Wheat Market in Pakistan: A Post-18th Constitutional Amendment Inquiry

1

Outline

Introduction & Background

Recent Literature & Gaps

Methodology & Data

Qualitative Assessment

Quantitative Results

Tasks Ahead

Area & Production of Wheat (2010)

Name of Countries Production (tonnes)

Area Harvested (Ha)

%age Share in Production

China 115180303 24256086 17.7

India 80710000 28520000 12.4

America 60102600 19278200 9.23

Russian 41507600 21639800 6.38

France 38207000 5426000 5.87

Germany 24106700 3297700 3.7

Pakistan 23310800 9131600 3.58

Canada 23166800 8268700 3.56

Australia 22138000 13507000 3.4

Turkey 19660000 8053670 3.02

Ukraine 16851300 6284100 2.59

Iran 15028800 7035020 2.31

Argentina 14914500 4373440 2.29

UK 14878000 1937000 2.29

Kazakhstan 9638400 13138000 1.48

Total of top 15 Countries 519400803 174146316 79.8

Total of other 108 countries 131480199 42828367 20.2

World total 650881002 216974683 100

Source: Agriculture Marketing Information Service, Directorate of Agriculture, Punjab

Country-wise Yield (2010)

Source: Agriculture Marketing Information Service, Directorate of Agriculture, Punjab

S.No. Name of Countries Yield (Hg/Ha)

1 Netherlands 89092

2 Belgium 88272

3 Ireland 85990

4 New Zealand 81241

5 UK 76810

6 Germany 73102

7 France 70415

8 Denmark 66264

9 Namibia 65789

10 Saudi Arabia 65000

62 Pakistan 25528

Volatility in Annual Yield

Source: FAO STAT

-30.0

-20.0

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50.01

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Import of Wheat

Source: State Bank of Pakistan

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Wheat Imports (000) tons Wheat Imports (PKR Million)

Some Recent Literature Wheat-sector Distortions

Literature Issues Highlighted Policy Recommendation

Dorosh (2012): Pakistan Wheat Procurement Reforms

Setting procurement prices too high relative to domestic prices results in massive fiscal costs with no benefit to consumers and small farmers that do not sell wheat to government agencies

Need for strengthening monitoring and coordination across government agencies

Dorosh and Salam (2007)

The dispersion in NRAs among farm products need to be reduced

Bastin et al. (2008)

45%-50% of wheat that has been harvested is wasted, spoilt, smuggled, or never even enters the cash economy

The wheat economy must be liberalized and rationalized. If it is necessary to provide food for the poverty stricken the government should do so directly with food vouchers

Ali et al. (2011) Government policy has insignificant effect on wheat production though the sign of its coefficient is positive

Need to upgrade the entire supply chain

What has changed post-18th

Amendment?

Has the devolution helped any

aspects of Wheat-sector’s supply

chain?

What explains the multiplicity of subsidies post-

2007/08?

What have been the economy-wide effects of targeted

and untargeted subsidies in Wheat

sector?

Some Gaps in the Literature

Situation Analysis

Existing Literature

Pre/post 18th Amendment Data

Political Economy Analysis

Qualitative

Focus Group Discussions

Key Informant Interviews

Stakeholder’s Analysis

Quantitative

Social Accounting Matrix 2007-08

Dynamic Computable

General Equilibrium Model

Methodology

18th Amendment and Reversal

Ministry of Food Security

ECC

Source: Salam (2012)

1. How much is government intervention worth? [Disbursements to TCP and Fertilizer Sector]

Subsidy to Trading Corporation of Pakistan

Subsidy to Fertilizer

Producers

PKR Million Years

Wheat Operations

PKR Million

Import of

Urea

PKR Million

2008-09 20000 31662 32000

2009-10 25500 3937 2334

2010-11 12000 4200 985

2011-12 217 44982 162

2012-13 -- 26000 3400

Source: Federal Budgets, Ministry of Finance Year Books

2. How much is government intervention worth? [Disbursements to Utility Stores Corporation]

Years Ramzan Package

PKR Million

Sales of Atta

PKR Million

Other Food Items

PKR Million

2008-09 1300 500 900

2009-10 1500 1200 200

2010-11 700 3000 500

2011-12 2000 -- --

2012-13 2000 -- --

Source: Federal Budgets, Ministry of Finance Year Books

3. How much is government intervention worth? [Disbursements to Pakistan Agricultural Storage and Services Corporation]

Years

Wheat Operations

PKR Million

Wheat Reserved Stock

PKR Million

Cost Differential for Sale

of Wheat

PKR Million

2008-09 286 -- --

2009-10 599 -- 598

2010-11 600 4000 --

2011-12 4171 4000 --

2012-13 1148 4000 --

Source: Federal Budgets, Ministry of Finance Year Books

4. How much is government intervention worth? [Disbursements for Tube-wells and Tractors]

Year

Sindh, Punjab and

Khyber

Pakhtunkhwa

PKR Millions

Balochistan

PKR Millions

Benazir

Tractor

Scheme

PKR Millions

Green

Tractors

Scheme

PKR Millions

2008-09 2044 4994 -- 2000

2009-10 2157 5732 -- --

2010-11 -- -- 2000 --

2011-12 -- -- -- --

2012-13 870 4000 2000 -- Source: Federal Budgets, Ministry of Finance Year Books

5. How much is government intervention worth? [Subsidy on Sale of Wheat]

Years FATA

PKR Millions

Gilgit Agency PKR Millions

2008-09 195 600

2009-10 216 660

2010-11 233 655

2011-12 255 744

2012-13 270 775 Source: Federal Budgets, Ministry of Finance Year Books

6. How much is government intervention worth? [Crop Loans and Remission Grants]

Years

Crops Loan

Insurance Flood Affected Areas AJK Earthquake affectees

ZTBL

loans

2008-09 -- -- -- --

2009-10 -- -- -- --

2010-11 292 -- 53 400

2011-12 500 3802 -- --

2012-13 500 -- -- -- Source: Federal Budgets, Ministry of Finance Year Books

PKR Millions

7. How much is government intervention worth? [GST Subsidy and Loans Written-off]

PKR Millions

Years

GST subsidy for

protected consumers

Write-off Loans,

Flood Affected Millers & Traders

2008-09 4302 --

2009-10 5704 --

2010-11 -- --

2011-12 -- --

2012-13 -- 256

Source: Federal Budgets, Ministry of Finance Year Books

8. How much is government intervention worth? [Provincial Subsidies - I]

PKR Millions

Source: Provincial Budgets and White Papers

Years

Punjab Baluchistan

Wheat Agriculture Atta Tubewells

2010 -- 2,500 -- --

2011 -- 3,073 -- --

2012 2,500 -- -- --

2013 3,000 -- 300 3,000

9. How much is government intervention worth? [Provincial Subsidies - II]

PKR Millions

Source: Provincial Budgets and White Papers

Years Khyber Pakhtunkhwa Sindh

Wheat Wheat Transportation

Food from

Punjab

Agricultural

Subsidies

2010 -- -- -- --

2011 2500 2500 3,391 1,680

2012 2,000 -- -- 2,505

2013 2,500 -- -- 3,015

10. Total Government Intervention in Wheat Market

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10000

20000

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50000

60000

70000

80000

2009 2010 2011 2012 2013

PK

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Note: Excludes support to urea or fertilizer sector in general

In FY 2012 total government intervention in wheat market was USD 754 million

Post-18th Amendment

How Government Intervention Promotes Rent-Seeking?

How Government Intervention Promotes Rent-Seeking?

• Case-I: Farmer needs to sell to PASSCO – Farmer goes to revenue officer to obtain certificate of land

authetication – The certificate is then submitted to PASSCO for obtaining the

bardana bags – After filling farmer comes back to PASSCO for finally selling the

output – PASSCO can reject if specifications not met

• Case-II: Farmer avoids above mentioned hassle and sells to middle man – Middle man gains by buying at low and selling at a higher

government-set price – The impact of subsidy ultimately doesn’t reach the grassroots

farmer

• Issue-I: Targeted Vs. Untargeted Subsidies

• Issue-II: Subsidies Vs. Second Best (e.g. Vouchers)

• Issue-III: Tax financing Vs. foreign borrowing to finance subsidy

How we Modeled Intervention? [Simulation: Economy-wide Impact of Subsidies]

• Social Accounting Matrix 2007-08 – Pre-18th Amendment economic structure

• Simulation Design – Between 2009 and 2012

• 11 percent annual average increase in subsidy stock

How we Modeled Intervention? [Data and Simulation Design]

• Model Specifications – Intertemporal model: Dissou and Didic (2011), Ahmed et al. (2012)

– Households and firms which are both classified under constrained and non-constrained categories

– Labour supply is inelastic and mobile across industries

– Representative firm is assumed to exist in each industry

– Composite output marketed domestically and abroad (exports)

• Dynamic Features – For each period all markets are assumed to clear

• Wages and prices clear factor and goods markets

• Foreign Borrowing at global interest rate

– Results: First Period (1st Year), Mid-Term (20 Years), End-Period (40 Years)

How we Modeled Intervention? [Dynamic Computable General Equilibrium Model]

• Elasticities and related parameters – Substitution elasticity of CES households function (0.7%)

– Substitution elasticity of first and second level CES production function (0.5 and 0.4% respectively)

– Rate of depreciation (12%)

– Output elasticity of public capital (0.3)

– Share of public investment in total investment (28%), population growth rate (1.8%)

– World real interest rate (6%)

– Share of constrained households in

• Consumption (57%)

• Labour income (71%)

• Income taxes (9.5%)

• Government transfers (10%).

How we Modeled Intervention? [Dynamic Computable General Equilibrium Model]

Macro-level Results – Percentage Change

Variables First Period Mid-Term End-Period Real GDP 1.26 1.05 1.06 Wage rate 2.46 2.40 2.40

Price of capital good 1.15 1.10 1.10

Household consumption 0.95 1.09 1.09 Myopic 2.69 2.20 2.20

Forward looking 0.28 0.61 0.62

Total Investment 0.37 0.12 0.14 Public 0.79 -0.04 -0.09 Private 0.23 0.18 0.22 Myopic 1.53 1.09 1.09 Forward 0.09 0.07 0.12

Total capital stock 0.06 0.12 0.12 Public 0.13 -0.04 -0.04 Private 0.03 0.17 0.17 Myopic 0.25 1.08 1.09 Forward 0.01 0.07 0.08 Total exports -2.37 -2.49 -2.47 Total imports 1.99 1.70 1.69

Income of myopic households 2.69 2.20 2.20 Labour income 2.46 2.40 2.40 Capital income 2.72 1.05 1.04

Government revenue 4.22 3.57 3.52

Sectoral Results – I (Percentage Change)

Wheat Other Crops

Agri Processin

g Cotton Livestock Manufact

uring Energy Textile Constructi

on T&C Private

Services Public

Services

Gross Output

First period 23.37 2.10 2.12 -1.43 0.37 -0.18 0.04 -0.36 -0.04 0.60 -0.49 -0.37

Short run 23.80 2.40 2.41 -2.74 0.78 -0.01 0.23 -0.57 0.01 0.81 -0.55 -0.32

Long run 23.81 2.40 2.41 -2.73 0.79 -0.01 0.24 -0.57 0.00 0.81 -0.54 -0.36

Investment

First period 3.15 -7.27 -0.30 0.90 -1.12 2.42 -0.93 -0.54

Short run 1.23 -2.63 -0.06 0.40 -0.48 1.05 -0.35 -0.14

Long run 1.26 -2.63 -0.03 0.42 -0.46 1.08 -0.30 -0.07

Export

First period -0.60 3.20 -2.08 -1.05 -2.93 -3.44 -2.92 -3.55 -3.88 -3.84

Short run 0.26 4.34 -4.15 1.40 -2.24 -2.95 -3.26 -2.87 -3.82 -3.62

Long run 0.27 4.35 -4.15 1.42 -2.23 -2.92 -3.25 -2.85 -3.80 -3.61

Imports

First period -40.87 5.06 0.95 -0.26 1.80 2.92 3.85 3.60 3.39 3.18

Short run -40.96 4.73 0.31 -0.16 0.17 2.49 3.70 3.60 3.19 3.08

Long run -40.96 4.73 0.30 -0.15 0.16 2.48 3.69 3.59 3.19 3.05

Domestic Demand

First period 23.37 2.19 2.07 -1.17 0.37 -0.05 0.14 0.29 -0.04 0.90 -0.31 -0.37

Short run 23.80 2.47 2.30 -2.18 0.78 0.10 0.32 0.11 0.01 1.07 -0.38 -0.32

Long run 23.81 2.47 2.31 -2.17 0.79 0.10 0.33 0.11 0.00 1.08 -0.37 -0.36

Sectoral Results-II (Percentage Change)

Wheat Other Crops

Agri Processin

g Cotton Livestock Manufact

uring Energy Textile Constructi

on T&C Private

Services Public

Services

Price of gross output

First period 0.33 -0.93 -2.44 -0.53 -0.27 0.25 0.29 0.82 1.14 0.14 0.64

Short run -0.05 -1.34 -1.91 -1.53 -0.53 0.09 0.36 0.17 0.92 0.08 0.56

Long run -0.05 -1.34 -1.91 -1.54 -0.54 0.08 0.36 0.16 0.91 0.07 0.54

Price of domestic good

First period -30.77 1.86 -0.55 0.62 0.71 1.47 1.84 1.64 1.62 2.07 1.67 1.62

Short run -30.94 1.47 -0.98 1.37 -0.30 1.19 1.67 1.73 0.97 1.83 1.61 1.54

Long run -30.94 1.46 -0.99 1.37 -0.31 1.18 1.66 1.72 0.97 1.82 1.61 1.52

Price of composite good

First period -25.07 1.82 -0.53 0.54 0.71 1.16 1.56 1.63 1.62 2.07 1.48 1.43

Short run -25.21 1.43 -0.95 1.20 -0.30 0.94 1.42 1.72 0.97 1.83 1.43 1.36

Long run -25.22 1.42 -0.96 1.20 -0.31 0.93 1.41 1.72 0.97 1.82 1.42 1.34

Shadow price of capital

First period 1.85 -0.46 1.08 1.35 0.90 1.68 0.94 1.03

Short run 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10

Long run 1.10 1.10 1.10 1.10 1.10 1.10 1.11 1.11

Major Gainers and Losers [In Output terms]

• Gainers

– Wheat

– Agriculture processing

– Livestock

– Transport

• Losers

– Cotton

– Textile

– Large Scale Manufacturing

– Construction

– Private Services

Major Gainers and Losers [In Price terms]

• Gainers

– Wheat

– Agriculture processing

• Losers

– Cotton

– Other Crops

– Livestock

– Textile

– Large Scale Manufacturing

– Energy

– Construction

– Transport

– Private Services

– Public Services

Major Gainers and Losers [In Export terms]

• Gainers

– Agriculture processing

• Losers

– Cotton

– Livestock

– Textile

– Large Scale Manufacturing

– Energy

– Transport

– Private services

– Public services

• Province-specific inquiry

• Political economy of subsidies Vs. other forms of transfers

• Introduce a reference simulation

• Detailed welfare losses

Way Forward

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