Pakistan’s economic direction, including its agriculture and food policy, is characterised by contradictions that could not be starker than its sugar policy. Sugar is an important part of the household diet in Pakistan but is not consumed more than rice, both in terms of volume and value. Paradoxically, rice is liberally exported and is without price control whereas sugar is subject to various price controls and other administrative machinations. It is a classic case of a conspiracy against the consumers.
It would be helpful to understand the sugar business value chain in Pakistan and identify the actors and players conspiring against the consumers who are forced to buy expensive local sugar when it is significantly cheaper in the international market.
The sugarcane crop, which is the raw material for sugar as a finished product, is cultivated on 21 lakh acres of land in Pakistan, mostly in Punjab and Sindh.
Later, sugar is extracted from the crop in 81 sugar mills, again mostly in Punjab and Sindh. These mills are the processing units where farmers and middlemen/contractors sell the sugar cane crop through a highly interventionist method devised by bureaucrats which in the end satisfies no one in the value chain. A tiny portion of the crop is also processed on the farms and gur is produced that is consumed mostly in Khyber Pakhtunkhwa and exported to Afghanistan.
Market rigging
Sugarcane cultivation and sugar manufacture represent the “worst of both worlds”. The price of sugarcane is administratively fixed by the government and the finished product ie sugar is supposedly sold at the “market rate” to wholesale dealers and ultimately to consumers (both households and industries).
It is akin to the government ordering a tailor to buy fabric at the price set by the government and sell his finished garment at the market rate. This cannot work and creates significant distortions in the value chain. Very few people in Pakistan are aware that this illogical system of the sugar sector value chain is sustained through a 40% duty on the import of sugar in Pakistan and ultimately it is the poor consumers who bear the brunt of the madness of the sugar policy.
It would be a valid question to ask what justifies government intervention or market rigging for a food commodity such as sugar which has far less value when compared to another food commodity like rice. It is important to know that more than half of the sugar is used in commercial businesses including sweets, biscuits and soft drinks where it functions as an intermediate commodity rather than being consumed by an individual and supposedly a poor household.
The list of government “distortions” in Pakistan’s sugar sector is long and starts with the issuance of or application for the licence of a sugar mill. It is the government that decides where a sugar mill can or cannot be installed.
The government also decides when sugar mills can start the crushing season (in other words when the tailor master will open his shop) and when mills have to make payments to their raw material suppliers for a business that is supposed to be free and liberal in nature in which private parties are supposed to make deals on their own without government intervention. It would not be out of place to ask what justifies government meddling in the sugar sector when invariably every household spends more on rice than sugar.
Sugarcane is a long-gestation crop and takes from 14 to 18 months and is known as a water guzzler requiring a huge quantity of precious irrigation water for maturing. This 14- to 18-month crop period makes sugar cane unsuitable for small growers and only medium- and large-scale farmers cultivate this crop. The dual aberration, that is the lower consumption importance and lower equitability value for the sugar cane crop on the production side (and a large environmental impact in terms of water requirement), makes government intervention even more bizarre. Why does the government intervene and take upon itself the wrath of all stakeholders as it is impossible to satisfy conflicting expectations of the players in the value chain?
History of issue
To understand the sugar sector mess, it is important to bring into the picture the current sugar mill owners who are also large-scale sugar cane farmers. This is different from the 1960s or the early 1970s when mill owners were mostly industrialists who had little interest in farming and the mill owners hardly had any electoral clout.
This sugar mill ownership landscape changed in the 1980s and large-scale farmers, as a form of state patronage (and with public-sector bank financing) got sugar mill licences and entered the business. The rise of these large-scale farmers as mill owners consolidated vested interests. The worst form of this vested interest manifested itself last year when millers were provided large-scale export subsidy and the same year the commodity was imported at almost twice the price of its export. Taxpayers and consumers were doubly robbed with this simultaneous export and import of sugar.
There is no doubt that the sugar policy is most bizarre and cannot be sustained no matter how powerful the sugar lobby is in Pakistan. It invariably results in losses for mill owners when international prices are low and our neighbours, particularly Afghanistan, do not lift our sugar and the local market is suppressed.
With the current boom in the international market for commodities such as sugar, it is the best time for Pakistan to deregulate sugar altogether. As household consumers are already conditioned for higher prices, the mill owners would be able to export without substantially impacting the local market. Perhaps currently the biggest hurdle in deregulation is the large-scale sugarcane farmers and not the mill owners.
This article first appeared in Dawn.