The Pakistani rupee has lost over 125 per cent of its value against the US dollar, sliding from Rs125 per dollar in June 2018 to Rs285 per dollar in June 2023.

Several key factors have contributed to this situation, including a substantial trade deficit, diminished foreign exchange reserves, reduced foreign investment and the heavy burden of foreign debt servicing. These factors have had a detrimental impact on Pakistan’s fragile economy, adversely affecting the overall economic landscape.

The currency devaluation has also had profound direct and indirect effects on Pakistan’s agriculture sector. First, currency devaluation has increased crop production costs due to price hikes in agricultural inputs such as fertilisers, pesticides, diesel, electricity, and agricultural machinery that are imported or use imported raw materials and are directly linked to the dollar value.

The impact on production costs is more pronounced for input-responsive/input-intensive crops such as potato, maise, sugarcane, and vegetables, whereas wheat, chickpea, sesame, canola, and other crops, whose input requirements are low to medium, have been affected to a relatively lesser extent.

The weakened currency has helped local farmers, who grow exportable crops, to fetch better prices for their produce in local currency for the same export value in US dollars

Second, the ongoing Russia-Ukraine war disrupted global supply chains of various food items, which led to food inflation worldwide. In Pakistan, the situation was further worsened by the devaluation of the Pakistani rupee as it increased import-parity prices of agricultural commodities like wheat, oilseeds (canola), pulses, garlic, and other crops, which are imported to meet the country’s demand beyond local production.

Consequently, these commodities have experienced an upward trend in prices within the local market. Faced with all these, the government had no choice but to increase the minimum support price of wheat from Rs1,650 per 40 kg in 2021 to Rs2,200 per 40 kg in 2022 and then to Rs3,900 in 2023.

Third, the weakened currency has helped local farmers, who grow exportable crops, including rice, maize, sesame, potato, fruits, and vegetables, to fetch better prices for their produce in local currency for the same export value in US dollars.

This is quite evident from the improved farm gate prices, which rose in a span of a year from Rs3,300 to Rs5,500 per 40 kg for paddy (basmati rice) and from Rs10,000 to Rs17,000 per 40 kg for sesame.

Nevertheless, it is important to note that currency devaluation is not the sole factor driving the price hikes. Other significant contributors include the country’s high inflation rate, the heightened global demand for agricultural commodities and the exceptional prices they have commanded in the recent past.

Given that both crop production costs and farm gate prices have increased, the net effect on farmers’ income depends upon the relative value of the two effects.

As far as production costs are concerned in Pakistan, cost elements can be categorised into two. Some elements like diesel, fertilisers, pesticides, and electricity are strongly dependent upon dollar value, whereas, the rest like land, labour, and canal water, rely upon domestic dynamics. Given that the agriculture sector is highly labour-intensive, the cost of crop production has not increased proportionally to farm gate prices.

Therefore, the empirical analysis, based on farmers’ responses, production costs of various crops, and farm gate prices, indicates that the net income of farmers has increased in recent years, despite the country’s average inflation rate of around 30 per cent.

However, there are certain geographic areas in Pakistan where adverse effects of climate change, such as floods, heavy rains, and hailstorms, have badly affected crop yields and, in turn, farmers’ revenue.

Though farmers’ income has improved, there are two risks that can alter this situation altogether. In April 2023’s Commodity Markets Outlook, the World Bank forecasts that the prices of agricultural commodities will experience a 7.2pc drop in 2023 and likely fall again in 2024 by 2.0pc.

The bank estimates that prices of maize (corn) will drop by over 15.3pc this year and by another 11.1pc next year, whereas wheat prices are expected to decline by 17pc in 2023 and a further 5.6pc in 2024.

On the other hand, the inflation rate has been steadily rising in the country, pushing up wages and labour rates. Recently, the government raised the minimum wage rate from Rs25,000 to 32,000 per month in the annual budget. Even though the minimum wage rate does not apply to the agriculture sector, it still indirectly influences labour rates in rural areas because workers migrate from rural to urban areas and vice versa.

If global prices of agricultural commodities maintain a downward trend in 2023 and 2024 (as the World Bank predicts) but inflation in the country continues to gather pace due to further currency devaluation, the simultaneous impact of these two factors can adversely affect the farmers’ income.

This, in turn, may negatively affect national food security and agriculture sector growth.

However, everything ultimately hinges on the point at which inflation and currency devaluation comes to a halt.

Fourth, economists argue that the devaluation of a country’s currency improves the competitiveness of its exports in the global market. In the past, a number of developing countries have used currency devaluation as a policy instrument, either unilaterally or under the direction of international institutions, to enhance their exports and improve macroeconomic indicators.

However, with a depreciated currency, Pakistan’s agricultural sector failed to enhance its exports considerably. Exports increased by just 13pc in four years, from FY18 (food group $4.8 billion) to FY22 ($5.42bn), whereas, during July-March FY23, exports declined by 3.4pc compared to the same period last year.

Khalid Wattoo is a farmer and a development professional Rahema Hasan is a political economist and graduate of the London School of Economics and Political Science

Published in Dawn, The Business and Finance Weekly, July 3rd, 2023