The World Bank has said that the government of Pakistan operates fiscally expensive and inefficient wheat procurement and distribution scheme, providing an untargeted subsidy to the entire population, where most of the benefits are reaped by the wheat flour millers and traders.
The WB in its report titled ‘Pakistan Towards an Integrated National Safety Net System’ has said that the government’s ineffective wheat procurement mechanism has resulted in a significant excess capacity of around 300 percent in the wheat milling industry, while crowding out private sector participation in wheat marketing. The rapid increase in world prices accompanied with sluggish rise of domestic prices lead to substantial subsidy on imports.
The government’s limited agricultural policymaking capacity has led to regulated prices which have at times given wrong signals to the market. Further, government’s interventions in the procurement, handling, marketing and storage of wheat through provincial food departments and Passco, widened the gap between the import and export parity prices.
The report says that the wheat procurement (support) price is determined by the federal government based on the cost of production studies undertaken by Agricultural Prices Commission (Apcom), and is announced before the sowing season (September) to enable the farmers to respond to the price incentives. The federal government in consultation with the Provincial Food Departments (PFDs) set overall procurement targets, which have been fairly constant over the years amounting to around 50-55 percent of the marketable surplus (20 percent of total production) in the country. The PFDs19 and Pakistan Agricultural Services and Storage Corporation (Passco) (on behalf of federal government) procure the wheat during harvest season (April-May).
The PFDs with the assistance of executive authorities at the district level set up procurement centres, the locations of which are advertised. The procurement takes place in a mutual manner, in which the farmers bring their wheat to procurement centres and get reimbursed for the transportation cost, or else the district food controller and his/her officers visit the farmers and procure the wheat from the farm. Since this procurement process is under implementation for many years, the procurement officers have extensive knowledge of the farms and their production. Inter-provincial (even inter-district) restrictions to wheat movement may be instituted to achieve procurement targets. The level of procurement price in relation to market price (which is determined by the size of the harvest) determines whether the target will be reached. The procurement process continues until a deadline set by the provincial government. In years where the target is not reached, the government (ie Trading Corporation of Pakistan- TCP) imports wheat.
The PFDs are responsible for transporting the wheat from the procurement centres and for storing and issuing the wheat. Passco also stores the wheat it procures for the federally administered areas. During the immediate post-harvest period of June-September, the private sector supplies the wheat market entirely. The procured wheat is not released until September when supplies in the market get low (stress period). The imported wheat is also routed through the PFDs for release.
According to the report, similar to the procurement price, the issue/release price is determined again by the federal government in consultation with the provincial governments. The issue price does not cover all the cost of procurement, storage, release (ie incidentals). In fact, in the past there have been instances when the issue price is lower than the procurement price. All the procurement costs, storage/transportation costs and issuing costs as well the discrepancy between the procurement price and the issue price (if any) are borne by the provincial governments in provinces and the federal government in the federally administered areas. In the case of imported wheat, the direct wheat subsidy (the difference between the import price and the lower issue price) is initially borne by the federal government but recovered later from the provinces based on the wheat issued to them.
The report shows that the federal wheat subsidy has been on a declining path since 2010. During the period 2008-09 and 2009-10, it increased by 31 percent in nominal terms, owing to the food crisis, however; it remained a constant 0.2 percent of the GDP. In the following years, the government reduced it significantly, represented by a total decrease of 95 percent from 2008-12, assuming only 0.005 percent of the GDP by 2011-12. This was the result of abolishing by 2011-12, the subsidy to USC for sale of flour; payment of subsidy to Passco on cost differential for sale of wheat; and reimbursement of cost differential of imported wheat to TCP, and only contributing towards the sale of wheat in Gilgit Agency and Fata.