Sugar, in other words, along with the other three major crops, is at the heart of what makes the Pakistani economy tick. Understanding this crop, and the dysfunctions that rule the industry, are critical to understanding the many reasons why the economy perennially fails to create broad-based growth. In this special report, we examine the factors that make the sugar industry important to the overall economy. We also take a look at how the sugar millers have a habit of behaving in a manner that the Competition Commission of Pakistan has described as oligopolistic and collusive.
But first, a look at the numbers. The total value of all the sugar sold in the country in 2013 was close to $3.4 billion, a number that has only continued to grow. The country as a whole consumes 5.6 million tons of sugar every year, or about 28.5 kilogrammes for every single Pakistani, according to statistics released by the Pakistan Sugar Mills Association, an industry group. Three out of every Rs100 spent by the average Pakistani household go to buying sugar, according to the 2012 Household Integrated Economic Survey, conducted by the Pakistan Bureau of Statistics.
Perhaps most significantly from the perspective of economic policy, Pakistan’s sugar crop is globally significant, and is the sixth largest in the world. While it accounts for just under 3.5% of global supply, market conditions for sugar inside Pakistan have been known to regularly affect global prices of sugar.
Create a level playing field, rather than setting market prices
For context, Brazil produces 40% of the world’s sugarcane, and India another 18%. To be sure, it is unlikely that Pakistan will ever compete with Brazil as the world’s leading producer of sugar, but surely we could be more competitive globally in this crop. Yet growth in sugarcane production in Pakistan remains anemic, trailing behind growth in other crops. The area under cultivation for sugarcane also varies far more wildly than that of any other crop grown in the country, according to statistics from the Ministry of Agriculture.
The reasons for this lacklustre performance have to do with the structure of the industry. Because sugar has been deemed a staple part of the Pakistani diet (along with wheat), the government tries – ineffectually – to intervene in the market. Provincial governments in Sindh, Punjab and Khyber-Pakhtunkhwa set support prices for sugarcane, below which it is illegal for any sugar mill to buy normal sugarcane, though they can pay less for substandard sugarcane (this loophole is exploited by many). Balochistan does not have a single sugar mill.
And while the government does not set a retail price for sugar, it does require every sugar mill in the country to conduct a cost audit to disclose exactly how much it cost the company to produce every kilogram of sugar. In theory, that transparency is supposed to bring greater accountability in pricing and prevent collusive behaviour. And by appearances at least, the sugar industry is relatively more transparent than others: 29 out of the 83 mills in the country are publicly listed on the Karachi Stock Exchange.
Yet the reality is far from rosy. Of the four major crops, farmers routinely complain of not getting adequate prices in the very same two crops that the government supposedly announces a mechanism for supporting farm incomes: sugarcane and wheat. Rice and cotton, meanwhile, have market pricing and rarely cause any disputes between farmers and the buyers of their crops.
Those disputes arise because of collusive behaviour on the part of sugar mills to force farmers to sell only to one mill, failure to close transactions on time, or to make payments, etc. Each of these dysfunctions traces its origins in the government’s poor choice of policy tools.
The government of Pakistan is correct in its desire to protect farmer incomes as well as consumer prices. But its chosen mechanisms are clearly not working. Yet despite decades of glaring problems, the government continues to persist with a policy that leaves farmers upset and undercompensated and consumers facing high prices for sugar. But given just how large a role sugar plays in the agriculture sector of Pakistan’s economy, it is absolutely critical that Islamabad get this one right. Rhetoric or tough-sounding policies will not do. The scale of the problem demands solutions that work.
One such mechanism appears to be strengthening the ability of the Competition Commission of Pakistan to go after collusive activity. In late 2009, when the CCP tried to break up the sugar cartel, it ended up briefly preventing collusion and thus caused prices for sugarcane for farmers to go up, while simultaneously causing a decline in retail prices of sugar for consumers. Perhaps a focus on creating a level playing field – rather than acting as the arbiter of market prices – may be a more constructive approach to getting this sector of the economy to grow to its potential.