The Competition Commission of Pakistan (CCP) has asked for the deregulation of the sugar market instead of setting price ceilings. The authority is of the view that, “Deregulation is a better and sustainable option to promote free trade mechanisms where price signals can be effectively conveyed to all stakeholders to attract investments, increase competitiveness and reduce the disruption of supply in the market.”
The CCP has also opposed the Punjab government’s decision to fix the price at Rs85 per kg saying that this move will further increase the price of sugar due to hoarding and smuggling to other provinces.
In its report, the CCP has urged the government to reconsider its decision to fix the sugar price saying, “When regulations consistently fail to achieve their desired objectives of fair prices and competition, it is perhaps prudent to reconsider them -even scrap them.”
It is one of CCP’s prime responsibility to provide level playing field and ensure competition while keeping an eye on the cartels. The governments usually resort to the regulation of prices because of the fear of unrest in the public and the effect it will have on them politically.
While referring to the decision when the Supreme Court of Pakistan fixed the sugar price at Rs40 per kg and it backfired big time. The report says, “In 2009 when superior courts fixed the price of sugar at Rs40 per kilogram, mills maintained that for them to break even, the minimum price ought to be at least Rs48 per kilogram. Within months, many mills stopped operations resulting in a severe supply shortage in the market and prices, at times, reached as high as Rs100 per kilogram. Thus, a measure whose objective was to ensure supply of sugar to ordinary consumers at affordable prices resulted in a vastly different outcome.”
The commission is of the opinion that the regulation of sugar prices is a temporary measure of fixing price and can provide relief for a short period of time.
“This measure fails to benefit the sector or the economy at large and the short-term benefit of fixing prices (if any) does not justify the long-term loss caused by such policies,” said the CCP.
The decision was taken to provide consumers relief in Ramzan but it can have an adverse effect on the prices as well as the supply in the market. The price regulation will influence suppliers to hoard or consumers will buy in bulk.
The CCP policy note suggested that “The better option for Pakistan than setting a price ceiling lie in deregulation, removing subsidies, and ensuring competition in the market. Competitive sugar pricing and removing restrictions on the imports and exports of sugar (without subsidies) would give sugar producers market-based incentives to enhance their productive, technical and allocative efficiencies as well as focus on the necessary research and development to improve the sector.”
The watchdog is of the view that all the sugar mills do not have an equivalent level of efficiency or resources, which may give an advantage over some less efficient mills from the market.
Furthermore, the report suggests that this decision will make the sugar mills hesitant to buy sugarcane at the price set by the government. This will in turn put pressure on the farmers to sell sugarcane below the minimum price or they may reduce the quantity they purchase. The execution and monitoring of this decision will need a robust effort from the entire bureaucracy which might be an uphill task.
Referring towards the Punjab government’s scheme of cheap wheat flour the commission said it resulted in long queues of consumers wanting to purchase an extra bag of wheat flour.
The CCP has also lambasted the policy of protecting the sugar mills from the competition by giving them export subsidies when sugar is expensive in global markets and imposing import duties when the commodity is cheaper worldwide, except Pakistan.
In October 2020, the CCP had declared the Pakistan Sugar Mills Association (PSMA), a cartel that according to it manipulated the price hike for their own advantage with active coordination of a senior officer of JDW Sugar Mills Group.
In February 2019, the price of sugar was Rs60 per kg, which has increased to over Rs110 per kg, showing an increase of Rs50 or 83%. According to the CCP, the 1.1 million metric tons sugar export decision was wrong that led to sugar price hike last year.
The watchdog said that most of the problems in the sugar sector stem from both over-regulation and lack of competition.
“If the market is deregulated, with free entry and exit, regulations and repeated interventions would not be needed. In an environment of open market competition, even mandatory crushing laws would not be required.”
“The Punjab government may consider the viability of non-price interventions at the farm level such as introducing a revenue-sharing policy between the millers and the farmers – for instance, in some countries, there is direct payment to farmers’ model,” the report suggests.