Why is food inflation running high in Pakistan?

Why is food inflation running high in Pakistan?

The continuing high food inflation poses the biggest challenge for Prime Minister Imran Khan’s embattled government. High wheat and flour prices have had a snowball effect on the prices of other food items as well. In a developing country like Pakistan, many see the price hike as a deliberate attempt to make the government unpopular and eventually unstable.

Narratives asked Miftah Ismail, former finance minister and senior leader of the PML-N, Ashfaque H. Khan, principal and dean of the Nust School of Social Sciences and former adviser to the Ministry of Finance and D.G of its Debt Office, and Shandana Gulzar Khan, convener, Special Sub-Committee on Agriculture and SDG, 5, to share their point of view.

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Miftah Ismail

Former finance minister and senior leader of the Pakistan Muslim League-Nawaz

 In both politics and economy, it is not necessary that only big mistakes lead to one’s downfall. If a government keeps committing small mistakes, these can also have a huge snowball effect. In the PTI government’s case, it is a combination of mistakes and other factors that has aggravated the situation and resulted in substantially pushing up food prices.

     Firstly, the State Bank of Pakistan (SBP) increased the money supply in the system. Monetary expansion always triggers inflation. The SBP increased the money supply in the system by at least 17 percent or roughly 1200 billion rupees through its open market operations over the last fiscal year, the effect of which is now being realised. The SBP bought different-period maturity bonds from commercial banks. This has had an inflationary impact of at least 10 percent. 

     Secondly, the increased prices of wheat and sugar have also contributed to about a third of the rise in food inflation. This is the result of both incompetence and corruption. For instance, in Punjab, wheat was given for grinding to select millers, and a lot of flour was smuggled into Afghanistan and Central Asia. The decision to give preferential treatment to some millers, denying the market the right to purchase wheat played a major role in jacking up the price of flour. Also, last year around 800,000 tonnes of wheat was used for animal feed, both cattle and poultry.

     Then, the Sindh provincial government didn’t purchase any wheat itself, presumably because of the NAB cases against them for past purchases of wheat. Perhaps for similar reasons, the federal government decided not to import wheat in a timely manner in spite of the pleadings of the flour mills. 

     The Punjab government’s rationing of wheat supplies to flour mills of its choice has meant that the margin of profit for those mills has increased, as demand for flour continues to outstrip the supply of wheat. An increased supply of wheat would have curtailed the rise in the price of flour. Right now, being a miller is one of the most profitable trades.   

     Another important factor is that the rates of electricity, gas and fertiliser have all been raised. When the input cost goes up, it is natural that the commodity price will also shoot up. To offset the pressure of increased input costs, the government did not introduce any scheme to help farmers, for instance, by subsidising the addition of gypsum in soil or providing solar tube-wells. 

     Finally, some of those small farmers, who live on the edge of poverty, also could not cultivate vegetables because of the increased input costs. This resulted in a decline in vegetable production by four to five percent which is not huge, but when it comes to food supply it can have a big impact on prices. All these factors played their part in fuelling food inflation. The government could have managed this by making timely decisions and importing wheat on time. But here again, because wheat prices are up in the international market, the cost of imported wheat will be higher than local wheat when it lands in Pakistan.

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Dr. Ashfaque H. Khan

The writer is a renowned economist, who served as an advisor to the Ministry of Finance & D.G of its Debt Office.Currently he is the Principal & Dean at the NUST School of Social Sciences.

 Food inflation has remained in the range of 15-16 percent per annum since August 2019. Such a prolonged period of high food inflation has seldom been observed in Pakistan. Higher food prices have substantially eroded the purchasing power of the poor and fixed income groups. Consequently we see a hue and cry in the print and electronic media, which has brought the PTI-led government under tremendous pressure. Moreover, it has given enough ammunition to the opposition to keep the government constantly in the line of fire.   

     Why have food prices surged and remained at a double-digit level for the last 14 months? There are several factors. Firstly, wheat production has remained constant in the range of 24-25 million tonnes for the last one decade.  With the rise in the country’s population, the average per capita wheat availability has significantly declined from 145kg per year to 120kg per year during this period. Although, the government reported production of almost 25 million tonnes of wheat in 2019-20, there are indications that untimely rain (March/April 2020) and an outbreak of yellow rust damaged the wheat crop, particularly in Khyber Pakhtunkhwa (KP), where production was 40 percent less than the previous year. The wheat crop was also damaged to some extent in Punjab due to untimely rain and thunderstorms. So the year started with a wheat shortage. 

     Secondly, the government kept the private sector out of the procurement drive and the provincial food departments tried to procure wheat on their own. The government could procure only 5 million tonnes of wheat i.e. 50-70 percent of the target, while the private sector (millers) could procure only 60,000 to 70,000 tonnes or 66 percent lower than last year. Hence, wheat production was less on the one hand and the procurement of wheat by various government agencies was also substantially less than the target, on the other. Furthermore, flour millers were also not allowed to secure sufficient quantities of wheat. This information was in the knowledge of various stakeholders. Further, the Punjab government started raiding various godowns with a view to bringing wheat into the market. The middlemen, who bought wheat from the farmers as is their normal practice, started hiding the wheat. Consequently there was a shortage in the market. The flour mills did not have enough wheat in stock as the various provincial governments did not release the wheat from their stocks to flour mills, which they usually do from October onwards. Hence, the price of flour continued to rise. 

     Thirdly, the government imposed a ban on the movement of wheat from a surplus province to a deficit province. This continued to build up pressure on flour prices. For example, wheat production was 40 percent less in KP and they could meet only 20 percent of their target. Thus, wheat and flour prices kept on rising in KP, as well as in the rest of Pakistan. 

     Fourthly, the international price of wheat also jumped from $235 per metric tonne to $275-280 per metric tonne. The domestic price of wheat followed the international prices under the Law of One Price, and hence the domestic price of wheat and flour kept spiralling upwards. In September 2020, it rose by 42-45 percent as compared to its price in September 2019. 

     What is the relationship between the price of wheat/flour and food inflation? Wheat is the staple diet of the people of Pakistan. The price of wheat serves as a benchmark for other food prices, because they rise in sympathy with wheat prices. When the price of wheat increases, the milkman will raise the price of milk. Empirical evidence in Pakistan suggests that with a 10 percent rise in the support price of wheat, overall inflation shoots up by 3 percent in one year. Wheat prices have a strong bearing on food inflation and hence, on overall inflation. 

     The rise in wheat/flour prices has led to an increase in the prices of other food items as well, resulting in the persistence of high food inflation with serious consequences for the poor.

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Shandana Gulzar Khan

Convener, Special (Sub) Committee on Agriculture and SDG 5.

Several factors are responsible for the persistent food inflation globally. According to the World Bank, “As the coronavirus crisis unfolds, disruptions in domestic food supply chains, other shocks affecting food production, and loss of incomes and remittances are creating food security risks in many countries. Food producers also face huge losses on perishable and nutritious food as buyers have become limited and consumption patterns shift. Though food insecurity is, by and large, not driven by food shortages, disruptions to the supply of agricultural inputs such as fertilisers, seeds or labour shortages could diminish next season’s crop.”

     Records show that spending growth has stalled since the latter part of June 2020 with one exception: household groceries. Spending on food is up globally and so are prices, which is squeezing families’ disposable incomes and access to nutritious food.

     For Pakistan, the growth in food inflation is due to similar and massive hits to the farmers. In addition, certain key factors are specific to this region. Firstly, wheat smuggled out of the country to countries with higher demand and prices is driving both scarcity and the rise in domestic wheat prices. Witnesses report that trucks loaded with wheat from Punjab are being smuggled out of the country due to the low MSP (Minimum Support Price) offered to the farmers. Wheat is being sold at Rs 2400 per kg in Pakistani markets, while the MSP received by the farmer is only Rs 1400, which is extremely unfair. If this wheat crosses borders, it fetches even higher returns but unfortunately, this does not benefit the farmer. It is the middlemen, cartels and mafias, who walk away with the profits.

     The second major reason is seasonal and annual hoarding. Year after year, Pakistan has witnessed a rise in prices every Ramzan, regardless of which political party is in power. Pakistan’s food and commodity markets have been hijacked by   well-established mafias, who regulate the market. In 1993, Khyber Pakthunkhawa (KP) faced acute flour shortages. Flour vanished even from the state-run Utility Stores and the public was ransacking government-held stores. There were reports that key political and business figures were involved in massive hoarding of wheat and were not allowing its supply to the millers. Interestingly, now that the current government has expressed its resolve to address the situation, these forces are getting so desperate that they have ganged up with their partners across the country, including some corrupt elements in the bureaucracy. 

     The third possible factor for the rise in wheat prices could be attributed to the Sindh Government, as it did not release its wheat stocks to the flour mills on time; KP and Punjab started rolling out wheat stocks well ahead of schedule and in a larger quantity to ensure a lower price of the commodity. Probably they took this decision because of fears of early smuggling, but, this delay encouraged the increase in prices nonetheless. Some view the Economic Coordination Committee’s recent decision to fix the wheat support price at Rs 1600 per 40 kg as not being commensurate with market conditions; the Ministry of National Food, Security and Research had recommended that it be fixed at Rs 1750. Sindh meanwhile, has set the price at Rs 2000 per 40 kg, which has generated fears of wheat smuggling from other parts of the country to Sindh. Once again, it is the middleman and the cartels that will benefit. One view emerging from ECC members hailing from the urban areas was that a higher wheat support price would result in inflationary pressure. However, those representing the rural areas argued that the interest of the farmers should be protected and the commodity price must reflect the market level. 

     Incidentally, the 18th Amendment has also introduced unplanned and unforeseen distortions in the food and agriculture sector. Food security and exports are the responsibility of the federal government, but labour, extension services, plantation, food etc. are the responsibility of the provinces, which unfortunately have done very little by way of loans, food quality upgradation, provision of bio-pesticides or bio-fertilisers, and modernisation of the agriculture sector. Moreover, in addition to the COVID-19 pandemic, the recent attack on farms by swarms of locusts emanating from East Africa and Saudi Arabia has added to the woes of farmers and threatened Pakistan’s food security.

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