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Surplus food, not to eat

March 28, 2011

ACCOUNTING for more than a 40 per cent share in the consumer price index, the higher food prices have driven the overall inflation for quite some time to the detriment of the people despite a tight monetary policy. The government’s food policies, tilted in favour of growers and other influential supply chain stakeholders without adequate safeguards for consumers, have as a result become a target of international criticism.

The World Food Programme (WFP) of the United Nations last week held the government responsible for pushing food prices ‘too high for an impoverished population, as malnutrition levels rise’ despite sufficient production and stocks.

Later in a statement issued from Islamabad, WFP director, Pakistan, Wolfgang Herbinger, clarified that in his press briefing in Geneva “although I sought to explain the many factors causing the food price rise, my statements unfortunately did not do full justice to the many efforts by the government to ensure food security. Please accept my sincerest apologies.”

“You may have the country full with food but people are too poor to buy it, said the WFP representative,. “The crop outlook is not bad but food security situation remains difficult because prices remain so high.”

Now ordinary consumers pay double the price for wheat compared to three years ago, according to the UN agency as malnutrition levels in Sindh reached 21 – 23 per cent, well above African  standards. Emergency standards are at 15 per cent.

Earlier the WFP had sounded warnings of food shortages about two months ago but was reminded by the then food minister Nazar Mohammad Gondal that the country had sufficient stocks of all food commodities and was in fact the most food secure nation.

He had, however, expressed government’s inability to control food prices, ignoring the fact that it was under his government’s first year in office that the guaranteed minimum price (GMP) for wheat was increased by 46 per cent in one go triggering the price spiral in subsequent years.

A week ago, the World Bank also said the present government’s public procurement price, particularly of wheat, had failed to yield positive results and advised to improve its agricultural policymaking capacity.

It said the wheat procurement prices since 2008, giving farmers an incentive to grow more wheat for the domestic market instead of smuggling and hoarding, had failed.

The fiscal costs of the government’s intervention in the wheat market are very high, mainly because it provides an untargeted subsidy to the entire population. The efficiency of the government’s wheat policies is low with most of the benefits of the wheat procurement and distribution scheme accruing to wheat flour millers and some traders, the Bank said. The current scheme has also created significant excess capacity in the wheat milling industry while crowding out private sector participation in wheat marketing, it added.

With between 17 and 38 per cent of households classified as poor, 91 and 56 per cent of the total population classified as vulnerable, the food crisis had a direct and significant impact on poor and vulnerable people.

Food price inflation raised the share of total income spent on food to 70 per cent or more for the poorest families, severely constraining their ability to meet other essential needs such as health and education. Poor households also tend to change their diets away from protein and micro-nutrient rich foods in an effort to keep up their calorie consumption.

Many rural households in wheat-deficit provinces in the western part of Pakistan have also been adversely affected. In all provinces, wage increases have been considerably below the increases in wheat prices.

The fiscal constraints have been resulting in slower uplift of wheat stocks by the provincial governments and other government and non-government agencies. During the current year, almost all government and non-government organisations have failed to lift stocks according to their allocations. All such agencies lifted only 856,000 tons of wheat till end-February against their allocated share of 1.24 million tons, as the produce from fresh crop has already started to reach the market.

As of February 28, the World Food Programme lifted only 927 tons of wheat against its allocated share of 40,000 tons for Afghanistan. In addition, the WFP was allocated 400,000 tons of wheat for the current season but it was able to lift only 1,880 tons.

Against an allocation of 50,000 tons, Balochistan has not lifted any quantity by end-February. More or less the same performance has been shown by other government agencies including the Army, Navy, AJK and Gilgit-Baltistan. As a result, total stocks in the public sector have stood at more than five million tons as of February 28.  This comes at a time the first wheat forecast puts the production estimate at 24 million tons, almost at the same level achieved last year. Still having exportable surplus of about 2.5 million tons, Punjab – the biggest official player – is struggling to clear last year’s stocks before the arrival of next crop.

The problem arises mainly because of a guaranteed minimum price for growers and similar protected issue prices for millers in the absence of similar fixed prices for the end consumers. Even the intervention price through offloading of government stocks has remained effective.

Last week, the government fixed the minimum guaranteed price of Rs950 per 40 kg for growers for official procurement of 6.57 million tons of wheat but cut the size of strategic reserves to one million tons from previous reserve level of three million tons.

The federal government has also decided in principle not to put an abrupt ban on wheat exports and promised to introduce a procedure that the policy of export was not terminated abruptly at the expense of exporters. It also decided that there would be no restrictions on the movement of wheat across the provinces and districts.

With current year’s closing stock of 3.37 million tons, the federal government has committed to guarantee bank loans to the extent of Rs165 billion next season to enable provincial governments to procure 6.57 million tons of wheat. As a result, Punjab would procure 3.5 million tons, followed by Passco and Sindh with 1.3 million tons each, Khyber Pakhtunkhwa 400,000 tons and Balochistan 70,000 tons.

For this target to achieve, the guarantees for raising commercial loans from banks would be available to the extent of Rs83.5 billion for Punjab, Rs37 billion for Passco, Rs30 billion for Sindh and Rs10.5 billion and Rs3.5 billion for KPK and Balochistan respectively.

But the provincial governments are showing concerns regarding commodity financing while the State Bank of Pakistan is worried over the issue of circular debt and possibility of liquidity shortages because of procurement drive.

The central bank and the government are under extreme pressure from international lenders to pull out of commodity operations because they think it leads to quasi-fiscal deficits, with long term impact on the country’s economic growth.