Issues of Food Pricing Policy in Pakistan and the Way Forward (Article)

Price control policies are implemented to support farmers and ensure affordability for consumers but often lead to market distortions and inefficiencies. The present study aims to investigate the role of food pricing policy in Pakistan. In each district, on the behalf of Deputy Commissioner Office (DCO), market committees (MC) fix retail prices of fruits and vegetables daily. We collected data on 11 fruits and vegetables from four mega cities (Islamabad/ Rawalpindi, Lahore, Faisalabad, and Multan) for 10 consecutive days. It is observed that the difference between farm gate prices and DCO prices varies between 6.2 percent to 20.3 percent which is not insufficient to cover the different costs (transportation cost from mandi to retail shop, losses of wastage, opportunity cost of the retailers’ labour and profit margins) of retailers. Our comparison of prevailing retail prices with the retail prices reported by PBS further demonstrates that PBS under-reported the retail prices to curb the inflationary effect.

The government procures 70-80 percent of the market surplus to maintain prices close to the minimum support price (MSP) and the government is spending about Rs.130 billion each year to achieve this single objective. However, retail prices increase more than double that of MSP and the benefit of the increase in prices goes to flour mills and traders. Our analysis for the year 2021-22 reveals that government footprints in wheat marketing are equal to Rs. 131 billion. If this cost had been passed on to the consumers in the form of increased prices (under the assumption that procuring, and handling will take place under the private sector), then it would have increased the retail prices by 28 percent. Hence, retail prices would be Rs. 70.3/kg in contrast to the government’s desired price of Rs. 55/kg (MSP). If we add up another additional profit of Rs.10/kg to incentivise the private sector, then prices will increase to Rs. 80.3/kg but the wheat prices will increase to Rs.110/kg. This implies that an extra profit of Rs. 30/kg is earned by the flour mills and other value chain actors. This could be diverted to consumers by adopting a free market mechanism. In case of wheat shortage, the retail price of imported wheat in the private sector would be Rs.94.3/kg (after adding transportation cost, loading, and unloading charges, and Rs.10/kg profit in the private sector) which is still lower than retail price of Rs.110/kg during 2021-22. Based on the study’s findings, it is recommended that the government need to minimise its footprints and allow market forces to determine retail prices. However, it should continue to play its regulatory role to assure equal access to all actors in the market to ensure fair market practices.

1. INTRODUCTION

Governments in under-developing countries often facilitate farmers by setting price floors in agricultural markets. Price controls on agriculture products are government-mandated to manage affordability (either for producers or consumers) and economic stability for a certain period (Mankiw, 2020). Government-imposed price controls may disturb the balance between supply and demand established through market transactions. This may lead to the creation of excess demand (or shortage) in the case of price ceilings or excess supply (or surplus) in the case of price floors (Barkley, (2019). Also, the Government’s regulatory policies cause prices to deviate from marginal costs (Murphy et. al., 2019). If not managed adequately through other measures like imports, exports, and subsidies, such surplus and shortage can lead to several problems such as smuggling, hoarding, and deterioration of the quality of agro products (De Soto & Diaz, 2002 & Murphy, et al. 2019). Price controls can often lead to losses for domestic producers, especially if prices are set too low, which often leads to low investment by producers and a drop in quality (Newfarmer and Pierola, 2015). If profit margins rely on subsidies to local companies to counterbalance price controls, this may discourage foreign investment in these industries by increasing the country risk premium that multinational corporations must assume. (Dimson, et al. 2003 & Teravaninthorn & Raballand, 2009). Moreover, such controls are costly to the government exchequer, burden administration, and detract bureaucrats from their more critical functions (Helm, 2006). The heavy cost involved in managing the surpluses and shortages may suck up resources from other important development projects and may crowd out the financial institutions (Maimbo and Gallegos, 2014).

Although price controls are occasionally employed as a tool for social policy, they can depress investment and growth, exacerbate poverty, cause governments to incur significant budgetary burdens, and make it more difficult to execute monetary policy effectively (Guenette, 2020). Regimes of price control may also favour the subsidised sector in resource distribution. In lower-income countries, price controls are more common in the agricultural sector complemented by input subsidies (particularly for fertiliser). However, such measures may ultimately have a negative impact on productivity, worsen wealth inequality (Goyal and Nash, 2017), and might result in inefficient use of subsidised inputs (Jayne, et. al. 2016). Price controls may also have a negative impact on the incentives to embrace new technologies that could increase productivity. Empirical research indicates a substantial correlation between increased firm-level productivity and market-oriented structural changes, such as the elimination of price controls and the accompanying subsidies (Kouame and Tapsoba, 2019). Price restrictions might be replaced with enlarged and more carefully targeted social safety nets, together with changes to promote competition and a stable regulatory environment, to be more pro-poor and pro-growth (Guenette, 2020). Some argue that such a transition may overlook the potential drawbacks. Critics point out that removing price restrictions without adequate safeguards could exacerbate income inequality and lead to food insecurity for vulnerable populations. Additionally, there are concerns about the feasibility and effectiveness of implementing comprehensive social safety nets, especially in developing countries with limited resources and institutional capacity (Gustafson, 2013 & Cingno, 2015). Therefore, the debate surrounding the replacement of price restrictions with social safety nets involves weighing the potential benefits against the risks and challenges associated with such a policy shift.

Price control is supported by the argument that consumers cannot be left at the mercy of the market for the availability of food even if markets perfectly respond to supply and demand situations. However, it has been shown by several studies that such price control fails to control and instead, in some cases, exacerbate food crises when they occur (Weitzman, 1991 & Winkler, 2015). Furthermore, price regulations that skew consumer behaviour toward price-controlled commodities can result in persistent shortages of those goods, the emergence of parallel markets with higher prices, and a shift away from those goods in favour of substitutes of inferior quality (Fengler, 2012). Similarly, it is argued that producers cannot be entirely left on market forces because bumper crops and resulting low prices may discourage investment in agriculture which may be detrimental to the long-run sustainability of the sector. However, it has been shown that such price control more often dampens agriculture commodity prices, thus discouraging investment in the agriculture sector. Producers of goods with price controls could move to black markets, which have high transaction costs but no regulations (Murphy, et al. 2019). Similarly, in some situations, producers may encouraged to shift their production activities towards the informal sector to avoid regulations (De Soto and Diaz, 2002). Throughout Pakistan’s history, instances of price regulation for commodities like sugar, wheat, oil, and drugs have often led to unintended consequences (Jamal, 2021). In many cases, attempts to impose price ceilings have resulted in artificial hoarding of stock or the emergence of informal markets where these products are sold at higher rates. For instance, over the past decade, the government implemented price controls on medicines to ensure access to affordable medication for low-income populations. However, this control was inconsistent and resulted in rent-seeking behaviour. In 2015, reports of shortages of tuberculosis medicines surfaced, prompting some individuals to hoard supplies and sell them on the black market at prices up to 50 times the original cost. Consequently, the absence of essential medicine or significantly higher costs disproportionately affects the poorest individuals, who rely on public health facilities for access to medication (Atif, et al. 2017 & Dewani, 2019). In 2023, despite intervention by the Economic Coordination Committee (ECC), sugar prices remained uncontrollable, leading traders to engage in hoarding to capitalise on the high prices. This situation also fueled the growth of the black market for sugar. Additionally, the smuggling of sugar to Afghanistan further exacerbated the problem (The Express Tribune, 2023). On the other hand, markets may not perform perfectly everywhere and all the time, providing the basis for market interventions primarily through price control (Mankiw, 2020). The free market mechanism fails due to asymptotic price information, primarily to producers, lack of necessary infrastructure to effectively participate in markets like farm-market roads, storage, etc., and poor bargaining powers of the producers mainly due to the lack of farmers’ access to formal credit institutions. Cartelisation by corporates and traders may also lead to market failure leading to a lower price for producers. Thus, upward price control is argued to be necessary to protect producers from the exploitation of market agents and their cartelisation. However, it is not clear how price control can stop such exploitations. Market failure occurs when economic outcomes deviate from what economists consider optimal and are typically inefficient economically (Bator, 1958 & Cunningham, 2011).

Moreover, due to the sudden increase in supply during the short-harvest period of agriculture commodities, the market glut and price drop at this point do not actually represent the yearly supply and demand situation. Still, such a drop in prices damages producers of the commodity. It is argued that if farmers are not protected against this peak-season drop in prices, they may get discouraged and leave agriculture production altogether. One of the reason of it is “Cobweb Phenomenon” (Poitras, 2022). However, alternative means of reducing the impacts of market gluts and price reduction at peak-season may also be evaluated. It is worth mentioning here that not only the producers suffer but the consumers too as it is alleged that the middleman creates extravagant profits at the expense of social welfare, moral principles, and efficiency by taking advantage of both the poor consumer and the impoverished farmer (Tribune, 2021). The function of these intermediates in the marketing chain is quite intricate. They make the rules and are the most influential players. By taking advantage of the market’s severe conditions, middlemen are able to sometimes make at least a profit of 50-60 percent(Olsson, et al. 2013 & Ashfaq, 2017).