A Sweet Crisis

By Aadil Nakhoda | July 2020

The recently published report of the commission to probe into the increase in sugar prices has created major shockwaves across the political spectrum in Pakistan . The report suggests that sugar mill owners have often colluded to earn significant profits from the export of sugar through their ability to influence the government by political maneuvering, irrespective of the party in office. Approximately Rs 30 billion worth of export subsidies were provided to politically influential mill owners across Pakistan. As the report itself indicates, export subsidies create distortions in the market. This not only allows other uncompetitive exporters to sell their products to foreign buyers in lieu of domestic buyers at lower prices but increases the price of sugar in the domestic market by creating an imbalance between demand and supply. In other words, the consumers bear the burden of inefficient producers by paying higher prices for goods otherwise available at a lower price while the government incurs greater expenditure as it subsidizes uncompetitive exporters.

According to the estimates provided by the Food and Agricultural Organization of the United Nations, Pakistan’s sugarcane harvest area peaked in 2017 at 1.3 million hectares. The acreage, yield and production was followed closely by the election cycle. The area increased by more than 20% in 2008, 9% in 2013 and 9% in 2017. However, there was a decline in the production area in 2018. The yield in terms of hectograms per hectare peaked in 2017. The yield also spiked around the election years of 2008 and 2013 compared to the years immediately before and after. Production of sugarcane increased to 83.3 million tonnes in 2017 compared to 62.8 million tonnes in 2014. Similarly, the production in 2013 increased to 67.5 million tonnes from 49.4 million in 2010. The largest spike was between 2006 and 2008 as sugarcane increased from 44.7 million tonnes to 63.9 million tonnes. The greatest volatility was evident between 2008 and 2013.

A closer look at the yearly distribution of the beginning stock of sugarcane suggests that its value was the highest close to the election year. The surge in production of sugarcane around the election year resulted in higher ending stocks. The surge followed with a fall in production in the years subsequent to the elections. However, interestingly, domestic consumption followed a less volatile pattern. On the other hand, the increase in exports of refined sugar accompanied the surge in production. Exports increased three times between 2012 and 2013 and increased four times between 2017 and 2018 in quantity terms. According to data from the Pakistan Bureau of Statistics, there was a strong surge in export value in FY13-14. Comparatively, the export surge in FY18 was significantly lower. However, the base year effect could have played a role as exports in FY2012 were lower.

Considering the data extracted from the International Trade Center’s Trademap.org, sugar exports peaked at approximately $600 million in 2013. Sugar exports increased in 2008 and 2017 as well, while bottoming out in 2011 and 2016. The most commonly exported sugar product from Pakistan was molasses up to 2010. Approximately 60% of all sugar exports in 2009 were of molasses. Sugar confectionary gained prominence in 2011. However, the trend in exports of cane or beet sugar is relatively peculiar. There was a surge in its share in 2008, followed by a collapse to a negligible level till 2012. Since then the exports of cane or beet sugar have constituted the highest percentage amongst all sugar products. In 2018, almost 80% of all sugar products were exported in the form of cane or beet sugar. Further, exports were mostly confined to cane or beet sugar and chemically pure sucrose in solid form. Raw sugar is unlikely to be exported from Pakistan.

The world price of sugar as determined by the International Sugar Agreement daily price in US dollars peaked in early March 2011 before declining to almost half its rate in early 2016. The world price then again increased till late 2016. The world price settled at around 30 cents per kilogram in early 2018 and in 2020. Interestingly, the exports from Pakistan were minimal during the peak price periods. Exports increased in 2013 and after 2016, when the world price was declining rather than increasing. In essence, the world price of sugar was an unlikely factor contributing to the export of sugar from Pakistan.

In the global context, approximately $12 billion worth of sugar was exported in 2018. The export value decreased by 5%, while the quantity increased by 4% between 2012 and 2018. This was reflected in the fall in export price of sugar. Pakistan exported $384 million worth of cane or beet sugar and chemically pure sucrose as defined in Trademap.org, with 15.5% growth in export value and 27.5% growth in quantity between 2012 and 2018. This growth was the highest among the top eight exporters of the aforementioned product.

Pakistan’s most important export destination is Afghanistan. However, the share of Afghanistan as the most dominant destination dropped in 2014 compared to 2013 as well as in 2018 compared to 2017. Interestingly, Asia (not elsewhere specified), Djibouti, Montenegro and India ranked amongst the top destination markets for export of cane or beet sugar and chemically pure sucrose (in solid form) in 2018. The total share of the aforementioned markets in world imports of the product was approximately 5%. Only 0.6 percent of Pakistan’s exports were destined for the United States, China and Indonesia, which constitute 18% of the global share in imports. The export patterns in the election years differ from the non-election years.

The sugar report clearly highlights that the sugar industry’s contribution to the national exchequer is in the negative, primarily due to the export subsidies the mill owners have availed. It is imperative that supply chains within the sugar industry be re-evaluated and the market structure within the industry improved.

The writer is an Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration (IBA), Karachi. He can be reached at anakhoda@iba.edu.pk

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