ISLAMABAD - In a bid to thwart Pakistan's
pestiferous wheat speculators, the government has
announced plans to wipe out - at least temporarily - the
current 25 percent import duty on wheat. There are also
indications that the government may order a reduction in
fertilizer prices to cut production costs for farmers.
If there was ever a textbook example on how not
to intervene in markets, the Pakistan wheat situation
would serve admirably. Although Pakistan is a
wheat-growing nation and wheat is a widely used staple,
with chapatis turning up on the table three times a day,
speculators often manage to tie up the market, drive
prices to stratospheric levels and reap huge profits.
The cost of government intervention is high and
its impact on agricultural performance is usually
significantly negative, according to the World Bank,
which has consistently urged policy changes such as
removing trade restrictions, price supports and
subsidies. However, the bank said in a recent report,
policy makers often resist such reforms, fearing that
they will expose the domestic market to fluctuating
international commodity prices.
Widespread
market reports indicate that this year, private traders
and millers stocked ample quantities of wheat after
borrowing at cheap rates from banks to purchase directly
from farmers at Rs 220 to Rs 260 for 40 kilograms during
March-May. A six-month bank loan at 4 percent to 4.5
percent plus the cost of storage for six months allows
speculators to push up open-market prices to Rs 10-10.50
a kg.
A Rs 1 gain per kg should earn Rs 500
million to Rs 700 million for about three dozen brokers,
traders and millers in Sindh for a relatively small
investment, traders said. They said the government
action could bring the price down to about Rs 9. The
announcement of duty-free imports leaves the speculators
with little option but to bring their wheat to market. A
member of the Indian trade delegation during his visit
to Pakistan in August offered wheat to Pakistan at less
than Rs 6 a kg.
There are signs the government
may finally be listening to pleas for reform. The
Economic Coordination Committee (ECC), chaired by
Finance Minister Shaukat Aziz, agreed to cut duties
after being told by the State Bank of Pakistan (SBP) how
much wheat has been pledged by the private sector with
the commercial banks.
In June, the government
said the current wheat crop would be 19.3 million
tonnes, enough to meet the country's domestic needs.
However, at the same time it was announced that Pakistan
would import 2.5 to 3 million tonnes worth approximately
US$300 million from the United States on cash payments.
The Ministry of Food and Agriculture said that a good
yield had been expected but unfavorable weather
conditions had wrecked the yield target.
Apart
from the government's desire to import wheat, a two-year
ban on grain imports from India continues. The ban was
imposed by Pakistan's government, blaming the Indian
crop as being affected by Karnal bunt fungus, an
allegation rejected out of hand by Indian officials. The
fungus is not dangerous to human or animal health but
brings a foul smell and fades the grain's color. Traders
in Pakistan say that, despite the government's strategy
of threatening speculators, the fungus scare is
politically motivated. They believe cross-border imports
are more viable and cheap, especially because freight
rates are low at the moment.
When the government
announced the cut in import duty, it was described as
conditional. The State Bank has been assigned to probe
the situation and collect data from banks as to how many
stocks of wheat have been pledged and where these stocks
are dumped.
The provincial governments of the
Northwest Frontier and Sindh told the ECC that their
wheat stocks were sufficient for only 50 days. The
Ministry of Food maintained that it cannot take a risk
on the speculation of stocks available with the private
sector as they are not confident of the exact amount and
also cannot force them to release their hoard.
The ECC also directed the provincial governments
and SBP to review the stock position and monitor the
situation in order to assure a proper and ample supply
of wheat. In the meantime, the government is targeting a
yield of 20 million tonnes from the November 2003 to
April 2004 crop. The target has been set mainly due to
satisfactory weather conditions so far and especially
excellent monsoon rains, which should eliminate any
hurdles. The government also plans to import 770,000
tonnes of fertilizer to enhance yields.
On
November 18, the federal cabinet for the first time in
four years increased the support price of wheat and
fixed it at Rs 350 per 40 kg from the previous Rs 300.
This is partly a confidence-building measure for farmers
in order to enable them to adopt new technologies and
techniques to increase yields. The government feels that
low yields during the last few years have resulted from
undermining the economics of wheat farming.
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Nov 26, 2003
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