Food Inflation In Pakistan: Causes And Policy

Inflation and its measures 

As defined in the glossary of economics, inflation is a sustained increase in the aggregate or general price level in an economy. In other words, inflation means there is an increase in the cost of living [2] . In Pakistan, inflation is measured by three indicators: the Consumer price index, Wholesale price index and the Sensitive Price indicator.

Consumer Price Index or CPI is the main measure which gives a general representation of the inflation in the country. About 374 items are included in this list. It measures cost changes associated with these items.

Wholesale Price Index or WPI represents the directional movements of prices in the wholesale markets. Items covered in the series are those which could be precisely defined and are offered in lots by producers/manufacturers. These account to 425 items.

Sensitive Price Indicator or SPI is computed on weekly basis to assess the price movements of essential commodities at short intervals so as to review the price situation in the country. SPI includes 53 items which are based on the staple diet of the country.

HISTORIC TRENDS

Inflation in Pakistan in the last two decades

Gone are the days when food on its own was considered as a cheap resource and most people could afford at least the basic commodities necessary for their survival. The food crises in our country is not only a local phenomena but it can, to a certain extent, be attributed to soaring food prices internationally, particularly over the last year. This, coupled with ineffective, myopic policy measures by the government has driven millions below the poverty line. Rising food prices was a major factor in driving up inflation between 2007 and mid 2008. The most appalling thing about food price inflation is that it is the most regressive of all taxes, hurting the poor and fixed income group the most.

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Starting with inflation in double digits in the 90’s, the real pressure came in the 1994-1995 when inflation went up by 13%, mainly due to extremely high food inflation of 16.5%.However, from then on, there was a steady dip in the overall inflation with food inflation falling below the Consumer Price Index (CPI) between 1999-2002. This was because of an improved supply position, strict budgetary measures and depressed international markets. [3] 

From then on, mainly because of higher wheat support prices, shortages of wheat and a rise in international prices including oil has pushed the inflation back up again, with food inflation going as high as 12% in 2004-2005. It fell again to single digit in 2005-2006 but has climbed at shocking levels since then. The food inflation average was lowest between 1998-2000 and currently the food inflation figure is around 7.5%.

However, eight of the top ten commodities contributing to the overall CPI inflation, were from the food group, having a weighted contribution of 38.3 percent in overall inflation. These items were fresh milk, meat, vegetables, wheat flour, sugar, readymade food, tomatoes, and tea. Of these, four items of food group; fresh milk, meat, vegetables, and wheat flour contributed 71.7 percent to CPI food inflation (YoY) [4] 

Inflation in the last 5 years

Inflation in Pakistan in the last five years has been sky rocketing. The following graphs have been drawn after collecting prices from the Business Recorder taken at a six month interval date. (A detailed list of prices is attached in the appendix of the report)

In the abpve diagram, Cereals include items: makai, juwar, moong Punjab, barley sindh and Wheat Pak whereas Sugar includes sugar and Gur. All other goods contain their sub types.

In the above diagram, the average prices include: Cereals includes 5 different items namely Makai, Juwar, Moong Punjab, barley Sindh and wheat Pak; Sugar includes Sugar and Gur; Whole rice includes Irri 6 Sindh, Basmati 386 new and Sela karnal new; Broken rice includes Irri white and Basmati; Rapeseed 40kg prices of Nawabshah and Dadulane types scaled to 100 kg and Castor seeds 40 kg prices of Lasbela new and Sindh types scaled to 100 kg prices

From the graphs , we can analyze easily that generally, the average wholesale price range per 100 kg has increased significantly after January ’08 from the average price range of Rs 1000-3000 to Rs 2000-5000.This is approximately a 70-100% increase in the average food prices over the last 2 years. It has brought about a 35-50% year on year with Whole Rice price even touching Rs 7000 mark in July 2008. The average sugar price has also gone up significantly causing sweetened items in the retail market to be beyond the common people’s reach.

Therefore, our report will analyze on the causes of these escalating food prices, focusing specifically on the last five years and will also analyze the impact of the food inflation on various segments of the society during this period. We will also be evaluating various food policies in order to cope up with this ever growing problem in the developing economy of Pakistan

Causes of Food inflation

This section is covered in three categories:

Causes for rise in food prices in general

Despite the fact that Pakistan has been blessed with all the natural resources such as a cultivable land, a hardworking labour force and a suitable climate for the production of variety of crops, a number of domestic and international factors are causing food prices to escalate. Some of these factors are analyzed below.

Although Pakistan derives fifty per cent of its energy needs from natural gas, yet due to rising energy demand, the country has to import oil to fulfill this gap. There has been a trend of increasing oil prices in the last few years globally. A rise in oil prices increases the cost of making fertilizers which are needed for increasing the yield per hectare of the crop. Hence, a rise in price of fertilizer translates into rise in price of crop

Not only that, rising fuel prices increase the electricity costs and therefore, farmers using tractors and tube wells have to pay a higher cost for using the machinery. Pakistan has a potential for using hydroelectric power but due to interprovincial disputes, this solution has not been achieved [5] . Transportation costs also rise as fuel prices increase.

Various other international factors have caused an increasing food prices globally. International food inflation creeps into Pakistan when it has to import these food items to fill the stomach of more than 160 million populations. This includes a move by many countries to substitute biofuels in place for rising oil prices to ensure energy security in the country. Bio-fuel production is seriously affecting the world food markets as its demand is leading to diverting grain to production of biofuel, thus creating supply shortages and increasing international food prices. Various other international factors such as price controls and export bans have hurt the incentives of the food producers which have reduced world supply of food production. Also, many people in the developed nations are now moving towards high end consumption products such as meat, fish and are using pulses for feeding the animals which creates shortages and drives up the prices [6] . This international rise in world price, along with a weakening rupee has caused imported food inflation in Pakistan as well.

In addition, there are other domestic factors also responsible for this trend of increasing prices. Pakistani farmers have outdated farming methods and have not resorted to modernization. Their risk averse attitude is although rational, yet, has disadvantaged agricultural output growth and hence economy.

Government has also neglected the agricultural sector with lack of facilities for the farmers to efficiently market their products or even for preserving them for bridging shortages and surplus when there is a demand supply gap [7] . This factor, along with inapt fiscal and monetary policies, has seriously affected the agricultural output. Growing political unrest has further diverted the attention of the government which is paying more attention to fight and mitigate the terrorism in the country. As rest of the world is busy competing with other nations, Pakistani government is busy sorting out their internal differences.

Also, politics play a dirty part in Pakistan as cartels are easily formed to manipulate the market prices. Such profiteering activities, along with black marketing and hoarding have further drowned the citizens in the already knee-deep flood of problem.

Causes for rise in sugar prices- The Sugar Crisis

We have all witnessed the tragedy of 18 women who were trying to get free bags of sugar dying in a stampede. This represents the seriousness of the current sugar crisis. Such horrific crises make us wonder about the effectiveness of the regulatory body of the government. Various factors are responsible, most of which are political.

As sugar has always been a difficult field to administer, Pakistan’s feudal lords try to benefit at the expense of poor farmers. They have always conquered politics and fulfill their selfish interests by easily passing on the higher prices of sugar to consumers [8] 

When governments try to intervene by importing sugar so that the prices stay under control, the mill owners who are mostly strong political figures, use their influence which results in government imposing higher tariffs thereby increasing the price of the imported sugar. Hence, domestic sugar prices do not come down.

Also, the trolley-owners who transport sugarcane for the mill owners exploit farmers by demanding additional Rs 250-300 per trolley during cane shortage. To make things worse, an extra cost of Rs. 100 per day is paid by the mill owners for a delay in unloading the sugarcane at the gate along with the provision of food and tea. [9] This is because the more time elapses, the lower is the recoverable cane juice and hence higher is the millowner’s profit when a guaranteed price is paid by the government. In this whole process, farmers and the final consumers are the ones who suffer

The International markets also experienced an increase in the price of sugar due to poor weather conditions in major sugar producing countries which includes Brazil and India. This automatically led to shortage of supply of sugar and the prices of sugar went up as a result. The price trends in the international market had an impact on prices of Pakistan and aggravated the existing supply issues.

Also, this year there was a shortfall in domestic production of the sugarcane crop. The government had no option but to plan for imports. The importation of sugar was delayed because the vested-interest groups used their undue influence and made huge profits by charging exorbitant prices as there was shortage of sugar. The delay in importing sugar resulted not just in shortage in the domestic market and poor availability but also led to loss of foreign exchange, as by the time sugar was procured in the international market, its price had soared.

Pakistan Sugar Mills Association was also involved in the creation of the sugar crisis. Khaled Mirza, Competition Commission Chairman told the media in November, 2009 that Pakistan Sugar Mills Association has confessed manipulation to get sugar production and distribution. The association violated competition ordinance and sought court’s relaxation under section39. [10] Also, Mian Manzoor Wattoo, Federal Minister for Industries and Production told the media in August 2009 that hoarding of sugar by the mill owners is the main cause of recent sugar crisis and negotiations with the mill owners are underway to end the sugar crisis. There are some mill owners who are not providing the sugar to Trading Corporation of Pakistan. [11] 

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Causes for rise in wheat prices – the wheat crisis

The dawn of 2008 in the Musharraf era, bought with it, amidst much political turmoil (after the Bhutto assassination) another nail that hammered in the coffin. Early January, there was a heavy spike in the price of wheat; Pakistan’s staple food crop. Supply shortages caused wheat prices to double from 15 to 30 rupees per kilogram in less than a week’s time [12] ; rendering much of the population grief stricken and helpless, out on the streets. The shortage ultimately led to a wheat-producing country importing tons of wheat to cater to local demands.

The causes of the shortage were numerous, and as in all situations, all stakeholders boldly showed their prowess in mud-slinging, and everyone put the blame to all but themselves. Let us have a look at the major causes that might have led to the crisis.

The most popular reason given was the general world food crisis that was prevalent at that time. Definitely the world wheat shortages somewhat contributed to the local crisis but it was certainly not the sole reason, and as we will see, many other internal flaws had a far major role to play.

Firstly the first, crucial shortfall was on part of the government as they unreasonably overestimated the annual wheat yield and allowed 1.6 million tons of wheat to be exported in the earlier year. The consequences were damaging, as the actual yield fell way short and the thus a large supply gap got created as local demand could not be met by a long shot.

Moreover, the popular policy of subsidized food prices also played a major role. In times of shortages, still the government decided to fix wheat prices well short of the market price which instigated the mill owners to hoard and pile up stocks to raise the prices at which they thought they could get reasonable profits. The world market price was around Rs 24 per kilogram but the retail price was set by the government at Rs 16 per kg. This also lead to the suppliers indulge in smuggling. The government did decide to monitor this by putting military around mills and warehouses but this was a shallow measure which only worked temporarily.

So this bizarre wheat policy has hurt the average farmer and the common man to suffer, and the benefactors being the middlemen, the flour mill traders and the government officials who have connived their way in the smuggling rucket as well at the expense of the commons.

Some specific actions by Musharraf though also led to this crisis. Musharraf’s desire to promote and use the newly built Gwadar port led to delayed transportation of the wheat from the remote areas of Balochistan to Punjab and other parts of the country [13] . The new port lacks the required facilities for swift unloading of consignments, which greatly delayed supply of wheat imports, creating unneeded problems.

So all in all, the government was at the focal point of the crisis from the start (the other players joined in though in due course), and it also failed to stabilize the issue afterwards with misguided policies

EFFECTS OF FOOD INFLATION

The word inflation may not ring bells to the majority of illiterate people of Pakistan but its deep and far reaching consequences may not be stranger to the lives of many.

People on fixed incomes are the worst victims when food inflation hits. Their spending power decreases which leaves lesser income to be spent on other goods and services. In order to pay for the higher food prices, many people have to take up multiple jobs, exerting great pressure on their physical health, thus increasing their medical costs. A common man who has other worries to take care of is left with lesser income altogether in this whole process

Not only that, food inflation affects the rural region and low income groups more than others, thereby resulting in exacerbating the already uneven distribution of wealth in the economy. Although the rich do not get richer because of inflation but the poor definitely gets poorer.

Significant increases in the prices of food commodities lead to an increase in the poverty levels of the country as the real income of people fall, pushing more and more people below the poverty line. In a report titled “Summary poverty reduction and Social strategy” the ADB states “overall a 20 per cent increase in food prices will lead to an 8pc increase in the poverty head count, from 36pc to 44pc, with the negative impact of food price shocks falling disproportionately on rural poor, as opposed to the urban poor.” [14] 

Government has to step in to protect the citizens but it leads to a conflict in other macroeconomic objectives. From July 2008 to March 2009, the policy rate had to be increased from 13.5% to 15%. [15] This causes a reduction in the investment and overall investor confidence which hampers the rate of growth of GDP. Private investment as a share of GDP fell for the third consecutive year to 13.2% of GDP. [16] last year.

Rising food prices creates frustration among the people which take the form of protests against the government creating more social unrest in the country. Strikes, abuse of property are common sights when food as basic as sugar and wheat have sky rocketed. Different steps were taken by the government to provide food to the poor at subsidized rates at Bachat Bazars but this is not proving to be as beneficial as one might believe because many people still go back home empty handed even after waiting in line for several hours as the stocks run out. [17] 

Businesses too have far reaching consequences. As there is a decline in the purchasing power of individuals, it results in a lesser demand for their goods and services. This in turn affects the profitability of the organizations. To make matters worse, laborers demand higher wages which in turn increase the cost of doing business. This increase in cost is transferred to the buyers in the form of higher prices, giving rise to more cost push inflation. This forms a vicious wage-price spiral in which expectations of further increasing prices leads to a self fulfilling prophecy.

Overall, when the economy inflation rate is making new records, people move the money out of the currency which leads to a devaluation of the currency. Moreover, when the price of these export items made up of agricultural food crop increase, it is not only the exporters who suffer but the entire country has little foreign exchange earning to pay for the rising import costs, thus weakening the balance of payments and increasing debt costs.

Policy Recommendations

Short term policies

It is a well known fact that prevention is better than cure but the miseries of the common man in Pakistan has reached a nadir whereby prevention is a long term and a secondary phenomena and short term quick fixes are immediate requirements of today. What the government is required to do in order to fix escalating food prices in the very short run is to distribute free food through mobile services at different points in the country. The government’s first and foremost responsibility is to make sure that no citizen of Pakistan die because he or she could not get a right as basic as food. However, as it was witnessed a few months back that such a free distribution make people rush to the place causing stampedes and deaths, great care needs to be taken while implementing the policy.

If the government cannot maintain distribution decorum in the people, then they should subsidize the incomes of the poor. However, the government should make sure that the subsidized income is provided only to those people who are needy enough and cannot even afford living. The government can introduce a compulsory work practice which can “screen” the needy from those who are not.

After curing the immediate side effects of the inflation, the government has to take some preventive measures. Food price mechanism in the country has been severely distorted because of food price controls and when such prices are less than the international prices, the farmers and the middlemen maximize their gains by smuggling their crop to the neighbouring country. If the international prices are also not high, then they have to think twice before planting the seeds of the same crop in the next season which reduces supply and automatically increase price in the next season, again leading to black marketing and hoarding issues. Such disincentives are the by-products of price controls set too low. The government should offer the price which is more than the market clearing price and then purchase the crop from these farmers and give them their minimum guaranteed income. The government can sell the crops at the subsidized rates in the market.

However, as various middlemen come in between, such an implementation of policy becomes almost an impossible task. As in the case of sugar, it came under the notice that the sugarcane farmers are exploited by the mill owners who purchase the raw material from farmers at a lower price then prescribed by the government. Also, these poor farmers who have no power of their own have to face delays while transporting the sugarcane to mill, due to political reasons which leads to loss in the value of output. This in turn affects supply of the food crop and hence affects prices. A government intervention at this intermediary phase by employing a better check on such profiteering activities at the expense of poor farmers can help control the soaring food prices.

Long term Policies

The ever money hungry politicians of the country will continue to play dirty as long as their power is not taken away. These politicians treat the small farmers as slaves just because they own that piece of land. These landlords do not even consider land as a gift of God which can fulfill the hunger needs but more as a status symbol of power and wealth. Pakistan requires such a leader who can come forth and shatter feudalism from Pakistan.

Until and unless farmers do not own the piece of land and continue to work as sharecroppers, the agricultural output cannot be maximized. Land Reforms are thus, the requirement of the country which can help increase food output and hence keep the prices under control. Distributing such large pieces of land to the small farmers who often have to work in marginal pieces of land will increase their productivity and hence increase the supply of products.

Also, in order to curb inflationary pressure created due to supply shortages, the government should invest in research and development so that better seeds, fertilizers and technology are available to the farmers which can then increase yield per hectare. The government also needs to educate them about not only what to do but also how to do. Also, there is a need to provide the farmers with infrastructure and logistics facilities such as better roads, easier credit facilities, warehouses to store extra produce, better marketing techniques etc.

Fuel not only drives machinery but also drives the success of the economy. An economy which relies mostly on such a fuel which has severe escalating tendency will end up destroying its growth engine. In a country like Pakistan where oil, diesel and natural gas serve the basic fuel requirements and where nothing much is done regarding its increasing price tendency, there is a dire need to develop alternate energy sources. The optimal measure for the short term is to subsidize the oil prices but for the long run Pakistan should develop hydroelectric power plants as it is a very cheap source of electricity. The government should also have talks with India over this very sensitive issue as the supply of water is often stopped by India which leaves less water not only for hydroelectric plants but also for agricultural output.

For the current hydroelectric power plants especially at Mangla, Tarbela and Warsak, silting is not an uncommon problem. Government should develop technology or purchase it from the foreign countries which can deal with the problem of silting in the dams as it reduces the water supply and hampers the movement of turbines in the hydroelectric plants

All these measures will not be fruitful if on an individual level, we continue to play the blame game and fail to perform our responsibility. We all need to go back fourteen hundred years where the rules of an effective society were established by God, the tying thread of which belief in Allah. We have to focus our minds from the benefits of this world to the punishments and rewards of the Hereafter. Once all of us on an individual level realize that we are accountable to Him, neither the policies will be selfish, nor its implementation will require any further checks and balances and only then the chronic problem of food politics and rising prices will come to a halt.