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Tuesday, September 15, 2009

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Yet another crisis

Ashfaque H Khan Pakistan is currently facing multi-dimensional challenges in the areas of politics, economics, security and international relations. It is natural to expect that the government will be spending quality time in addressing these challenges. On the contrary, it is painful to see that the government both federal and provincial -- is engaged in handling the sugar crisis in the country. Apart from the government, the judiciary has also involved itself in a purely economic issue fixing the price of sugar. A simple issue of demand and supply has been turned into a monster only because it was mishandled by the people who had little or no idea about sugar trade. It is, therefore, a bad reflection on part of the government. How can one expect it to tackle bigger challenges that the country is currently facing? What is the crisis all about? The price of sugarcane, the main raw material, accounts for 85 per cent of the total cost of the production of sugar. The total size of the sugarcane crop was 50 million tons in 2008-09 as against a bumper crop of 63.9 million tons in the previous year almost 14 million tons less. Accordingly, sugar production was expected to be 3.2 million tons as against 4.7 million tons last year 1.5 million tons less. Pakistan's total consumption was estimated at 4.2 million tons. Hence, the current year's (November 2008 to October 2009) sugar production was expected to be one million tons short of the consumption requirement. However, the country had a carry-over stock of 800,000 tons from the previous year. Therefore, the estimated shortfall for the current year was 200,000 tons. It has, however, been a common practice to begin the new crushing season with a carry-over stock of al least 400,000 tons in order to keep the price of sugar stable. Accordingly, the estimated shortfall was 600,000 tons assuming a carry-over stock of 400,000 tons. This was known to the government during AprilMay 2008. Fully aware of the emerging sugar crisis in the country, the Ministry of Industries and Production (MOIP) made several attempts to get the approval of the competent forums for the import of 0.4-0.6 million tons of raw sugar during July-October 2008. Each time the growers' lobby vehemently opposed the proposal and blocked the import of raw sugar a substitute for sugarcane. The MOIP made yet another attempt by taking a summary to the ECC, the meeting of which was held on December 30, 2008. The MOIP, once again, came under severe attack by the growers' lobby. The then Advisor to Prime Minister for MOIP joined the bandwagon of the growers' lobby and deserted his own secretary because of this. Thus, the growers' lobby once again blocked the import of raw sugar. How then did the problem start? At the end of crushing season (April 30, 2009) the total stock of sugar in the country was 2.3 million tons against the consumption requirements of 2.17 million tons (0.31 million tons per month) for May-November 2009 a tightly balanced situation. This current demand-supply situation makes us think that there will be no carry-over stock for the next season indeed a highly risky assumption. The people associated with the sugar industry are smart as they possess enormous information about the availability of sugar within and outside the country. The international sugar market is 18 years tight as India alone wants to import 4.0 million tons sugar this year. The international price of sugar has been ranging between $500-600/tons and the landed cost of it was estimated to be Rs60-65/kg in Karachi.

It is pertinent to point out here that while average retail price of sugar in Pakistan ranged between Rs45.4 Rs47.2 per kg during May-July 2009, it was hovering around Rs70-75 per kg in Afghanistan. Such a massive price differential (Rs25-28/kg) was enough to encourage the smuggling of sugar to Afghanistan. There is news that smuggling of approximately 3,000 tons/day of sugar was taking place and, so far, 200,000-250,000 tons have already been smuggled to Afghanistan, thereby putting pressure on the domestic price of sugar. It is a well-known fact that the sugar consumption rises during Ramazan. Therefore, before the beginning of this month, that is, early August, the price of sugar started rising and averaged to Rs52.5/kg from Rs47.2/kg in July. The print and electronic media started highlighting a substantial increase in sugar prices across the country. The government came under pressure and instead of addressing the issue through economic measures, it resorted to a massive crackdown on the sugar industry in the name of hoarding. This was a colossal mistake on the part of the government. As said earlier, sugar crushing season lasts for four months and sugar mills crush millions of tons of sugarcane during this period. They produce 3.2 million tons of sugar in the four months to be consumed over 12 months. Therefore, one can find millions of sugar bags stacked in sugar mills at any point in time. This does not mean that hoarding is taking place. Furthermore, all the stocks of sugar are pledged to banks against borrowing from them. The crackdown on sugar mills completely disrupted the supply chain and the commodity was not available even in retail shops, thus pushing the sugar price even further up. The manipulation of the price of sugar by the mills cannot be ruled out either. Sugar mills knew the international price of sugar and the would-be landed cost at Karachi and Lahore. Thus, the slower release of sugar from the mills to the market with an objective of continuing to put pressure on domestic prices, and aligning them with the landed cost of imported sugar, appears to have been a rational strategy on the part of mill owners. It is the government that has to be blamed for mishandling the situation and providing opportunities to be exploited. Firstly, the government did not take the right decision at the right time. Not allowing import of sugar before the beginning of the crushing season was a bad decision. The growers' lobby showed their muscle and thwarted the efforts of MOIP to import raw sugar. Secondly, when the government came under pressure, it reacted irrationally. A simple demand-supply situation was badly handled. The raids on sugar mills disrupted the supply situation and put further pressure on prices. The current sugar crisis is just a trailer. Next year, the sugarcane crop will be at least five million tons less than this year; the price of sugarcane will be much higher than this year; sugar production will be less than three million tons against the consumption requirement of 4.3 million tons; and the shortage will be in the range of 1.5-1.7 million tons. We must learn lessons from the current sugar crisis. For one thing, do not allow the growers' lobby to prevail upon economic decisions. Never provide an opportunity to sugar mills to exploit the situation. Don't handle economic issues with administrative power. While fixing the support price of sugarcane for the next season the chief ministers must take into confidence the representatives of sugar mills and the consumers. Large differentials between subsidised and the market price of sugar is bound to breed corruption. Why are you using foreign tax payers' money for such purposes? The Friends of Pakistan have been asking these questions privately. Finally, improve governance, lest we are seen as a nation lurching from one crisis to another.

The writer is dean and professor at NUST Business School in Islamabad. Email: ahkhan@nims.edu.pk