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Thursday, September 21, 2023

Economic Advisory Group in favor of govt’s SSRC reforms agenda

Sugar Sector Reforms Committee set up by the federal government proposed a set of reforms addressing challenges facing Pakistan's sugar sector. EAG supports these measures and encourages policymakers at federal and provincial levels to take necessary steps towards their implementation.

Economic Advisory Group (EAG) in its Vision document has strongly argued in favour of revisiting the support price regimes and the relevant laws that hinder competition, including in the agriculture and commodities sector.

A general principle we espouse is that economic activity should be contestable, i.e. individuals and firms should face the pressure of unrestricted competition. Deviations from this principle should be thoroughly scrutinized and vigorously debated.

Historically, there have been significant deviations from the principle of contestability. For example, the Punjab Sugar Factories Control Act 1950 states,“… cane grown in a reserved area shall not be purchased by a purchasing agent or by any person other than the occupier of the factory …” This adversely affects the bargaining position of the farmer in relation to factory owners.

Likewise, the licensing regime governing the setting up of sugar factories not only prevents existing factories from relocating to where production can be organized more efficiently, but also prevents new entrants, thus limiting competition. Excessive government intervention in restricting exports and imports of the commodity has also frequently given rise to surpluses and shortages in the domestic market, thus keeping government functionaries busy with managing one crisis after another.

Read more: Economic Advisory Group unveils simple steps for Pakistan’s economic transformation

SSRC agenda to improve production levels

In light of this, the Sugar Sector Reforms Committee (SSRC) setup by the federal government has proposed a set of reforms that go a long way in addressing the above challenges. Some of the key proposals include the abolition of restricted areas, tax-free imports of sugar, a gradual move away from the minimum support price regime, bringing transparency to forward contracts by allowing for such under the Pakistan Mercantile Exchange, and implementing adequate pricing of water to incentivize the adoption of water-saving farming practices.

EAG supports these measures and encourages policymakers both at the federal and provincial level to take necessary steps towards their implementation. EAG believes that these measures will improve farmers’ bargaining positions in relation to other stakeholders by allowing them to sell their produce to whoever offers the higher price.

These reforms will further allow for new factories to be established, while facilitating existing ones to relocate to where it is more productive to operate. In addition to improving productivity at the level of sugar factories, the increase in competition between factories will also benefit both the farmer and the consumer.

Allowing for forward contracts while ensuring effective supervision will help reduce seasonal volatility in sugar prices. Likewise, removing restrictions on imports will expose the industry to international competition and incentivize the adoption of more productive technology. Alternately, the new regime will allow inefficient players in the sugar industry to exit the market, thus reallocating economic resources to more productive activities. This latter point is the bedrock of EAG’s vision document.

Why allowing free export of sugar is better policy

While supporting the reforms agenda in principal, EAG also recommends that the SSRC reconsiders some of the other proposals put forward in the report:

The report suggests that exports may only be allowed “in times of high production” and “through allocation of quota on FCFS without any government subsidy.” This proposal will lead to similar problems as in the past. A combination of low international prices and surplus stock at home will necessitate government subsidising exports to bring inventories at a level where factories have an incentive to undertake production. Instead, a better policy will be to allow free export of sugar while maintaining strategic reserves as a credible threat against speculative activity in the domestic market.

The current proposal restricts forward contracts to a maximum of 15 days. EAG proposes that this limit should be increased to at least cover one full season, if not more. Research shows that forward contracts play an important role in reducing the volatility of the spot price. These further allow businesses to hedge against risks and, as a result, incentivise firms to increase their investments. To avoid speculation, the government should invest in the capacity of concerned regulators, such as the Competition Commission of Pakistan, to monitor collusive practices and guard against these.

Read more: Challenges to Pakistan’s Export Competitiveness

Distinguishing between hoarding & storing commodity

The proposal also recommends enforcement of relevant laws “to ensure that no hoarding is possible.” EAG recommends that the committee should clearly define “hoarding” in the context of the sugar industry. There should be a clear distinction between hoarding, on the one hand, and the need to store the commodity by industry players for business purposes. For example, farmers need to store the crop while they negotiate on price with multiple market players. Likewise, retailers need to maintain sufficient stock levels to effectively manage their supply chains and expand their retail networks.

Finally, traders accumulate stocks so these could be sold during the off-season when prices are generally high. This distinction has historically been lost on the district authorities charged with implementing anti-hoarding laws, and, as a result, economic efficiency is compromised. For example, in the process of implementing anti-hoarding laws, farmers have been denied the few weeks after the harvest that it can take to select the best possible transaction.

While the report notes, “import of sugar is already open for the private sector,” policymakers have time and again imposed restrictions in the past, often requiring approvals from the highest levels of the government. This loophole must be closed to bring more certainty to the rules that govern the sugar market.

Finally, while EAG fully endorses the move away from the minimum support price, EAG also recommends that policymakers at the provincial level should work towards carefully designing a mechanism for introducing crop insurance for small farmers in order to protect them from adverse shocks. This is essential both for protecting small farmers from falling into poverty in the face of adverse shocks, and also for increasing the acceptability of a market-based pricing regime. The insurance product can be linked to the Kissan Card that the current government has recently introduced, and rolled out gradually to minimize the likelihood of costly mistakes.

Read more: Journalist explains why Kissan Card initiative of PTI government is revolutionary

Overall, EAG largely supports the reforms agenda put forward by the SSRC. This is in line with what the EAG has been proposing on different forums. However, EAG also points to certain proposals and reservations that must be revisited in line with the recommendations above. This will ensure that the overall effectiveness of the reforms agenda is not compromised.

The Economic Advisory Group is an independent group of individuals from economics, policy, and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.