Pakistan Wheat Policy

WHEAT POLICY:

IS THERE A WAY OUT?

Agriculture and food policy (ECON-343)

(Dr. Abid Aman Burki)

JAZIB ALI 18020144

Hasnain Akram 18020299

Abstract:

This research paper is focused on the issues of the government intervention and procurement prices in the wheat market. Government justifies its interventionist role in the wheat market and aims at targeting self-sufficiency, providing relief to farmers and reasonable prices of wheat prices urban consumers, hence, overall increasing the welfare of the society. However, the interventions of the government results in loss of billions from the tax payers’ money, making cumbersome situation for the government, farmers, and urban consumers, which later on also discusses in the paper on monetary terms. Price markets can better solve the issues of self-sufficiency, wheat storage and price fluctuations. Targeted subsidies especially to low-income and socially marginalized people can enhance the social welfare of the society.

Introduction:

Agriculture is the central component of Pakistan’s economy with 19.8% share in country’s GDP and employing about 42.3% of the labor force (Pakistan Economic Survey 2015-16, "Agriculture"). Therefore, it acts as the engine of economic growth and poverty reduction. Crop sub-sector contributes the major portion to total value added in the agriculture sector. Wheat constitutes the most important crop as it is the main staple food cultivated on the largest acreages of 9 million hectares covering 40% of the total cultivated land in Pakistan. Pakistan falls in ten major wheat-producing countries of the world with respect to area under wheat cultivation, total production and yield/hectare. This crop alone contributed about 14 percent of value added in agriculture and 3 percent of the country’s gross domestic product (GDP). It is the essential diet of population as it constitutes 60% of the daily diet of common man in Pakistan catering to 48% of their caloric needs and average per capita consumption is about 125 kg (Masood). Its relevance can further be elaborated that “wheat accounts for 9.9% of the value added in agriculture and 2% of the GDP in Pakistan” (Pakistan Economic Survey 2015-16, "Agriculture").

The consumption pattern of wheat in Pakistan depicts that it has significantly inelastic demand, which enhances its importance in the food security of Pakistan. The performance of wheat crop affects the overall growth rate, import bill, and nutritional standard of our people. Therefore, it occupies a central position in agricultural policies of the government. These policies depict significant government interventions in pricing, procurement, stocking, distribution and transportation of wheat. The main purpose behind these policies is to provide a fair price (income) to wheat producers, to stimulate the production of wheat, to attain an adequate revolving reserve of wheat, to provide wheat flour at low price to urban consumer specially. This policy paper is designed to evaluate successes and failures of the present wheat market and pricing policy in the light of original objectives of food security for urban consumers and stable incomes for wheat producers using supply and demand model. Wheat is procured at a price higher than the domestic market prices to support farmers (income). In days of inflation, this procured wheat is released into market or flour mills at subsidized prices which consumers can afford.

The data on consumption and production of wheat highlights the importance of this crop in the economy of Pakistan. A chain of policy measures has been used to regulate the wheat market in order to achieve the desirable results. The main objectives, as proclaimed by the government (i) to provide a reasonable amount to rural farmers (ii) enhance the production of wheat to meet the consumption demands (iii) to provide the wheat floor at low prices to urban consumers (iv) to have wheat stock, in case of unfavorable conditions (e.g. drought, wheat shortage etc.). The wheat market of Pakistan is isolated from the international’s market as imports and exports of the wheat can only be performed by the government. This act of government gives the power to manipulate the patterns of demand and supply in order to influence the pricing mechanism of wheat market, which is one of the targets set by the government.

Background:

In the 1960s wheat procurement prices were on average two-thirds higher than international prices calculated by using official exchange rate. If distortions in the foreign exchange market brought about by the two-tiered exchange rate system are taken into account, it brings the average nominal rate of assistance to wheat producers down to just below zero for 1962-69. When world wheat prices and other grains rose sharply from 1972 to 1974, government insulated its domestic wheat market from that shock through government imports and subsidized sales. The implicit tax on wheat producers rose to 70 percent in 1973, but during the remainder of the 1970s as world prices fell and Pakistan wheat policy maintained real domestic wheat prices at approximately constant levels, NRAs became much less negative (Anderson, Kym, and Martin, 2009).

The Government net injections in wheat markets were significantly lower in the 1980s, around 2.7 percent of net availability. Wheat NRAs averaged 22 percent at this time period. Then policy reforms during the 1990s brought exchange rate distortions to lower level, but government net market interventions surged again to an average of 12.4 percent of net availability. This lead to depress domestic prices relatively lower than the depression in international prices with the NRA averaging -24 percent. After the bumper harvest in 2000, Pakistan briefly became a net exporter of wheat. Because world market prices were lower than domestic prices, these exports required government subsidies.

Era of substantial liberalization started from the mid-1980s with the abolition of wheat ration system to the early 1990s. It greatly reduced explicit tariffs and taxes, as well as government direct interventions in markets for most agricultural products. Nonetheless, the government continued intervening in domestic wheat markets. Inter provinces transport of wheat was banned until the mid-1990s to help ensure that district officials of the provincial Departments of Food were able to meet their procurement targets. Later on marketing of wheat was liberalized, but in 2004 the Punjab government re-imposed restrictions on transport of wheat in order to meet procurement targets – Again this restriction was removed in 2005. Imports of wheat, undertaken by the federal government, were used to supplement provincial food reserves and enable sufficient wheat sales on subsidized prices to keep domestic price levels from rising too high.