RAWALPINDI, Oct 19: Energy has become the second major household expenditure after food in Pakistan, and if every poor person were to be compensated to offset the loss in real expenditure caused by food and energy price increases, the government may incur an annual cost of between Rs18.5 billion (0.3 per cent of GDP) and Rs83 billion (1.3 per cent of GDP). Household expenditure surveys indicate that a sharp rise in food prices can have a devastating effect on the poor. Food expenditures make up an average of about sixty per cent of household expenditures of the poor in Pakistan, says Asian Development Bank in its latest analysis.

The rise in poverty incidence from such an increase in energy prices is estimated to be much smaller at about 1.5 percentage points, it says. The food prices increased by over 20 per cent in the first quarter of 2008, and by 32 per cent year-on-year, as of June 2008. The ADB’s analysis shows that a 10 per cent increase in food prices could drive an additional seven million into poverty in Pakistan; a 20 per cent increase, 14.7 million; and a 30 per cent increase, 22 million.

In the household income and expenditure survey of 2004-05, household expenditure’s share on wheat products was 15.9 per cent, the second highest in the basket of 17 major food items with the first being fresh milk at 17.4 per cent.

Pakistan’s poverty profile has seen many swings over the last two decades. Poverty incidence was 25.5 per cent in the early 1990s before rising to 34.5 per cent in the fiscal year 2001, and declining to 23.9 per cent in FY2005 and 22.3 per cent in 2006, according to government estimates.

Other studies have estimated it at 29.3 per cent to 36.4 per cent (44 million -45 million people).

Meanwhile, government estimates point to a further reduction in the poverty rate to 22.3 per cent in 2005-06. Household expenditure surveys indicate that the share of food in total expenditures is inversely related to income levels, which means that a sharp rise in food price can have a devastating effect on the poor.

From the viewpoint of the public, the rising wheat flour price is perceived largely as the gross mismanagement of the wheat situation by the previous government. The main problem was that the government’s fixed price for wheat flour per 20kg was too low (Rs425/20kg) vis-à-vis the market price (Rs625/40kg), resulting in increased leakages and corruption, not to mention the huge subsidy cost incurred by the government of about Rs4.4 billion as consumer subsidy.

Traders, flour millers and households near the borders of Afghanistan benefited from the low price of wheat flour but not the poor consumers. Further, because of the higher price hike of coarse rice and maize, which are used for animal feed, livestock farmers substituted coarse grain and maize with more wheat use. About one million tons of wheat was diverted to animal feed. In the end, the previous government had to import 1.7 million tons at already high global prices, resulting in another fiscal burden of about Rs50 billion. Assured and rising incomes would be a more sustainable way for the poor to cope with food price spikes and to move out of poverty permanently. This would form the foundation for transforming subsistence agriculture into commercial and pro-poor agriculture which would in turn finance the development of value-adding manufacturing and service sectors.

Among the most pressing problems facing the new government is the rising food prices, especially the main staple, wheat. A confluence of global factors resulted to this phenomenon: high food demand and changing food consumption patterns, increasing energy prices which encourage shift in production land use from food to alternative bio-fuel, increased land cultivation for feeds and structural neglect in agriculture investments.

The present government is thus under great pressure to act due to the very tight supply situation: opening stocks for May 2008 were down to 0.2 million tons. Latest estimates of wheat production are down to 22.8 million tons, while requirements for 2008-2009 are 23 million tons. The country’s strategic reserves are also 0.5 million tons short from the desired strategic level. Some argue that the strategic reserves fixed at one million tons may be low as this estimate was made when population of Pakistan was below the 100 million mark.

High wheat prices, increased global food price volatility and heightened market uncertainty are projected in the medium term. There is thus popular pressure on the new government to revert to increased public role in the wheat sector as the way for ensuring food security.

As far as the medium-term agenda spreading over one to five years, the government should make investment reform measures that will develop a market responsive wheat/food supply chain network.

The key agenda for action are productivity-enhancing and efficient land and water-use management measures at the farm level, and policy reforms and infrastructure investments that efficiently link the food-producing farming sector with the domestic and global food supply chain.