PAKISTAN: Sugar industry bleeding with export subsidies

Published: 09/14/2017, 11:07:49 AM

The sugar industry which had been sending out SOS signals of late finally got a breakthrough recently with an inter-ministerial committed recommending export of 1.5 million tonnes of sugar in three phases with a subsidy of PKR10.7 (US$0.10) per kg, according to Pakistan's Business Recorder newspaper.

Sugar production has flourished on the back of incentivisation by the government. This has led to frequent situations of a supply glut being created. The primary reason for this seems to be the imposition of a minimum support price (MSP) which has distorted demand-supply dynamics. In the last five years, sugar cane cultivation area has gone up by 7% whereas the production has gone up by 15%.

During FY17 crushing season, the provincial governments of Punjab, Sindh and KPK have maintained the minimum support price (MSP) announced in FY15. The MSP for Punjab and Sindh is PKR180 per 40 kg (US$43.3/tonne), and for Sindh PKR182 per 40 kg (US$44/tonne). Even though sugar mills are obligated to pay farmers the MSP, yet in many cases the farmers and sugar mills negotiate below-MSP rates if both parties agree.

The Pakistan Sugar Mills Association (PSMA) had already raised concerns recently stating the mills will be unable to pay more than PKR120/40 kg for the purchase of sugar cane in the upcoming season. The reason is the record surplus sugarcane production which has led to a severe supply glut. According to the association, the mills still have 55% surplus stock available even after fulfilling the annual domestic demand of sugar.

To ease the situation the PSMA had been intent on getting government permission to export 1.5 million tons of sugar immediately with a rebate of PKR19 per kg. International sugar prices have taken a sharp downturn which means the government needs to pay the price differential in the form of an export subsidy. But the government, wary of a rise in domestic sugar prices if too much export is allowed, also needs to balance local demand considerations when taking into account the level of export quota.

There seem to be no winning sides here. Flawed economics, political influence and populist measures have all combined to make the burden fall on the taxpayer eventually.

If left unchecked the sugar supply glut will only worsen in the years to come. Serious steps need to be taken to plan sugarcane cultivation in line with the required consumption and the MSP needs to be reconsidered.