Just recently, under the $7 billion Extended Fund Facility, the International Monetary Fund (IMF) introduced a new condition that requires Pakistan’s federal and provincial governments to phase out the crop minimum support price (MSP) system by June 2026.

Currently, MSP is limited to just three crops — wheat, sugarcane, and cotton — unlike in India, where 23 crops benefit from it.

The MSP, widely used in many developing countries, serves two key purposes: it guarantees farmers a minimum return on their produce and stabilises the production and supply of essential crops. While the former aims to protect farmers from global price fluctuations and distress sales during periods of surplus, the latter safeguards consumers from supply-demand imbalances and market inefficiencies.

These benefits, however, come at a cost; effective implementation requires robust institutional support, adequate crop storage infrastructure, and substantial financial resources.

Wheat — Pakistan’s largest crop, cultivated on 9.6 million hectares — will be most affected by the IMF’s condition. The MSP system for wheat is not inherently flawed, and it has largely provided stability to the wheat market in most years. However, the real issue lies in its implementation, which is plagued by massive inefficiencies, widespread corruption, and a heavy reliance on borrowing from commercial banks at high interest rates to finance wheat procurement and storage.

The Fund is pushing Pakistan to end support price intervention as the system continues to put a burden on the public exchequer

For instance, in previous years (except 2024), the Government of Punjab (Food Department) procured approximately 3.5-4.5m tonnes of wheat annually — about 16-20 per cent of Punjab’s total production — to maintain strategic reserves and stabilise wheat flour prices. The government disposed of the procured wheat stocks through flour mills at a release price equal to or even above the MSP.

The core issue stems from the extraordinarily high incidental expenses (storage cost, freight, interest payments on bank borrowing) along with operational costs (including salaries), which are further compounded by wastage and pilferage. Together, these factors inflate the overall cost to the government by 20-25pc above the MSP.

Over the years, the government consistently borrowed substantial amounts every year but only managed to make partial repayments. As a result, the outstanding debt ballooned to Rs680bn in June 2023, with annual interest payments reaching Rs87bn in 2022-23 and Rs110bn in 2023-24.

The situation in other provinces is more or less the same. This has turned what could have been a beneficial system into a burden on the public exchequer, which is why the IMF is pushing Pakistan to discontinue such intervention.

While the wheat MSP set by the federal and provincial governments is often viewed as a subsidy for farmers, this perspective is somewhat misleading. An analysis of MSPs and corresponding global wheat prices over ten harvests (2014-2023) reveals that in 2015, 2016, 2017, 2018, and 2019, farmers benefited from higher MSPs, primarily due to the PML-N government’s unsustainable policy of capping the dollar exchange rate at around Rs100, which made food imports cheaper.

The extraordinarily high incidental and operational costs of procuring wheat inflate the overall cost by 20-25pc above the minimum support price

Conversely, during 2014, 2020, 2021, 2022, and 2023, farmers were paid less than global market prices, with the government even forcibly lifting wheat from farmers’ houses to meet its procurement targets. Overall, farmers have barely gained from the wheat MSP system, if at all.

Cotton is another crop where the federal government steps in by setting an intervention price, though not regularly. In 2023, it set a price of Rs8,500 per 40kg for cotton (phutti) as part of a drive to revive cotton production. Unfortunately, when market prices dropped below the intervention threshold, the government did not back it up. As a result, most farmers, especially those who were encouraged to grow cotton, ended up selling their crop for Rs6,000-6,500 per 40kg.

The situation with sugarcane is notably different, as provincial governments set a minimum purchase price for sugarcane each year in consultation with farmers and sugar mills, but without incurring any financial obligation.

However, there are concerns that governments set higher sugarcane prices to benefit farmers, which leads to higher sugar production costs. Yet, this view has not been supported by recent facts. For the 2023-24 crushing season, the Indian government notified the sugarcane price at INR 315 per quintal (equivalent to Pak Rs421 per 40kg), while in Pakistan, the price was set at Pak Rs425 per 40kg — virtually the same. Meanwhile, the cost of sugarcane production in Pakistan is significantly higher than that in India.

The most pressing issue is to anticipate the effects of phasing out MSPs and, in turn, take proactive measures to minimise the potential negative consequences. The policy shift — MSPs-free regime — would negatively affect the overall productivity of our agriculture sector.

The Competition Commission of Pakistan is largely ineffective. Therefore, in a distorted market, relying solely on market forces could leave farmers at the mercy of cartels operating in the wheat, cotton, and sugar sectors. Such a situation leaves farmers with no option but to switch crops, as evidenced this year by the reduction in maize and cotton acreage, driven by subpar prices of 2023.

This would lead to further worsening the instability index of crops — the variation in acreage, yields, and prices over time — which is already high in Pakistan due to climate change and rising input costs.

Nevertheless, increasing crop yields, which would enhance the production and supply of crops while lowering both per-unit costs and prices, could significantly mitigate the adverse effects of this policy shift.

Khalid Wattoo is a farmer and a development professional, and Dr Waqar Ahmad is a former Associate Professor at the University of Agriculture, Faisalabad.

Published in Dawn, The Business and Finance Weekly, September 23rd, 2024