Trade Chronicle May - June 2020

TRADE CHRONICLE
The sugar crisis
By: Mahmood Hasan Khan
In recent weeks, I followed with great
interest the stories about the
disappearance of flour and sugar from
the market and the surge in their prices.
In the case of sugar, apparently it was
allowed to be exported with a subsidy at a
time when there was a shortfall in output
to meet the domestic demand. The
exporters obviously made a killing in the
market thanks to the export subsidy and
the devalued rupee. But the sugar
problem is far more serious than what has
appeared in the press so far.
The structure of production of sugarcane
and sugar in Pakistan has been a drain on
society since at least the mid-1970s. I
recall a research study I did around thirtyfive
years ago – it was published in Food
Policy (Vol 11, Issue 3, August 1986, pp
253-258).
According to my estimates then, there
was a high private return on investment in
sugar, but the industry was not profitable
for society. I found that, given the disparity
between the domestic and international
prices, there was a welfare loss of Rs5.48
billion (in 1986 prices), but producers
made about Rs2.36 billion in profits and
the government gained Rs321 million in
revenue. I also estimated that about onethird
of the sugarcane area could have
been used for other crops.
My conclusion was that Pakistan should
focus on increasing the yield level and the
sucrose recovery rate, at the same
reducing the area given to sugarcane. In
the meantime, Pakistan would have been
better off importing sugar than producing
it at home at a much higher cost.
The situation today seems not much
different. First a few facts about the
sugarcane grown in Pakistan. Pakistan
produces 20 to 30 percent less
sugarcane per hectare than the average
reported for other countries. Second, the
varieties of sugarcane grown in Pakistan
have a 15-20 percent lower sucrose
recovery rate than in the major
sugarcane-producing countries.
Third, sugarcane uses a lot more water
per hectare than any of its competing
crops and it occupies the land area for a
longer period in the year. Fourth, for the
farmer, it is a far more profitable crop than
its competitor, thanks to the price support
and subsidies on inputs (water in
particular). Fifth, the average price
received by the sugarcane grower is
higher than the international price by a
significant margin while there has been no
significant increase in the output of
sugarcane per hectare. (On the other
hand, the competitive crops have shown
increased yield levels and their domestic
price has not been higher than the
international price.)
In light of these facts, Pakistan would be
far better off by reducing the land area
used for sugarcane. The focus should be
on improving the yield level and the
sucrose recovery rate and on reducing
the price subsidy going to the growers.
I n t h e s u g a r- m a k i n g i n d u s t r y,
government support to the owners of
nearly 91 sugar mills comes in many
forms, including cheap bank loans,
subsidised import of
equipment, zoning
o f m i l l s f o r
sugarcane, and a
guaranteed return
on equity. The millzoning
system gives
each mill a monopoly
to receive the cane
grown within the
zone. This deprives
the grower from
choosing a mill for
f a i r p r i c e a n d
convenience. In fact,
the cane growers are
dependent on the mill owners for loans,
inputs, and extension services.
The result of this is that mill owners make
a hefty profit, the government acquires
substantial revenue in taxes, but the
consumer ends up paying a price
significantly higher than the international
price of sugar. Considering the welfare
loss to society, the government should
discourage the production of sugarcane
in the country, particularly in Khyber
Pakhtunkhwa and parts of Punjab, and
allow import of sugar to compete with
domestic producers.
The government should reduce the tax
burden on domestic sugar – which in any
case falls on the consumer – and use a
flexible tax regime on the export and
import of sugar. It should remove the
sugarcane zoning requirements and
reduce the availability of cheap bank
loans and other subsidies to the mill
owners. There is no reason to grant new
licences for mills and a guaranteed return
on equity. There is a need is to promote
efficiency in the production of sugar and
price stability in the market.
As a short-term policy measure, the
government should liberalise the import
of sugar. This will soften the domestic
market and provide competition to the
local producers, helping them to become
better users of the country's resources.
Imported sugar at the world market price
could be sold with an import tax as a
source of revenue to the government as
long as, the selling price is somewhat
lower than the domestic producer price.
A policy of liberalised import, with duty on
the imported sugar, would allow the
government to reduce the current high
tax on domestic sugar, and hence benefit
both producers and consumers of sugar
in Pakistan. In the long run, public policy
should aim at reducing the area used for
sugarcane, increased productivity –
which means higher output per hectare
and higher sucrose recovery rate,
reduced dependence on subsidised
inputs (water in particular) and a supportprice
regime in line with the border price.
Along with this policy, the government
should dismantle the zoning system for
sugar mills, make the licencing system
competitive, limit the access to cheap
loans, and give no guarantee of return on
equity to the mill owner, but create market
conditions that give a fair return on
investment. Frankly, for too long have
consumers of sugar have been held
hostage by sugarcane growers and
owners of sugar mills. It’s time the
government comes to the rescue of these
hostages. One last point for consumers
to ponder: too much sugar and salt is not
good for anybody's health. Governments
should help people learn to consume less
of both.
(Courtesy The News)
TRADE CHRONICLE - May.~ June. 2020 - Page # 14