Four actions to address food inflation in Pakistan

Over the last few years, people of Pakistan have been hard hit by rising food prices with double-digit year-on-year food inflation numbers observed in most months since mid-2019 - as high as 23.6 percent in January 2020, 17.8 percent in July 2020, and 15.9 percent in April 2021 amidst lower fluctuations, according to the State Bank of Pakistan. According to the Chairperson of the Consumer Association of Pakistan, Mr. Kaukab Iqbal: “The rising prices of food items, particularly fresh fruits, milk, and chicken are having a major impact on the livelihoods and nutrition levels of all families. But much of the burden of this falls on the poor as higher prices put protein and vitamin-rich foods out of their reach.”

The underlying causes of price increases are stagnant and fluctuating agriculture productivity, inefficient use of key natural resources particularly water, and limited innovation, as well as weather-related shocks. The COVID-19 pandemic and associated restriction along with a major locust attack last year created further problems. The poor performance has been exacerbated by ineffective Government policies. Discussions with various stakeholders, including at a recent Webinar on ‘Food Inflation and Market Interventions’ hosted by the World Bank and Consortium for Development Policy Research (CDPR), have identified four areas for priority action to make food more affordable, especially for the poorest people.

The underlying causes of price increases are stagnant and fluctuating agriculture productivity, inefficient use of key natural resources particularly water, and limited innovation, as well as weather-related shocks. 

Reform the wheat procurement system 

Wheat is the staple food of most Pakistanis. The Government has set the objective of stabilizing the wheat market principally through its wheat procurement programme on which it has spent, and continues to spend, billions of rupees. But consumers or smallholders have not benefited from Government support to the wheat sector. In fact, the main beneficiaries of the system are large farmers who have a saleable surplus, middlemen who buy from small farmers and sell to the Government; and the flour mills who have access to subsidies that are usually not passed on to consumers.

Urgent reforms in the wheat procurement system should aim at reducing the Government’s footprint in the market and leaving the work of buying, selling, storing, and importing wheat to the private sector. The public sector’s role should be limited to maintaining a “strategic reserve” to be used in emergencies and market stabilization if prices exceed an acceptable range. It should also shift subsidies released by these reforms to enhance long-term growth and food security outcomes. These include the promotion of innovations particularly in the face of climate change, assisting small farmers, and strengthening targeted nutrition programs among the poor and vulnerable.

Over the past years, the Government has repeatedly announced its intention to reform the wheat market, reduce outlays, increase the role of the private sector and provide more targeted help to small farmers. However, so far limited steps have been taken such as the recent announcement by the Finance Minister to reduce the subsidy to flour mills with associated increases in subsidies to the poor consumer.

Urgent reforms in the wheat procurement system should aim at reducing the Government’s footprint in the market and leaving the work of buying, selling, storing, and importing wheat to the private sector. 

Increase competition in the sugar sector

Sugar production imposes major costs on the economy due to high consumer prices, inefficient production, and the heavy use of water – an increasingly scarce resource in Pakistan. It is essential to bring further competition to the sugar sector through liberalization of imports, along with the removal of barriers to entry to the establishment of new mills. It also needs more oversight on timely payments to farmers.

Initial steps in this direction are ongoing with greater sugar imports being envisaged, as well as greater powers given to the Competition Commission to investigate and take action against collusion in the sector. This would reduce prices and contain fluctuations in the domestic markets.

It is essential to bring further competition to the sugar sector through liberalization of imports, along with the removal of barriers to entry to the establishment of new mills. 

Promote high-value, climate-smart agriculture

Government policies have systematically penalized the production of high-value products by focusing support on wheat and sugarcane. As a result, Pakistan remains an importer of horticultural products. Pakistan also imports dairy products despite having a massive number of animals producing below potential and relies on imports of cotton to feed the domestic textile industry. Moreover, Pakistan is not taking advantage of regional and international export markets, including the new opportunities for fresh produce and livestock products resulting from better transport infrastructure. 

There is a need to upgrade agricultural research and extension with a view to introducing new crops and crop varieties; more efficient production technologies including climate-smart techniques; and better control of pests and diseases. Such improvements would help relaunch productivity growth which is essential for sustainably raising farm incomes and lowering prices. At the same time, domestic and international trade needs to be liberalized with tariff and non-tariff barriers reduced; quarantine and hygiene control facilities improved, and market restrictions and price caps removed.

Progress is underway with the passing of The Punjab Agricultural Marketing Regulatory Act, which liberalized the establishment of agriculture markets. Similar legislation is under preparation in other provinces.

Upgrading agricultural research for introducing new crops and crop varieties, more efficient production & climate-smart techniques, and better control of pests & diseases, would help relaunch productivity growth. 

Improve monitoring, forecasting, and coordination 

Government policy decisions need to be based on a monitoring of the food system that tracks changes in global supply and demand, currency movements, local production and consumption, and public and private stocks.  The government has a long-established system for forecasting and monitoring crop production, as well as the prices of several essential foods. However, as evidenced by recent events and the Government’s internal assessments, the system works poorly and is in urgent need of reform.

Work is ongoing to establish such a system within the Ministry of National Food Security and Research with funding and technical help being provided by the Food and Agriculture Organization of the UN (FAO) and the World Bank. At the provincial level, Punjab has launched the “Qeemat” App to provide price information in different markets as a guide to both sellers and buyers.

Moreover, the monitoring system should include better coverage of livestock products, which make up over half the county’s agriculture output, as well as the markets for inputs such as fertilizer, pesticides, machinery, and labor. There is also a need for stronger involvement of the private sector to assess levels of private stocks of both output and inputs, and formal and informal trade flows.

Social safety nets may be more cost-effective in avoiding hunger and malnutrition than country and economy-wide market interventions.

And finally: The experience of many countries has shown that to protect the livelihoods of those that suffer most from food inflation, reducing the upward pressure on prices is not the only strategy. Social safety nets may be more cost-effective in avoiding hunger and malnutrition than country and economy-wide market interventions and the Government might explore how the Ehsaas and Benazir Income Support Program can be used to mitigate the effects of high food prices. For managing food inflation, effective social protection complements agricultural sector policies.