which demand is rising.

Furthermore, with improved agronomic practices and seed quality, total wheat production could increase through gains in productivity, with the much lower land and water use.

The report stated that public support for sugarcane needs to be restructured, and the key entry point is the removal of licensing restrictions that prevent the entry of new mills.

Sugar subsidies

Proposed by the Sugar Sector Reform Committee and the Ministry of Planning and Development, this would reduce the wasteful post-harvest losses induced by monopsony, which allows a handful of buyers to control the market and prices.

A second entry point is the removal of import duties and export subsidies. While some of these changes would benefit smallholder farmers, the removal of import duties and export subsidies could also induce some exit out of sugarcane towards higher value, more environmentally beneficial crops.

The benefits of public intervention in the sugar sector accrue almost entirely to sugar mills and large farmers, yet the costs are borne broadly by smallholder farmers, urban consumers, and the environment.

High import duties help keep domestic sugar prices higher than international market prices; export subsidies to sugar farmers have the effect of transferring virtual water out of Pakistan; and licensing restrictions prevent the free entry of new millers which, coupled with mobility limitations, binds farmers to sell to the regional mill under quasi-monopoly conditions.

The report says the natural gas subsidy for chemical fertiliser production urgently needs to be phased down and reconfigured to subsidise chemical fertiliser purchases by smallholder farmers and to promote a shift to natural fertilizer alternatives.

Subsidy and risk-sharing interventions would need to be carefully targeted at identified market failures and subjected to adequate oversight and monitoring arrangements to prevent leakage, capture, waste, or broader market distortions.

Published in Dawn, November 11th, 2022