Saturday, May 06, 2023
Wheat has been in the spotlight lately for two reasons — news of a bumper crop and, that notwithstanding, fears of impending shortage due to hoarding on the one hand and allegations of corruption in the handing of the recent 'Free Atta' scheme, on the other.
The importance of wheat for Pakistan cannot be overstated. It is the biggest pillar of our economy, and as staple food, provides food security for over 220 million people. 80% of the farmers grow wheat; it is sown over 44% of the total cultivated area and contributes 72% to the food basket. Given this, we cannot afford to get our wheat policy wrong, although that is exactly what we have done for the last seven decades. Once an exporting country, Pakistan now spends nearly $2 billion annually on wheat imports, with the gap between supply and demand worsening by the day.
This comment is an attempt to outline distortions in the wheat value chain and suggest public policy solutions to address the wheat mayhem. I refer to seven areas related to our wheat policy.
First, support to farmers is inadequate and politicised. Key agricultural inputs are heavily taxed, driving up the costs of production. Water, and access to agriculture credit, which are key inputs, have limited availability. Limited investment in Research and development (R&D) prevents innovation and productivity increase.
‘Support price’ is regularly used as a government tool to protect farmers but falls prey to politics and collusion. The politics surrounding support price represents a failure of federalism, as this matter is never resolved in Council of Common Interests meetings; it drags on till the last minute and usually lends itself to a decision under pressure at a cabinet meeting hastily based on conjectures, rather than evidence-based pricing.
Support-price politics is also deeply divisive where rural decision-makers tend to support a higher price and conversely those with urban roots pushing for a lower limit on the legitimate grounds that it fuels flour price inflation. Furthermore, one province reportedly tends to announce a higher support price while running largely ghost procurement operations. In addition, discrepancies in support prices between provinces open the door to systematic rent-seeking at provincial boundaries.
Once wheat is harvested, bigger problems arise. Federal and provincial governments buy strategic and other reserves from farmers through Pakistan Agricultural Storage and Services Corporation (PASSCO) and provincial food departments, respectively. While PASSCO does a commercial transaction given that it is backstopped by the central bank and FD guarantees, provincial governments take commercial loans. Since they also must give a substantial subsidised quota to flour mills, they accumulate a circular debt, which must be financed through the budget.
In 2022, Punjab alone had a wheat circular debt of Rs640 billion. This represents the worst outcome of a public policy choice, which results in high cost to the government in lieu of an untargeted-mistargeted subsidy.
Third, when government-procured wheat lands in government godowns, another level of collusion emerges. Most godowns are owned by government functionaries — and in the absence of trackability and digitalisation, there is much pilferage. This is in addition to weightage level collusion, which is extremely sensitive to moisture content, a loophole, which godown owners thoroughly exploit.
The fourth setting of collusion is in flour mills that profiteer illegally not just by deviating from permissible levels of value addition but also through several other tactics. As it is, there is no trackability of the subsidised flour they get from the government. So, with the ‘right connections’ with government inspectors, it is easy to sell less flour in green bags (which have subsidised flour for poor people) and more in white bags (sold at commercial price).
A fifth and further level of collusion is at the retail level where substitution of green bags for white is common given the lack of traceability, and the green-white price difference, which is Rs510 for a 10 kg bag. This arbitrage opens avenues for all sorts of functionaries on the ground to make a quick buck including predatory middlemen.
Cross-border movement of wheat is another arbitrage setting, rooted in government bans on interprovincial movement of wheat. Not only is it a violation of the constitution, given that Article 151 guarantees the right to free trade of goods across borders, it also sows the seeds of systemic corruption due to the inter-provincial price disparity.
Today, the price of flour is much higher in Khyber Pakhtunkhwa and Balochistan and police and food department personnel are gouging bribes worth millions at multiple checkpoints, daily. Smuggling is also pervasive, in collusion with customs and border staff, especially when international prices are higher.
The tendency to hoard and create artificial shortages driving costs higher, is another factor where commercial entities, district administration and wholesalers are in cahoots. Artificial shortages make a case for imports and even import subsidies perpetuating a confluence of business, politics and profiteering with politicians, regulators, and millers all in unison. This year’s bumper crop is paralleled with policy where all wheat is being bought by the government, which will likely end up being hoarded.
There would be no issue if all the wheat produced in Pakistan comes into the market. But a combination of deficient planning, market failures, administrative botches, enforcement failures, institutionalized collusion, and opportunities of arbitrage self-manufacture wheat crises, which are meant to serve rich millowners, powerful wholesalers, their accomplices, the regulators — all of whom have political connections. Anyone with the mightier means takes a bigger share of the profiteering.
The costs and quality compromises of wheat malpractices affect everyone but since wheat is a staple item, the burden is borne disproportionately by the poor and those with limited means. Around 50.8% of the monthly income of a poor household is spent on food of which flour is the largest price ticket.
What is the public policy prescription to address this mayhem?
First, the government should leave wheat to the market (this includes free inter-provincial movement) and should involve itself only to the extent of buying strategic reserves and public policy interventions and/or R&D in the areas of seed technology, improved agronomic practices, especially on farm water management, prevention of pre- and post-harvest losses, provision of credit and subsidies for innovations, technology-driven silos and warehouse receipt systems, which cater to futures markets and price stability.
Second, rather than the currently prevailing untargeted and unsustainable subsidy on flour, a digital system of targeting wheat subsidy should be widely institutionalized, which benefits the deserving more effectively. Ehsaas Rashan Riayat was implemented on a fast-track basis by our government with this in view.
Its end-to-end digital infrastructure enabled execution of a targeted subsidy on flour, with the eventual goal of phasing out all fiscally inefficient and unsustainable untargeted subsidies. This programme needed to be upscaled in an evidence-based manner in line with the broader vision of public policy change in the wheat sector but was dismantled due to political considerations.
And, finally, enforcement is key in the short term. Price and movement of the wheat is managed by provincial and district governments, who must be held to account and need to checkmate collusive pricing, massive hoardings, pilferage of subsidy, artificial stock outs and smuggling.
Wheat policy is relevant not only for food security, but also national security. This is one product which if managed well can solve many of our problems. If continued to be mismanaged, it is a disaster in the making, especially in the context of the country’s burgeoning population and economic plight.
The writer is a senator and former special assistant to the prime minister for poverty alleviation and social safety. She tweets @SaniaNishtar