Undecided Puzzle of Sugar Exports: Getting Foreign Reserves vs Price Stability

After a lot of back and forth, the government has allowed exporting half a million (500,000) tonnes of sugar in phases, a move that could earn the country an estimated $266 million at a time when even fruits & vegetables are stuck at ports amid challenges in opening letters of credit. It is understood that only 100,000 tons of sugar could be exported in the first phase.

Sugar prices have a history of touching roofs due to shortages in part due to government mismanagement and hoarding, with media channels showing people waiting in lines for one kg of sugar, exactly not the visuals any government would desire in the election year. That’s probably one reason the government has been reluctant to permit the exports while the crushing season got delayed for two weeks in both major provinces.

The federal government imposed a total ban on sugar exports in May this year to keep in check the price of this essential commodity while the Pakistan Sugar Mills Association has been demanding to lift the ban so excess stocks could be exported. Sugar mills produced 8 million tonnes of sugar during the last crushing season, while figures released by the ministry of food security pointed to 1.7 million tons of surplus sugar.

The PSMA stated in October that the country could earn $1 billion in sugar exports. The government’s inaction caused huge losses to the country as sugar prices in the international market fell from $560/ton to $528/ton, with predictions that prices will fall further. The association informed the provincial government that the production cost stood at 90 rupees/kg against the market rate of 78-80 rupees.

Markets observers have argued that millers would’ve lived with the export ban in light of floods causing damage to sugarcane crops which meant millers would’ve been able to sell their stocks domestically but the hike in minimum support price has ruined that prospect. There is also a concern that if international sugar prices fall further, exports wouldn’t be possible without a subsidy. Provincial governments raised the MSP by 25% and set it at 300 rupees and 302 rupees in Punjab and Sindh, respectively. Authorities are indirectly attempting to aid flood-hit farming communities without burdening the treasury.

It’s a daunting task to achieve a win-win situation for everyone, in this case, stated Dr. Muhammad Ali Iqbal, founder of Concave Agri, a provider of crop advisory and e-commerce platform for Agri Commodities.

First, we didn’t allow imports and now the prices are down 10%-15% and we have only allowed 100,000 tons, Iqbal said. These critical decisions should be data-driven and structured in a way that best caters to the needs of every stakeholder, he added.

If the government’s refusal or delayed approval for exports with increased support prices had caused the millers to shut down their operations early, then the resulting disaster would’ve hit the supply chain on both ends. Farmers would not get to sell their products while consumers would face shortages due to hoarding.

The government could assist farmers directly through foreign reserves earned through sugar exports instead of increasing the minimum support price, which is aimed at protecting farmers. Farmers are within their rights to demand assistance due to floods damaging 9.4 million acres of crop land, reportedly causing a 61% loss in sugarcane production in Sindh alone, but the assistance should come through better means instead of throwing the burden on the private sector and endangering the viability of the supply chain. The meetings are being held since early October so the decision could’ve been taken two months earlier to quash market uncertainty. Regardless, there is a need to streamline these crucial decisions in future.

Pakistan is facing a dollar crunch with importers facing denials over their letters of credit and SBP enacting restrictions to restrict the outflow. Foreign exchange reserves are touching a four-year low with nearly $33 billion of debt payments due in the upcoming financial year. The country might not have fully recovered from COVID-19 when it got struck by multiple crises from the Ukraine war, the catastrophic floods and political uncertainty that’s still looming over the markets. Pakistan has requested $4.2 billion from Saudi Arabia amid talks on a ninth IMF bailout review, and vegetables, fruits and pharmaceuticals stuck at ports paint a dismal picture.

In light of all this, we could export excess stocks but in a much more structured and streamlined way while ensuring price stability, instead of delaying the crushing season and fueling market uncertainty.

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