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April 11, 2021

CCP opposes ex-mill, retail price fixed by Punjab govt

Top Story

April 11, 2021

LAHORE: Competition Commission of Pakistan (CCP) opposed the Punjab government sugar ex-mill and retail price fixation decision of Rs80 and 85 per kilogram, respectively and termed that this stopgap measure of ‘fixing price’ can at best provide temporary relief to cap the excessive price increase.

However, this measure fails to benefit the sector or the economy at large. The short-term benefit of fixing prices (if any) does not justify the long-term loss caused by such policies, the CCP stated in a policy note ‘fixing of maximum retail price of sugar by government of Punjab’.

The policy note has been issued in the context of a circular issued by the government of Punjab for fixing of the maximum retail price of sugar at Rs85 per kilogram. The CCP compelled by its mandate deemed it necessary to caution and explain the unintended consequences of putting a price ceiling.

For sugar, as Punjab is the only province to set a price ceiling, one immediate effect could be that sugar moves to other provinces where no price ceiling is in place and it can command a higher market price. Price control could also encourage hoarding by suppliers or impulsive buying by consumers, especially ahead of Ramazan, both of which will likely result in shortage in the market. This shortage could directly affect price with the result that consumers may end up paying even more for sugar than what they would have to pay if price controls were not in place. According to the policy note, a copy of which available with this correspondent, the CCP opined that’ rather than price ceilings, the deregulation of the sugar market would be a better and sustainable option to promote free trade mechanisms where price signals can be effectively conveyed to all stakeholders to attract investment, increase competitiveness, and reduce distortions in local supply.’

Punjab government recently fixed the maximum retail price of sugar at Rs85 per kilogram following the federal government’s calculated ex-mill price of sugar at Rs80 per kilogram. While this decision was taken in the spirit of ensuring that consumers not pay exorbitant prices, particularly in Ramazan, and protect that segment of the population that cannot meet price increases, the Commission by virtue of its mandate is compelled and deems it necessary to caution and explain the unintended consequences of putting a price ceiling.

In doing so, the Punjab government may remain mindful of the fact that the benefit of price fixing, particularly at the time of Ramazan, is also likely to go to the industrial consumers and perhaps, not to the target poor population because the industrial consumers make up for about 70 percent consumption. And that it is such consumers who have the ways and means as well as the wherewithal to capture such benefit. That they pass on the benefit to the ultimate individual consumer is also a concern that calls for attention.

The CCP observed that the ‘price controls could provide relief, though only temporarily, to the poor directly affected by high prices. More crucial is the fact that price of sugar may rise more rapidly once the controls are lifted to recoup the losses incurred during the period of price control, triggering high price inflation. Rapid inflation is always a concern for consumers whom the price controls intend to protect.’

The CCP stated that price controls rarely work and fail to protect the consumer interests while the negative implications are both temporary and long term, direct and indirect ultimately affects the consumers.

In the long term, price fixation could affect sugar production. The financial viability of sugar could be compromised by rising minimum support price on the one hand and the price ceiling on the other hand. Since Punjab is the major sugarcane producing area (around 60% of Pakistan’s requirement), any measures introduced by the Punjab government could have a spill-over effect in other provinces.

The CCP stated that all mills are not operating at equal efficiencies and fixing maximum retail price could be resulted in many mills fail to achieve break even. ‘Imposing the maximum retail price could mean that some mills, which must purchase sugarcane at the minimum support price as fixed by the Punjab government, may not be able to break even.’

The CCP mentioned that Punjab government’s minimum support price (MSP) have a tendency to raise domestic cost of production when compared to international prices as the price of sugarcane is the major cost factor in sugar production.

If cost of production is more than the fixed retail price, this could lead to a temporary shutdown of operations on their part or, in the worst case scenario, their closure; if such price fixing measures are allowed to continue for a long period. This may lead to purchase of lesser sugarcane by mills from farmers which resulted into shifting of crops. Hence, in long run it may be resulted in lower sugar production and a rising import bill for a commodity (sugar) for which there is sufficient land and infrastructure available in the country.

Pakistan’s protection of the domestic sugar industry through tariffs and subsidies has not allowed it to develop the necessary capability to compete in the international market for sugar by-products (like ethanol), for which demand is stronger. A more efficient agriculture policy may be considered, which would take all factors into consideration, including domestic exigencies as well as international reality and direction. This will be in line with the federal government’s desire to achieve effective deregulation.

The CCP referred that in the past such price control actions did not work in Pakistan. In 2009, when superior courts fixed the price of sugar at Rs40 per kilogram, mills maintained that for them to break even, the minimum price ought to be at least Rs48 per kilogram. Within months, many mills stopped operations resulting in a severe supply shortage in the market and prices, at times, reached as high as Rs100 per kilogram. Thus, a measure whose objective was to ensure supply of sugar to ordinary consumers at affordable prices resulted in a vastly different outcome.

Similarly, in late 2000s, wheat was transported to Afghanistan when the government tried to keep domestic prices lower than the commodity's global prices. The resulting shortage forced the government to import wheat at a much higher price to cover the shortages despite domestic production that resulted in surplus stocks.

The CCP suggested that ‘the government should deregulate the sugar industry to promote free trade mechanisms where price signals can be effectively conveyed to all stakeholders to attract investment, increase competitiveness, and reduce distortions in local supply’.

The CCP policy note suggested that better options for Pakistan than setting a price ceiling lie in deregulation, removing subsidies, and ensuring competition in the market. Competitive sugar pricing and removing restrictions on the imports and exports of sugar (without subsidies) would give sugar producers market-based incentives to enhance their productive, technical and allocative efficiencies as well as focus on the necessary research and development to improve the sector.

The Punjab government may consider the viability of non-price interventions at the farm level such as introducing a revenue-sharing policy between the millers and the farmers - for instance, in some countries, there is direct payment to farmers’ model.

The CCP recommends to focus on R&D in yield and quality and to make technological improvements in the processes at the mills to make manufacturing process more efficient and cost productive.

In the past also, the CCP through various policy notes and opinions has always supported full, free and fair interplay of market forces and making only the institutional intervention to correct any market malfunctioning as well as maintenance of appropriate strategic reserves to draw upon where needed.

The policy note concludes that free trade in sugar would make consumers better off by discouraging hoarding and over-pricing in the domestic market. These measures would definitely impact the development of the competitive sugar industry in Pakistan, leading to economic efficiency.