THE raging sugar crisis which has led to unprecedented prices in the retail market, has been blamed on a variety of factors. Everything from a shortage of sugar cane to high international prices has come under fire. There has been a hectic trading of blame between sugar cane growers, mill owners, government departments and ministries.

The real story: this fiasco is anything but a simple game of economic supply and demand. It is quite the opposite; a complex political puzzle with political motivations and political means. Consider. The origins of this crisis lie in 2003-04, when sugar cane growers produced 53 million tonnes of cane from which four million tonnes of sugar was produced. With the addition of 0.5 million tonnes of carry-over stock from the previous season and against an annual domestic demand of 3.5 million tonnes, there was a surplus of about 0.8 million tonnes.

This led to a decline in sugar prices from the range of Rs 21 per kg to Rs 19 per kg. The politically influential trade body of mill owners, the Pakistan Sugar Mills Association (PSMA) beseeched the Ministry of Finance for a bailout. The government agreed to buy about 0.5 million tonnes of sugar from the mills through the Trading Corporation of Pakistan and payment was made. Why the rescue?

The government figured that unless a bail out was provided, the mills would not pay their dues to the growers for sugar cane and would not be able to retire bank loans either. The twin threat on the part of the mills worked wonders and an agreement was reached. Typically and ever so conveniently, the industry that otherwise clamours for deregulation and market-based systems never has any qualms whatsoever about demanding a bail out when their own financial interests are threatened.

The agreement was that the government would buy the excess sugar if the mills agreed to clear dues to growers by June 2004. The mills, not surprisingly, reneged on their end of the bargain and refused to make all payments to farmers.

Logically, when the next season came around, growers decided to reduce their production of sugar cane and divert resources instead to less troublesome crops. In 2004-05, therefore, 47 million tonnes of sugar cane was produced, over 11 per cent less than the previous year.

The Sindh government set a price of Rs43 per 40 kg and the Punjab government pegged the procurement rate at Rs40 per 40 kg. In reality, farmers ended up receiving Rs50-60 per 40 kg because of high demand as a result of a lower crop. A total of 3.2 million tonnes of sugar was produced that year, 20 per cent lower than the previous year but on account of a carry over stock from the previous year, there was no supply crisis.

Prices shoot up: Then came the crushing season of 2004. Crushing is scheduled to begin on October 1 but usually begins in mid-November and by December 2004, it was at its peak. In late December, alarmingly, the prices of sugar began to rise and within one month had risen by Rs6 per kg from Rs21 per kg to Rs27 per kg. Not just that but the price hike continued till it reached a high of Rs32 per kg.

The mills used the argument that the shortage of cane was “driving” prices up. But clearly mass collusion took place to send prices soaring in the midst of the crushing season. In February 2005,the Economic Coordination Committee of the Cabinet decided to allow the duty-free import of raw sugar to create an alternative raw material to cope with the shortage of cane. Raw sugar is commonly used by countries like the UAE which do not produce sugar cane, as the input to produce refined sugar which is then exported the world over.

At the time, raw sugar was selling for $200 per tonne in the international market and the ex-factory price of sugar produced (using raw sugar) was the same as it would be if sugarcane was used. The government’s hope was that mill owners would stock pile raw sugar and extricate themselves from what they termed as the exploitation by sugarcane growers. So why did no more than 20 of the 77 sugar mills import just 400,000 tonnes of raw sugar?

The reason is clear. Imports are documented because L/Cs have to be opened and tax evasion is not possible. And mills accustomed to evading taxes in a big way found this an unnecessary inconvenience.

Worse still, even those mills which produced sugar using duty-free imported raw sugar as an input have been selling sugar at the inflated prices, taking advantage of the created market conditions. Clearly, the financial benefit of duty-free imports went straight into the pockets of the mills.

The question then is that why did the government not ask the importers of raw sugar to pay the full customs duty on the imports when the benefit of duty-free imports were not passed onto consumers?

By now it was also evident that the conflict between growers and mill owners would lead to a further reduction in the sugar cane crop in 2005-06. Therefore, the duty-free import of refined sugar was also permitted and by April 2005, both the private sector and the TCP imported several hundred thousand tonnes of refined sugar.

The government also fixed the price of sugar at utility stores at Rs23 per kg. As a result of these measures, the price of sugar fell from Rs32 to Rs27 by April 2005.

In 2005-06, the crop fell short once more. The Ministry of Food and Agriculture, right up until early February 2006 had claimed sugarcane production would amount to 45.88 million tonnes. Then, suddenly, last week they revealed that the figure was in fact just 40 million tonnes which would translate to approximately 2.5 million tonnes of refined sugar production.

The inability of the Ministry of Food and Agriculture to estimate crop sizes is a major and persistent problem. They have failed entirely to invest in any sort of modern mechanisms for crop size estimation, which has developed into a complex science the world over. As a result, the ministry provides random, faulty estimates to the government which is often a source of embarrassment and always a source of erroneous economic estimates.

The ministry remains preoccupied with support prices—the mechanism through which to gain political support from powerful farmers—and no attention has been paid to investing in crop estimation methods or capacity. This way-off estimate added to the confusion in the industry.

The shortage of some 0.8 million tonnes of sugar had to be bridged. Imports from the international market posed their own set of problems. The price of sugar in the international market had doubled from $280 per ton in November 2005 to $465 per ton in February 2006. This was on account of a shift by Brazil—the world’s largest sugar producer—from using sugarcane to produce the fuel ethanol rather than sugar.

The supply of sugar was further curtailed because Thailand, another major producer that sells 4.5 million tonnes of sugar a year in the international market, also faced a short crop this year and was able to bring just two million tonnes to the market instead. Moreover, there was a shortage of sugar in Pakistan, Bangladesh, the Philippines, Indonesia, China and Turkey, all of which were buyers in the market and 300,000 tonnes were also needed for Iraq. This quantum of pressure in the international market drove sugar prices even higher.

The domestic shortage placed sugar cane growers in an advantageous position to their rivals, the mill owners. When the crushing season got underway in January, mills in Sindh faced procurement difficulties.

The Sindh government intervened and set a procurement price of Rs60 per 40 kg while Punjab set a lower price of Rs48 per 40 kg but farmers received prices of Rs60 to Rs65 per 40 kg. That should have translated into an ex-factory cost of Rs30 per kg of refined sugar or a market price of Rs 34 per kg at most. Why, then was sugar being sold at Rs42 per kg?

To begin with, massive unregistered buying of sugar cane took place in the Punjab. Since this took place last year with no checks by the provincial government, the problem assumed a larger scale this year. So, instead of growers selling their cane at the gate of the mills and receiving a receipt assuring payment at a later date, the representatives of mills bought sugarcane from the field.

This process enables the grower to receive cash payments rather than wait for delayed payments and they accept lower prices to save to the hassles of chasing payments later. It also enables them to evade income taxes. And it enables the mills to pay less for cane and easily evade sales tax and provincial taxes. The massive tax evasion goes entirely unchecked by the Central Board of Revenue.

The question needs to be answered as to why, despite its much talked about reform, the CBR is unable to check this. The fact that several mill owners are powerful politicians may have something to do with it. Moreover, the provincial government also turns a blind eye to this unregistered buying.

The result: There is no record of how much cane is crushed and therefore no factual way of determining the state of supply. This, in turn allows mills to slow the release of refined sugar to a trickle-slow pace since there is no means of ascertaining how much cane has been bought and crushed.

By some estimates, only 10 to 35 per cent of production is being released and the rest is being hoarded to keep prices high. But the government chooses not to conduct raids on mills or enforce through stringent penalties the timely release of stocks.

Government under fire: When prices continued to escalate and the government came under fire, they allowed the private sector to import sugar and some 150,000 tonnes of sugar is now being brought into the country with the aim to increase supply and force the hoarders to release their stocks into the market.

The government assured the private sector that the TCP will import only to build reserves and not to release sugar at subsidized prices into the market. Sugar prices fell slightly and the hope is that retail prices will moderate to Rs33 once supply improved. Whether that happens remains to be seen. Meantime, the damage has already been done.

Clearly, the sugar crisis of today has not emerged overnight. It has been engineered and planned well in advance. Indeed, it is critical to note the timing of this crisis. With Senate elections in the works and rumours doing the rounds that a cabinet reshuffle could be in the making, the coveted position of finance minister is being jostled for by powerful interest groups. For them it is advantageous to prove that the existing finance ministry has failed to do its job and thereby create the need for change. The merits of the finance ministry, notwithstanding, this is not just lame but severely manipulative.

Why have the prime minister and president failed to address the problem despite the meetings they have chaired and the directives they have issued? It’s simple. Sugar cane is a political crop and the sugar business is a political industry. Action against either the powerful lobby of farmers or the even more powerful lobby of mill owners will have serious political consequences.

Getting farmers an additional Rs25 billion or so means an invaluable base of support. Likewise, overlooking hoarding, price manipulation and exploitation of the consumer by mill owners will win votes for those with support within the sugar industry.

That is why we witnessed last week a pitiful debate about the sugar issue in the Senate where Senators traded accusations, reached their own myopic, one-sided conclusions and no conclusive, comprehensive analysis to the problem was done.

The result of this game is that consumers are forced to pay almost twice as what they should have to for a basic commodity like sugar. And for no other reason than helping create a windfall profit for mill owners and big agriculturists to use on their next election.

That still leaves one question. What about the government machinery? That’s simple too. The toothless Monopoly Control Authority openly allows the menace of hoarding to liberally take place without so much as conceptualizing that mass-scale raids and tough penalties should be imposed on hoarders and profiteering.

The government repeatedly claims that the MCA, which allows consumer exploitation across a host of industries, is being reformed. Isn’t it time Prime Minister Shaukat Aziz finally reveals what this reform will entail and more critically how long it will take? It is all very well to boast abroad about record deregulation in Pakistan (a welcome move indeed) but the dangers consumers are exposed to by an unfettered private sector left with severely inadequate regulatory oversight have now been proven time and again.

A big part of the problem, of course, is the eagerness of the government to always appear business-friendly. That, too, is all very well in the attempt to gain investment.

But until the other side of that face of a tough regulator that ensures consumer interests and is not shy to crack down hard on exploitative industrialists, their aims will lead to misplaced results altogether.

nmangi@yahoo.com