Agriculture is in a crisis
Without addressing it, the country cannot deliver on the promise of sustainable and equitable socioeconomic growth.
Pakistan’s agriculture sector is in a state of crisis and the most important indicator of all - price data - has been flashing red for months. Shortages of key commodities means that the country has had to import sugar, wheat, and tomatoes in recent months.
Despite this, food inflation has continued to spike. Urban food inflation stood at 15.1% in July 2020, on a year-on-year (YoY) basis. Rural Pakistan fares even worse, registering an uptick of 17.8% in food inflation during the same period.
Looking at inflation and income data across households, it turns out that barring rural households in the 2nd income quintile, households’ purchasing power was either flat or negative from 2016 to 2019. This rise in inflation is eating into the purchasing power of Pakistani households, according to data I analyzed from the Pakistan Bureau of Statistics (PBS).
We may see further increase in food inflation in the coming months as the full scale of the locust attacks on crops becomes clearer. On top of it all, COVID-19 has inflicted further pain as millions of individuals have lost jobs or seen a decline in their incomes at a time when buying essential necessities has become even more expensive.
This crisis has been in the making for decades.
Agriculture represents ~20% of Pakistan’s GDP, but employs ~40% of the country’s workforce. It is the backbone of rural Pakistan and more importantly, it plays a critical role in ensuring the country’s economic and food security.
The sector showed strong growth in the years following independence, growing over 5% per year in the 1960s. In recent years, growth has collapsed, with the sector inching up by 0.6% in 2018-19. Most alarmingly, important crops during that same year registered a growth of negative 7.68%, significantly hurting Pakistan’s rural economy and its food security.
The issue is primarily caused by lack of investments in the sector, resulting in little to no growth in yields across major crops.
This lack of growth in yields means that Pakistan continues to fall behind the rest of the world in its agricultural competitiveness. Here is an excerpt from The Express Tribune:
Pakistan produces 3.1 tons of wheat from one hectare, which is just 38% of the 8.1 tons produced in France - the world’s best productivity.
Similarly, Pakistan produces 2.5 tons of cotton per hectare, which is 52% of the 4.8 tons produced in China.
Sugarcane yield stands at 63.4 tons per hectare in Pakistan, which is 51% of the 125.1 tons Egypt produces from every hectare while maize productivity is estimated at 4.6 tons per hectare, 41% of the 11.1 tons that France is producing. In the case of rice crop, Pakistan produces 2.7 tons from every hectare, which is merely 29% of the 9.2 tons per hectare in the US.
There is also the issue of subsidies and price floors, which reduces the incentive to innovate for farmers. These end up distorting the market and divert scarce taxpayer resources away from more productive uses. Additionally, they lead to an accumulation of debt in the agriculture sector, as highlighted in the Economic Survey of Pakistan:
These guarantees were issued against commodity financing operations undertaken by TCP, PASSCO, and provincial governments. The outstanding stock of commodity operations was Rs 649 billion at end March 2020.
The crisis is reverberating across the economy.
The result are a whole host of issues that weaken the economy and hurt households:
With a growing population requiring more food, mismatches in demand and supply become more likely, leading to high food inflation.
Lack of growth in the agriculture sector also weakens the rural economy, leading to poor income growth in rural Pakistan; this leads to reduced savings per capita.
High food inflation forces households to spend an increasing amount of money to buy basic essentials to feed their families, resulting in reduced savings per capita.
Additionally, many households struggle to provide their families with proper nourishment, leading to high rates of malnutrition and stunting.
High rates of malnutrition and stunting has significant negative effects on children’s development, leading to an unhealthy and undernourished workforce.
A lack of competitiveness in agriculture limits the country’s ability to produce excess output, add value, and export the final product to the rest of the world.
Lack of competitiveness and a regulatory framework that distorts the agriculture market also reduces incentives for domestic and foreign investment in the sector, further deteriorating long-term productivity growth.
At the same time, market distortions incentivize farmers to produce less of what is needed and more of what isn’t (such as sugarcane), leading to increased imports of essential products like pulses, palm oil, and cotton.
Lack of access to nutritious food at low prices leads to an unhealthy, undernourished workforce. This means that the workforce is more likely to be unproductive, reducing the overall productivity potential of the economy.
The reduced savings mean that the country suffers from an investment-savings gap, limiting the economy’s ability to finance future investments through domestic savings.
This increases the reliance on foreign borrowing and imports, which leads to increased debt servicing burden.
For the country to prosper, the sector employing ~40% of the country’s workforce must register sustainable growth. Without this, the country will be food insecure, its population underfed and malnourished, and its economy will find it difficult to compete with the rest of the world.
Rescuing agriculture requires more than just financial packages.
The latest Economic Survey of Pakistan talks about the issues facing agriculture, but signals that the issues can be solved by increasing funding:
Realising the potential of agriculture and taking cognizance of the challenges/issues related to agriculture, the present government has introduced “Prime Minister Agriculture Emergency Programme” worth Rs 277 billion to revolutionize the agriculture and livestock sectors.
The issues plaguing the sector, however, requiring much more than money. As Dr. Erum Sattar, a guest on my podcast mentioned, Pakistan is still in “hardware mode.” What she meant is that the country’s policymakers think that by building more dams, lining more canals, and having more tractors, Pakistan can increase its output.
But this won’t be enough, as the country needs to reboot the “software” that runs the agriculture sector. This includes the software that informs farmers, i.e. their education level, as well as the software that governs markets, i.e. the regulatory framework governing the sector.
The first and most important step is to improve farmer education. Studies have found that improving farmer education leads to sustainable improvements in total factor productivity. Note that this is different than being literate: farmers must be educated about proper use of fertilizers, modern technologies, weather patterns, efficient ways to consume water, etc. to be able to fully utilize all the modern tools that are available to farmers around the world.
Protecting property rights is also essential to unlocking long-term investment in the sector. Dr. Mujtaba Isani, who has done significant research in interior Sindh, joined me on my podcast and pointed out that without guaranteeing property rights, the country’s agriculture sector cannot be modernized. This makes sense, because no investor would be willing to risk their capital without knowing that their property would be protected from feudal and criminal elements that benefit from the status quo.
Expanding access to agricultural credit is also important as it enables farmers to buy the high-yield seeds, fertilizer, and other inputs necessary that boost yields. Recent announcements on markup subsidies were encouraging, but reports suggest that implementation has been delayed. Rural Pakistan remains underbanked - only 3.9% of rural women and 22.3% of rural men have and use a bank account - and without a government-mandated push to increase financial access modernizing the agriculture sector will remain a distant dream.
Finally, deregulating agricultural markets, such as wheat and sugar, is important. For years Pakistan’s agriculture sector has been held hostage by politically-connected rent-seekers that have distorted the market and created cartels. The government must liberalize the agriculture sector and cut subsidies that it pays to rent-seekers - the contingent liabilities from commodity operations are nearing a trillion rupees!
These savings should be invested in educating farmers, bolstering the Competition Commission, expanding access to credit and modern technologies for farmers, and developing a modern agricultural supply-chain that smoothes the volatility in prices Pakistan sees every year.
Inaction will cause social and political crises.
Climate change and a rapidly growing population will strain Pakistan’s agriculture sector, which is already in crisis. These three crises have the potential to cause significant social and political instability. The warning indicators have been flashing red for years and it is time for policymakers to pay heed to the crisis and begin addressing it before it is too late.
There is no reason for the country to have high food inflation and rely in expensive imports for essential products like oil and pulses. A long-term vision that seeks to modernize the agriculture sector is the need of the hour.
Agree with the software thesis. Moreover, the analysis seems outstanding. I would like to know how the inflation is measured? Thanks
People say,Y is the sugar industry run by mafias and politicians ?
Y ?
1st people have to understand that the sugar industry is based on the thesis,that cane is the easiest and highest risk adjusted return,for the farners – and to keep farners from starting a Tahrir or joining ISIS. Hence,over supply of cane and over-production of sugar,is an accepted reality of cane farming,in Pakistan
This ensures perpetual raw material supply for the mill,and a PASS THROUGH of all costs to the state – on a defacto basis.Defacto basis,is key,as there is no contractual arrangement for the pass through – which is a threat to the economic security of the state,as the mill owner can create shortages,spikes and supply and payments crisis and easily manufacture repetitive, but ingenious reasons for debt waivers,tax reliefs,export subsidies and drawbacks.
Excess cane production and sugar,is the disaster scenario for the Pakistani state.If there is a bad crop,international sugar prices would not rise,to an extent,to make imports on a duty free basis, costlier than the NSR to the sugar mill.
In fact,the inported sugar could be sold at a profit to dealers,to more than offset the indirect tax revenue earned, by the state,on cane purchases by mills (mandi/purchase tax) and sale of sugar by mill (excise and sales and VAT tax)
Y is the mafia required in sugar ? dindooohindoo
Phase 1
To start strikes in mills of competitors
To divert raw material supplies of competitors
To set fire to bagasse stock of competitors
To monopolise truckers for mill logistics
To choke off the logistics for the mill competitors
To break unions in workers and truckers
For the above,a mill owner needs the support of the police,mafia and the neta
Phase 2
To manipulate raw material supplies,as under:
To downgrade and reject materials purchases
To delay purchase payments w/o delayed interest
To pick and choose cane suppliers
To tamper quality,moisture and weighnent tests
Using dummy names to route purchases from captive plantations
Route farmer purchases,as captive plantation purchases
To run a racket of farmers cane bills discounting
To organise dharnas/riots/logistics blockades, with the aid of farners
To charge financial conversion charges for payments to farners in cash
For the above,a mill owner needs the support of the police,mafia and the neta
Phase 3
To recover the costs of fire insurance and LOP insurance, there are accidental fires in bagasse stocks – once in 5 years, to recover,in bogus claims – the aggregate premiums paid over 5 years
Phase 4
To con the state in export subsidies and drawbacks
To con the state w.r.t CDR/OTS with banks
To con the state w.r.t capital and interest subsidies
To tamper the power consumption meters of CPP and power from grid – which is the only forensic proof of production
Phase 5
Bogus exports to eat up the subsidy and drawbacks – from land dry ports and sea ports
Routing exports proceeds on actual and bogus exports,via hawala and other modes
Manipulating cost,production and stock records to inflate costs,make off the books sales and purchases and hide stocks of finished goods
Selling bagasse in cash,instead of selling power to the grid
Creating shortages and spikes in prices of raw and processed/refined sugar Make fake cash purchase bills to generate cash for the sugar mill
For all the above,you need the mafia and the neta, AND also, since the farnmers are voters for the netas.Since the netas cannot outsource the political risk of the cane souring and payments,to a private party – and that,it is a no-loss, monopoly business,the netas are in the sugar mills,and will stay so,forever.