The International Monetary Fund (IMF) just imposed a new requirement under the $7 billion Extended Fund Facility, requiring Pakistan's federal and provincial governments to phase down the crop minimum support price (MSP) system by June 2026.
The MSP is now only available for three commodities: cotton, sugarcane, and wheat. In India, however, it is applicable to 23 crops.
The MSP, which is extensively utilized in many developing nations, has two main functions: it stabilizes the supply and production of vital crops and ensures that farmers receive a minimal return on their goods. The former seeks to shield farmers from changes in world prices and distressed sales during times of excess production, while the latter protects consumers from imbalances in supply and demand as well as inefficiencies in the market.
These advantages do not come without a price, though, as successful implementation calls for strong institutional backing, a suitable infrastructure for agricultural storage, and significant funding.
Pakistan's main crop, wheat, which is grown on 9.6 million hectares, will be most impacted by the IMF's requirement. The wheat market has generally been stable thanks to the MSP system, which is not intrinsically bad. The actual problem, though, is how it is being implemented, which is beset by enormous inefficiencies, pervasive corruption, and a significant reliance on high-interest loans from commercial banks to pay for the purchase and storage of wheat.
The Fund is pushing Pakistan to end support price intervention as the system continues to put a burden on the public exchequer
For example, the Punjabi government's Food Department used to purchase between 3.5 and 4.5 million tons of wheat a year, or 16 to 20 percent of the province's total output, in order to keep strategic reserves and stabilize wheat flour prices, with the exception of 2024. Through flour mills, the government sold the wheat inventories it had purchased at a release price that was either equal to or more than the MSP.
The main problem is the extremely high incidental costs (freight, storage fees, interest on bank loans), which are exacerbated by waste and theft, in addition to the operational costs (salaries). When taken as a whole, these elements raise the government's overall costs by 20–25 percent above the MSP.
The government has continuously borrowed large sums of money over the years, only being able to repay a portion of it. Due to this, the total amount of outstanding debt skyrocketed to Rs680 billion in June 2023, with interest payments totaling Rs87 billion in 2022–2023 and Rs110 billion in 2023–2024.
In other provinces, things are essentially the same. Because of this, the system that may have been advantageous has become a financial burden on the government, which is why the IMF is pressuring Pakistan to stop its intervention.
Although the federal and provincial governments' wheat MSP is sometimes perceived as a farmer subsidy, this viewpoint is not entirely accurate. In 2015, 2016, 2017, 2018, and 2019, farmers benefited from higher MSPs, primarily due to the PML-N government's unsustainable policy of capping the dollar exchange rate at around Rs100, which made food imports cheaper. This is according to an analysis of MSPs and corresponding global wheat prices over ten harvests (2014–2023).
The extraordinarily high incidental and operational costs of procuring wheat inflate the overall cost by 20-25pc above the minimum support price
On the other hand, farmers received lower payments than the going rate on the world market in 2014, 2020, 2021, 2022, and 2023. on order to fulfill its procurement targets, the government even forcibly removed wheat from farmers' homes. In general, farmers have benefited very little, if at all, from the wheat MSP system.
Although rarely often, the federal government also intervenes in the cotton market by establishing an intervention price. As part of an initiative to boost cotton production, it established the price of Rs8,500 per 40kg for cotton (phutti) in 2023. Regretfully, the government did not support it when market prices fell below the intervention level. Because of this, the majority of farmers—especially those who were urged to plant cotton—sold their produce for between Rs. 6,000 and Rs. 6,500 every 40 kg.
The situation with sugarcane is notably different, as provincial governments set a minimum purchase price for sugarcane each year in consultation with farmers and sugar mills, but without incurring any financial obligation.
There are worries, though, that governments may raise sugarcane prices to help farmers, which would raise the cost of producing sugar. However, recent data does not support this opinion. The Indian government announced the sugarcane price for the 2023–24 crushing season at INR 315 per quintal, or Pak Rs421 per 40 kg. In contrast, Pakistan fixed the price at Pak Rs425 per 40 kg, which is essentially the same. In the meantime, Pakistan's sugarcane production costs are far greater than India's.
The most important thing is to foresee how MSPs will be phased out and then take preemptive steps to minimize any potential negative repercussions. The change in policy—the MSP-free regime—would have a detrimental effect on our farm sector's overall productivity.
Pakistan's Competition Commission is mainly ineffectual. Thus, in a skewed market, farmers who depend only on market forces may find themselves at the mercy of cartels involved in the sugar, cotton, and wheat industries. Due to the poor prices of 2023, farmers are forced to switch crops, as demonstrated this year by the decline in the acreage dedicated to cotton and maize.
This will exacerbate Pakistan's already high crop instability index, which is a result of growing input costs and climate change-related variations in acreage, yields, and prices across time.
However, the negative effects of this policy shift may be considerably reduced by raising agricultural yields, which would improve crop availability and output while lowering prices and per-unit expenses.
Published GSB Hub, September 25th, 2024
The GSB Hub published this content on 16 Oct,2024.