The government intended exporting 1.44 million tons of wheat during the current fiscal year and almost the same amount during the next fiscal year.
According to the Federal Bureau of Statistics, in 2000-01, only 80,500 tons could be exported at a price of $137per ton and in 2001-02 another 296,000 tons could be exported at a price of $110 per ton. With the passage of time, the prospects will only diminish and ultimately disappear necessitating total write-off. No foreign country appears interested because of the price and the quality, which is claimed by the prospective countries to be sub-standard.
Against a government-to-government deal with Iraq, for export of 100,000 tons only 28,000 tons have been exported. Negotiations for sale of another 500,000 tons are in the process.
The root cause of the problem is the fascination for public service to be involved in commercial activities starting with procurement of wheat. Procure-ment price per ton being Rs.7500 and with additional cost of Rs1700 as incidental charges, the total cost of the surplus unsaleable wheat of 4.1m tons works out to Rs. 38 billion.
Since export of wheat is a freakish phenomenon, the real price to calculate the loss would be the import parity price. The pattern of prices during the 1990s has been erratic and the prices of comparable wheat (US Western white) have ranged between $112 and $200 per ton. If one assumes a price of $200 total loss for our failure to export will be the equivalent of $684m. At $110 a ton, it would be $451m.
Such a huge loss can only be attributed to the wrong decision to continue to remain involved in the commodity trading in the public sector. Procuring such a large quantity of wheat on the one hand, and not to let the private sector export it only compounded the problem. But accountability being unpredictable, no one would be held responsible for this fiasco.
For a poor country like Pakistan, such a huge loss ought to have brought the full fury of the accountability process into motion. Had the government not resorted to unprecedented procurement of 6.3m tons in Punjab alone two years ago or allowed the private sector to export it mainly to Afghanistan, we would have been saved the colossal loss. This appears to be a carryover of previous two years’ procurement done mostly by the government of Punjab.
During the previous 5 years the government of Punjab procured the following quantities:
YEAR MILL. M.TONS
1996-97 1.7
1997-98 2.5
1998-99 2.8
1999-2000 6.3
2000-01 2.5
In 1999-2000 procurement was the highest ever and increased by 125 per cent as compared to the previous year. Obviously such unprecedented huge stocks could neither be stored, nor sold at will. As a result the government godowns came bursting at the seams involving damage through elements and pest.
In an earlier report it had been stated that government was contemplating to provide incentives, a euphemism for much maligned subsidy, to exporters in the shape of incidental charges. Exporters are demanding an export subsidy, but to avoid the odium the word carries, the government has offered to pay ‘incidental charges’ instead. It is estimated that such incidental charges will amount to $ 60 per ton. That is almost half the price we may fetch if we are lucky. The reluctant buyers are Iran and Iraq, and to the willing buyer, Afghanistan, we would not sell because such sale we characterized as smuggling if done by the private sector. The public sector suffers from its proverbial inability to take decisions thereby saddling the poor nation with more avoidable losses.
What is interesting to note that we face a crisis if we have shortages and we face a crisis even when we have a surplus? Production of wheat during the last 5 years has been as follows, with 1999-2000 being an unusual year with the highest ever production:
Year Wheat (000 Tons) percentage increase or decrease:
1996-97 16,651 -1.5
1997-98 18,694 12.3
1998-99 17,856 -4.5
1999-2000 21,079 18.0
2000-01(P) 18,535 -12.1
As will be seen the production has declined by as much as 12.1 per cent in the last year as compared to the previous year although in absolute terms it is still higher than in 1996-97 and 1998-99. Punjab is the biggest producer and therefore, the biggest buyer of wheat in the public sector.
Increased wheat production for the last three years has yielded surplus for exports. Total releases to the mills have been around 2.5 million tons per annum, yielding a surplus during this freak year of 3.8m tons in Punjab alone. This the government must sell either in the domestic market or abroad. Punjab saddled with huge surpluses with no places to store, adopted an unconventional method to force-sell to Sindh, NWFP and Balochistan and recovered the cost through deduction at sources by ministry of finance.
That these provinces did not pick these stocks did not upset Punjab, because it maintained that the wheat sold to these provinces even if not lifted still belongs to them. That the public sector is quite unfit to profitably indulge in commercial activity is more than confirmed by this experience.
The whole philosophy of support price is predicated on a shaky belief that the government involvement in a purely commercial activity helps the small grower as well as an urban dweller.
Without having to dispute the shaky basis of philosophy, it is impossible to justify the dubious thesis on economic grounds. As a ritual as certain as death, the federal government through the Agricultural Prices and Policy Commission (APPCom) makes an announcement, before the start of each season, of the procurement price.
Fixed annually, after assessing the prospects of the current crop and a number of antiquated parameters,the APPCom recommends a higher than the previously recommended price for approval of the government.
The provinces in turn fix its release or issue price at which they sell the wheat to the flour-mills. Support price is usually the rock bottom price below which a grower may not be forced to sell and instead come to the government.
But in this country, the support price is an incentive price to encourage more production of wheat and is pegged at a much higher level than the market price.
Present support price of Rs300 /40kgs appears to be higher than the market price, which, based on effective demand and supply at the crop time, would be no more than Rs250/40 kgs.
Incidental charges involved in this Herculean exercise have been on the increase. From Rs733 pmt in 1991 they have increased to more than double at Rs1734 in 2000-2001.
The elements of incidental charges are given in the table below:
It will be noticed that interest constitutes more than 56 per cent of the incidental charges. Even this figure is not representative of the real price of the funds borrowed from the State Bank as commodity loans before the start of each procurement season. The financial loss is understated because the State Bank provides commodity loans to the food departments of the provincial governments for specific purpose of procurement at a subsidized rate. The incidental charges listed above do not show or reflect any damage caused to the wheat during storage, handling or poor decision or an inertia afflicting the public service.
The entire edifice of support price is based on misconceived notion that a higher supporting price encourages more production and makes the country self-sufficient. Proponents of support price declared victory when the increase in support price for 1999-2000 to Rs300/40 kg coincided with the highest ever production, which went up by 18 per cent. That the argument is patently fallacious can be seen if the situation of the next year is viewed, when with the same support price, the production declined by 12.1 per cent.
The proponents of support price might as well claim that had the support price been increased from Rs300 to 315 the next year, the production would have increased. It seems that the magic wand of support price does not cause the production to go up. One has to look for other factors for the phenomenon.
The rationale of the policy is based on the claimed virtual wisdom of the state functionaries in controlling the economic forces. In 1999-2000 when record procurement of 6.3 million ton was made by Punjab, it was claimed that support price had brought about the unprecedented increase in output.
The proponents of the support price, not knowing much economics, imposed restrictions on movement of wheat from one district to another, so that they could force growers to sell wheat only to them and not to the private market. This policy had the unintended effect of crashing the prices and stunting the growth of private trading in the commodity.
It is high time that the government realized the futility of its interventionist policies and saved the taxpayer from having to pay for its misconceived policies. Government should allow free trade in wheat like in rice and allow economic forces to allocate resources in agriculture.