LAHORE: Punjab’s food sector circular debt has risen to a staggering Rs560bn, equal to the Annual Development Programme for the year 2021-22, giving a nightmare to the finance wizards in the province.

Punjab harvested a bumper wheat crop, about 22 million tonne this season and the department procured at least 3.5 million tonne of it at a rate of Rs1,800 per maund (40kg).

The food debt was hovering around Rs400bn until the end of the last financial year (2019-20) but the recent wheat procurement campaign by the food department added close to Rs160bn to the number.

The food officials, however, clarify that a good portion of the Rs160bn will be recovered when the department issues wheat to flour millers after the end of their own stocks.

Rs160bn added since the end of last financial year

The food circular debt has been a headache for the provincial authorities for almost two decades. It began in 2002 with a volume of Rs36.9bn when the government began supplying subsidised flour to the urban consumers at a rate less than its purchase rate and excluding incidentals like cost of gunny bags, transportation charges, fumigation costs, pilferage in public stock, interest on bank loans secured each year to procure wheat from the farmers and recurring expenditures on maintaining a very large procurement infrastructure.

As political governments have been disallowing the food department to include the incidentals in the wheat issue price, the circular debt continues to inflate each year.

The government has a couple of options to tackle the issue. One is curtailing the wheat procurement by the government and allowing the private sector to play a bigger role in it as suggested in a World Bank-funded SMART agriculture programme, which reduces the public sector role to maintaining just strategic reserves.

A food official, who requested not to be named, claims that the cut in wheat procurement target this year – from 4.2 million tonne last year to 3.5 million tonne this season – is a step forward towards this goal. He says the annual grain procurement target will be gradually brought down to 1.0 million tonne.

Whereas to save the urban poor from hike in flour prices, they will be given a targeted subsidy as Dr Sania Nishtar, the special assistant to the prime minister, is working on a project for the purpose under the Ehsaas Cash Programme, he says.

According to him, Prime Minister Imran Khan, in a recent meeting with the Punjab officials, had said if people were okay with the existing flour prices prevailing in the open market, there’s no need for subsidising the commodity but stressed that flour supply must not go short in the market like the last year.

The finance department, in the meantime, has been working on issuing sukuk bonds to retire the accumulated food circular debt. Its modalities are yet to be finalised.

Punjab Food Director Danish Afzaal, however, gives credit to the government for reducing the spread on the bank loans secured for procuring wheat.

He claims the spread on the loans has been brought down from 100 basis points (plus KIBOR) to 30 basis points in case of loan from the consortium of banks and to 10 basis points in case of an individual bank.

Published in Dawn, July 18th, 2021