Global Rice News

Elections and Inflation: The Impact of Price Control Policies in Pakistan

As the elections draw near in Pakistan, the issue of inflation and price control policies has been making headlines. However, these policies have not been without their problems.

The federal government’s Price Control Order 2021 was implemented with the aim of favoring inflation-hit consumers. However, it ended up creating market distortions and incurring a heavy cost. Producers not only allocated resources inefficiently, but they also started lobbying political forces to influence price-setting decisions.

The Impact on Inflation

Since the issuance of the Price Control Order 2021, inflation has been ticking around 20%. In contrast, the average Consumer Price Index (CPI) for other South Asian countries has remained in single digits.

It appears that the real motive behind these policies was to target specific items in the CPI basket in order to artificially control inflation for political gain.

Inefficient Policy Implementation

While freezing prices, the government failed to consider the surging pressures on cash flows, solvency, and price recovery systems in the midst of an economic crunch and rising gasoline prices. Retailers and producers were expected to cut their margins to meet the government’s target of reducing the CPI to below 10% before the general elections.

Furthermore, the 2021 order did not differentiate between variations in product categories. For example, eggs could be free-range, organic, standard or entry-level size, private label, or proprietary branded. However, the policy imposed a one-size-fits-all approach, which contracted domestic supply and worsened inflation readings on the CPI.

The policy also failed to respond promptly to the increasing costs of rearing chicken. This led to a doubling of the price of loose eggs in the past two years due to the lack of access to cheap, good-quality soya feed.

Lessons from Egypt

A similar policy framework in Egypt provides some insights. Fixed bread prices in Egypt were heavily subsidized for decades, as the nation relied on cheap bread. However, when the price of wheat skyrocketed due to Russia’s invasion, the government hesitated to let the price of bread be determined by market forces. Instead, it was forced to heavily subsidize bread prices to prevent social unrest.

Now, Egyptians are grappling with ongoing inflation and long queues for scarce rations of subsidized flour, rice, and sugar.

The Importance of Market-based Prices

Market-based prices are a signal of demand and supply. When the government tries to control prices, it scrambles that signal, making it difficult for stakeholders to forecast a good or bad season.

Instead of dictating numbers in a volatile environment, the government could consider using buffer stocks to stabilize prices. During surplus crop seasons, the government can buy buffer stocks to prevent price drops. These stocks can later be sold during shortages to bring down prices. This approach can bring stability and attract more investments in agriculture.

However, it is important to note that a buffer stock scheme is a form of subsidy that can lead to oversupply and burden the government financially.

The Challenges of Price Control Policies

Between 2022 and 2023, Pakistan experienced the worst food inflation figures. Price control committees failed to enforce official rate lists, leading to smuggling of wheat and flour to Afghanistan. Foreign markets became more lucrative for producers and hoarders, undermining the strictly regulated Pakistani markets.

In addition, barter trade flourished in areas near the Pakistan-Iran border, with locals exchanging Pakistani rice for Iranian cooking oil, fruits, dry milk, and cement. Smuggling became a natural response to the new price control policy.

Pakistan’s poor spend a large fraction of their income on food, and a higher share of food items in the CPI acts as a regressive tax. Floods and non-insurance of crops further exacerbate the situation for small farmers and lower-income classes.

Unfortunately, price control policies can only work if the government is willing to subsidize them, which is not currently possible due to the reduced fiscal space of the federal government.

A Better Approach: Improving the Agricultural Sector

If the government is serious about food price control, it should focus on improving the productivity of the agricultural sector to ensure higher supplies. It should also assess the complete supply chain to identify leakages, dead weight, and transaction costs at every stage.

Governments should be willing to buy excess produce from farmers for export purposes and to build buffer stocks to prevent abrupt price falls. Similarly, they should be willing to timely import and sell buffer stocks to bring down prices in case of shortages.

Therefore, the presence of anti-market price control systems makes it nearly impossible to achieve food inflation control. Pakistani food supply chains, farmers, and shoppers need a better policy framework than the current one in place.

Source: The Express Tribune