EAG endorses sugar sector reforms for better market

ISLAMABAD: The Economic Advisory Group (EAG) of PRIME supports the suggestions given by the Sugar Sector Reforms Committee (SSRC), and encourages policymakers to take necessary steps both at the federal and provincial levels for implementation.

Setup by the federal government, the SSRC has proposed a set of reforms that go a long way in addressing the challenges faced by the sugar sector. Some of the key proposals include abolition of restricted areas, tax free imports of sugar, a gradual move away from the minimum support price regime, bringing transparency to forward contracts by allowing for such under the Pakistan Mercantile Exchange, and implementing adequate pricing of water to incentivise the adoption of water-saving farming practices.

The EAG believes that these measures would improve farmers’ bargaining positions in relation to other stakeholders by allowing them to sell their produce to whoever offers the higher price. These reforms would further allow for new factories to be established, while facilitating existing ones to relocate to where it was more productive to operate. In addition to improving productivity at the level of sugar factories, the increase in competition between factories would also benefit both the farmer and the consumer.

Allowing for forward contracts while ensuring effective supervision would help reduce seasonal volatility in sugar prices. Likewise, removing restrictions on imports would expose the industry to international competition and incentivise the adoption of more productive technology.

Alternately, the new regime would also allow inefficient players in the sugar industry to exit the market, thus reallocating economic resources to more productive activities. This latter point is the bedrock of EAG’s vision document.

While supporting the reforms agenda in principal, EAG also recommends that the SSRC reconsiders some of the other proposals put forward in the report.

The report suggests that exports may only be allowed “in times of high production” and “through allocation of quota on FCFS without any government subsidy.” This proposal, the EAG said would lead to similar problems as were faced in the past.

A combination of low international prices and surplus stock at home would necessitate government subsidising exports to bring inventories at a level where factories have an incentive to undertake production. “Instead, a better policy will be to allow free export of sugar while maintaining strategic reserves as a credible threat against speculative activity in the domestic market.”

The current proposal restricts forward contracts to a maximum of 15 days. EAG proposes that this limit should be increased to at least cover one full season, if not more. To avoid speculation, government should invest in the capacity of concerned regulators, such as the Competition Commission of Pakistan, to monitor collusive practices and guard against these. The proposal also recommends enforcement of relevant laws “to ensure that no hoarding is possible.” EAG recommends that the committee should clearly define “hoarding” in the context of the sugar industry.

There should be a clear distinction between hoarding, on the one hand, and the need to store the commodity by industry players for business purposes. For example, farmers need to store the crop while they negotiate on price with multiple market players.

Likewise, retailers need to maintain sufficient stock levels to effectively manage their supply chains and expand their retail networks. Finally, traders accumulate stocks so these could be sold during off-season when prices are generally high.

“This distinction has historically been lost on the district authorities charged with implementing anti-hoarding laws, and, as a result, economic efficiency is compromised. For example, in the process of implementing anti-hoarding laws, farmers have been denied the few weeks after the harvest that it can take to select the best possible transaction,” it pointed out.

While the report notes, “import of sugar is already open for the private sector,” policymakers have time and again imposed restrictions in the past, often requiring approvals from the highest levels of the government. This loophole should be closed to bring more certainty to the rules that govern the sugar market.

Finally, while EAG fully endorsed the move away from the minimum support price, EAG also recommended that policymakers at the provincial level should work towards carefully designing a mechanism for introducing crop insurance for small farmers to protect them from adverse shocks. The insurance product can be linked to the Kissan Card that the current government has recently introduced, and rolled out gradually to minimise the likelihood of costly mistakes.

The EAG is an independent group of individuals from economics, policy and the private sector, which is supported by PRIME, an independent think tank.