Impact of Imported Food Items on Trade Balance of Pakistan

PROJECT

IMPACT OF IMPORTED FOOD ITEMS ON TRADE BALANCE OF PAKISTAN

Date: 24th March, 2009

Presented by:Rabia SaeedAtufa Ambreen DarAyesha MujahidNida MalikPresented to: Miss. Yusra

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1 | IMPACT OF IMPORTED FOOD ITEMS ON TRADE BALANCE OF PAKISTAN

C HAPTER NO.1

INTRODUCTION

Agriculture plays an important role in Pakistan's economy, accounting for about 25 percent of GDP and almost half of the country's labor force. Crop production accounts for the largest share of agricultural GDP (63 percent), followed by livestock (32 percent) and fishery and forestry (5 percent).

Despite the rising trend of agricultural output, the country faces a number of challenges in respect of the sector. One is to reduce food imports, which have been growing steadily, especially in recent years. According to projections, food demand will rise substantially by the year 2010, with the share of imports in domestic consumption likely to go up further. With limited scope for expansion of cropped land, higher crop output will have to come essentially from higher yields, which requires investments in agricultural research and irrigation, among others. Yet, investment in agriculture has been on the decline.

Agricultural exports have contributed significantly to overall export growth. Pakistan has a strong comparative advantage in the production for exports of a number of agricultural products, including cotton and rice. In recent years, horticultural exports have increased rapidly, with little by way of subsidies. The country's climate and location give it an advantage in accessing a number of niche markets and it is generally considered that, given an enabling environment, horticultural exports could grow substantially.

1.0 FOOD INDUSTRY OF PAKISTAN

Pakistan is basically an agricultural country and thus agriculture is the 'backbone' of the economy and the mainstay of our national economic life. It contributes about 25% to the GDP, employs about 50 % of the total labor-force, provides livelihood directly to 70 % of the rural population, and earns about 60 % of the total value of exports. Overall, it meets the food needs of the population. But unfortunately, the backbone is aching badly now and may suffer crack under the pressure on soil discordance and natural calamities.

One of the finest Pakistani achievements related to the historical fact of post independence period has been the green revolution of 1960, which turned the country from an ardent importer of food grains into an exporter of a few crops. The newly developed early maturity and high yielding dwarf varieties of wheat and rice during the period helped in increasing the production of food grains significantly. This has led to enormous transformation in the positive direction of economy of the country, which came about through the combined efforts of scientists, researchers, planners and farmers.

The country produces wheat, rice, cotton, sugarcane, maize and other cereal in sufficient quantities. Wheat is the leading food grain in Pakistan. Rice is the second most important food grain. It requires irrigation and is grown as a Kharif crop. Maize is mostly grown in Kharif season. Cotton is an important cash crop of the

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country. It is exported in sufficient quantity. Other crops of food products millet, sorghum, soybean, dry beans, chickpeas, tomatoes, pepper, tobacco. The important fruits are date palm, apples, citrus, mangoes, bananas. The production of all major food commodities in Pakistan have shown as upward trend, but the increase was most significant in the case of poultry meat, fruits, eggs, red meat and vegetables. Pulses also showed substantial increase in production. Pakistan's major imports of food commodities include edible oils, sugar, tea, dry milk and pulses. The country however, is a major exporter of rice and cotton and other exports include fruits and some vegetables. Since independence, the population increased many folds, similarly the grain production increased several times. Besides green revolution, significant production advances have been made in milk, fish, fruits and vegetables. To propel agriculture of the country into 21st century, the quality of technical skills and management of agricultural manpower must improve. Science, technology and generation of new technology will of course be helpful in increasing the agricultural productivity of the country.

Pulses: The pulses include gram, mung, masoor (lentil), mash, mattar and other pulses of Rabi and Kharif season. The area and production of all pulses in Pakistan are (Area 1530.5 x 103 hectares, Production 951.4 x 103 tons).

Edible oils: The edible oils crops include soybean, sunflower, sesamum, groundnut, mustard, linseed, canola, rape-seed, castor-seed etc.The total area, production and yield of all oilseed crops are (Area 690 x 103 hectares, Production 3790 x 103 tons).

The oilseed crops do not fulfil all the requirements of our increasing population, therefore Government of Pakistan have to spend billions of dollars on the purchase of palm oil and soybean from the foreign countries.

Vegetable: The important vegetable crops grown in the country are potato, tomato, egg plant, lady finger, kakri, bitter gourd, loki, pumpkin, chillies, ginger, cucumber, garlic, radish, carrot, turmeric, corriander etc.

Livestock: Pakistan is self-sufficient in the production of livestock. The livestock includes, cattle, sheep, buffalo, goats, canals, asses, horses, mules and poultry. All the four provinces are enriched in livestock production. However, the production of livestock in the country are: cattle (17541 x 103), buffaloes (15705 x 103), sheep (23287 x 103), goats (29945 x 103), camels (958 x 103), asses (2998 x 103), horses (388 x 103), mules (69 x 103) and poultry (57503 x 103).

Fruits: The important fruits, which grow in Pakistan are: citrus, mango, banana, apple, guava, grape-fruit, apricot, peach, pears, plum, grapes, pomegranate, dates, almonds.

1.1 INTRODUCTION TO TRADE BALANCE OF PAKISTAN

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Pakistan has been experiencing severe macroeconomic problems since the last one year. Two biggest economic problems faced by the new government are inflation and the trade deficit. This report focuses on the later and suggests a strategy for reducing the deficit through import management.

Our basic focus is on food imports and its effects on trade deficit of Pakistan. But before we start our argument on food imports we first examine how and when this deficit started to expand.

The trade balance in Pakistan has nearly always remained unfavorable. Trade deficit, defined as exports minus imports, started increasing in 2003-04. The deficit figure increased from $1060.1 in 2002-03 to $3278.5 in 2003-04, showing a rise of 209 percent. The average growth in trade deficit since 2003 is colossal 92%. Table 1 show that the trade deficit has reached 20.75 billion US dollars in 2007-08, which is even higher than the total exports of Pakistan.

Table 1: Pakistan's Trade* (in US $)

Year Exports Imports Balance FY 03 11160.2 12,220.3 -1060.1 FY 04 12313.3 15,591.8 -3278.5 FY 05 14,391.0 20,598.0 -6207 FY 06 16,451.0 28,581.0 -12130 FY 07 16,976.0 30,540.0 -13564 FY 08 19,220.0 39,968.5 -20748.5

* Excluding Re-Exports & Re-Imports

Source: Federal Bureau of Statistics, Govt. of Pakistan.

Chart 1, below, shows that the trade deficit has increased by around 7.2 billion dollars in 2007-08, which is the highest ever increase in one year. This is not because of lower exports but due to the unprecedented rise in imports. Pakistan achieved its export target of $19.2 bn in 2007-08, with a growth of 13.22 percent. However, the sharp surge (31%) in imports took the deficit to all time high. The upward sloping steep part of the curve in the front page diagram depicts the severity of the situation. The decade-wise trend line shown as a dotted line shows the long-term rising tendency of the trade deficit.

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If this growth in trade deficit is not controlled at this stage it can make the economy more vulnerable.

In order to find out the reasons for the country’s soaring trade deficits, one may have to look deeper into the composition of the country’s exports and imports.

THE EXPORT PICTURE

A study of the exports statistics for 2007-08 (July-April) shows that textile exports and though lower by 2.5 per cent as compared to the same period last year ñ had enjoyed a share of 57 per cent in the total exports. Exports of food group had a share of 13.2 per cent; petroleum group a share of 6 percent and other manufactures had a share of 19 per cent in the total exports. Export of all other remaining items had a share of 5 per cent.

THE IMPORT PICTURE

Coming to the imports now, the country’s total imports had grown by 28.3 per cent in 2007-08 (July-April), compared to the same period last year, reaching a formidable $32.06 billion. Petroleum group occupied the largest share of 27 per cent in total imports, followed by 16.6 per cent share of raw material, 13.2 per cent of machinery, 11 per cent of food group, 5.9 per cent of telecom sector-related imports, 5.3 per cent of consumers’ durables and the remaining 21 per cent share of others.

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The external trade data for the years 2006-07 and 2007-08, released by Federal Bureau of Statistics, is reproduced in the table below showing only group wise summary of imports.

Group-wise Summary of Imports

CommoditiesValue in thousand $

Growth Share

G R A N D T O T A L39,968,49

630.87 100

A FOOD GROUP 4,209,742 53.51 10.53B MACHINERY GROUP 7,376,383 10.32 18.46C TRANSPORT GROUP 2,251,116 -6.04 5.63D PETROLEUM GROUP 11,380,048 55.14 28.47E TEXTILE GROUP 2,348,808 49.96 5.88F AGRICULTURAL AND OTHER CHEMICALS GROUP 5,828,912 31.59 14.58G METAL GROUP 2,542,409 8.37 6.36H MISCELLANEOUS GROUP 738,115 11.62 1.85I ALL OTHERS ITEMS 3,292,963 38.55 8.24

Above table is showing increasing trend of imports of all group of commodities. The highest import growth is recorded in Petroleum, Food and Textile group, which was around 50%. On the other hand a 6% decline was recorded in Transport Group. Overall imports increased by 31% in 2007-08 in terms of value calculated in US$, while in terms of Pak rupees this growth rate was 36%.

Group Petroleum constituted the largest share in our import bill which was 28.5%, while Machinery Group and Agriculture & Other Chemical Group, was second and third highest groups, with 18.5% and 14.6% share, respectively. Our major focus is on the imports of food items and their contribution in the trade deficit of the country.

Here we want to know what contribution food group is making in broadening the trade deficit of the country.

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C HAPTER NO.2

2.0 FOOD IMPORTING CULTURE AND ITS IMPACT ON TRADE DEFICIT:

Below is more detailed analysis of the food import groups:

Commodities2007-08 2006-07 Growth

Unit MT Value Rs. Mn

Value 000 $


Value 000 $


Value 000 $

FOOD GROUP -264,29

34,209,74

2166,24

12,742,27

5 - 58.98 53.51Milk, Cream & Milk Food For Infants 29,107 4,640 74,344

39,586

5,108

84,223 -26.47 -9.16 -11.73

Wheat Unmilled1,823,41

5 54,091 860,001 135,960 2,518 41,559 1,241.1

42,048.1

71,969.3

5Dry Fruits & Nuts 116,369 4,962 79,452 115,051 4,136 68,185 1.15 19.97 16.52

Tea 102,261 12,659 202,099 112,136 12,965 213,812 -8.81 -2.36 -5.48Spices 132,909 5,393 85,270 86,198 3,275 54,021 54.19 64.67 57.85Soyabean Oil 108,382 6,455 103,488 48,492 2,468 40,666 123.50 161.55 154.48

Palm Oil 1,766,47

1 101,82

21,614,39

0 1,710,437 55,529 915,779 3.28 83.37 76.29

Sugar 36,605 912 14,750 586,543 15,722 260,334 -93.76 -94.20 -94.33Pulses (Leguminous Vegetables) 333,899 12,635 200,755

520,922

14,839

244,773 -35.90 -14.85 -17.98

All Others Food Items - 60,724 975,193

49,681

818,923 - 22.23 19.08

The above table shows that Palm Oil has the biggest share of 35.38% in overall Food Group imports. Value of its imports was increased by 76.3% however, quantity increased by 3.3% only. This shows that this increase in import bill is because of the price factor, which has grown rapidly in international markets over the last fiscal year. Almost entire import of this item comes from Malaysia and is included in Pak-Malaysia FTA. Pakistan has allowed its import under Tariff Rate Quota regime with specific duty. So, it is not advisable to take any preventive fiscal measures to reduce its imports. This is an essential food item; therefore any tariff hike would further increase inflation, since being an essential food ingredient, it is a very price inelastic good.

Crude and refined palm oil shipments from top producers Malaysia and Indonesia make up about 75 percent of Pakistan’s total imports as these products satisfy strict Muslim dietary laws and are among the cheapest vegetable oils. Normally, Pakistan’s palm oil imports consist of 80 percent refined palm products and the rest crude palm oil.

As regards, edible oil (Palm Oil plus Soya bean Oil), the jump in import value occurred essentially through continued rise in world prices of edible oils, like palm oil, soya bean oil, canola and rapeseed oil. Malaysia (largest producer of palm oil), USA (largest producer of soya bean oil), Canada (largest producer of canola oil), and Europe (largest producer of rapeseed oil), all engaged in biodiesel production

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in a big way, diverting their largest commodity away from edible oil market. This supply constraint, in addition to other reasons like ballooning fuel prices, resulted in high import prices for Pakistan for palm oil and soya bean oil, while the quantities imported did not change significantly. It is forecast by commodity analysts that prices of oilseeds would not increase this year, and are in fact likely to fall. This should then be reflected in lower world edible oil prices, and thus lower import for Pakistan. Simultaneously there is an urgent need for MINFAL to mobilize its Oil Seed Corporation to launch some kind of “OIL SEED UGAO” campaign nationwide.

The second biggest import item, in Food Group, is wheat, whose import bill increased by a whopping 1970% in the just-ending fiscal year. This very large import of wheat last year was an extraordinary circumstance, when due to mistaken forecast of surplus production, wheat was allowed to be exported. Later when the mistake was realized, it was too late, and a large quantity had to be imported at high price, as the world wheat prices had gone very high by then.

C HAPTER NO.3

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BRIEF ANALYSIS OF IMPORTED FOOD ITEMS

3.1 DAIRY INDUSTRY IN PAKISTAN

Dairy farming is an agro-based activity, buffaloes and cows can be raised for milk production in an organized manner for commercial purpose.

Pakistan is the fifth largest milk producer in the world. Milk production is 28 million tonnes from 125 million heads. Milk is used for drinking, tea, desi ghee, yogurt and butter making.

PRODUCTION OF LIVESTOCK PRODUCTS

Product 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003Milk 24,877 25,566 26,284 27,031 27,811Beef 963 986 1010 1034 1060

Mutton 633 649 666 683 702Milk is also used to make Khoya and different types of sweets. Milk processing companies use milk as a raw material to formulate different types of milk ie pasteurised milk, UHT milk, condensed milk, skimmed milk, milk powder, etc Different value added products like yogurt, ice cream, butter and cheese are also produced from the raw milk.

Livestock is an important sector of agriculture in Pakistan. It accounts for 39 percent of agricultural value added and about 9.4 percent of the GDP. Its net foreign exchange earnings, in 2001-02, were 51.5 billion, which was 12.3 percent of the overall export earnings of the country. The Livestock include cattle, buffaloes, sheep, goats, camels, horses, asses and mules.

With the every passing day, dairy products are becoming costlier because live stock farming has not scientifically grown with the increase in population and also it did not match with the pace of urbanization.

REASONS FOR IMPORTS

The recent increase in meat prices is attributed to the export of live animals or meat to the Middle East and Afghanistan. There was a time when animals used to be imported or smuggled from Afghanistan into Pakistan but after 9/11 the situation suddenly took a 'U' turn. In Afghanistan, the war has seriously affected the Livestock sector. Thus Pakistan started exporting instead of importing Livestock from Afghanistan.

Besides, the smuggling of Livestock from Pakistan to Afghanistan has also started in a big way to meet their domestic shortage of animals.

The country, though rich in Livestock, rarely got a chance to export meat or meat products to earn foreign exchange. It was offered an opportunity when various

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Middle East states stopped importing meat from European countries due to the incidence of the mad cow disease.

Traditionally, Europe was the biggest exporter of meat and meat by-products and Livestock and had been a major source of foreign exchange for several European countries. Technically, meat from South Asia has a superior quality, due to grazing and vegetable concentrates as the main source of Livestock feed here, against bone and meat meal in Europe.

There is a greater possibility that this trend would go unbridled if the government does not take corrective measures to ensure a steady supply of animals in the domestic market.

3.2 WHEAT

In Pakistan, wheat being the staple diet is the most important crop and cultivated on the largest acreages in almost every part of the It contributes 13.7 percent to the value added in agriculture and 3.0 percent to GDP. It occupies 75 percent of total rabi cropped area of the country Over the past three decades, increased agricultural

productivity occurred largely due to the deployment of high-yielding cultivars and increased fertilizer use. With the introduction of semi-dwarf wheat cultivars, wheat productivity has been increased in all the major cropping systems representing the diverse and varying agro-ecological conditions.

IMPORT AND PRODUCTION OF WHEAT IN PAKISTAN

Pakistan experienced a negative trend since its existence up to Green Revolution period (1965-1976). During this period, country witnessed increasing trend in wheat yield. Pakistan has been a net importer of wheat since past several decades.

Pakistan imported 5.7 million tons wheat during 80s and 2.07 million tons during 90s. The highest quantity of wheat (4.1 million tons) was imported during 1998, which decreased (1.6 million tons) in 2000 (2). This decrease in import was primarily due to record wheat production. Crop management practices and decisions involved in wheat production may be the main factor contributed to increased production. The data revealed that wheat yield in irrigated Punjab (2645 kg/ha) was somehow equal to the world average. Punjab is leading province regarding wheat yield, followed by Sindh, Baluchistan and NWFP. FACTORS CONTRIBUTING TOWARDS YIELD GAP

There is around 60% yield gap in wheat, which needs to be narrowed. Wheat production in the country, however, has been well below potential and variable. The major reasons for low productivity and instability includes: delayed harvesting of kharif crops like cotton, sugarcane and rice, and consequent late planting of wheat, non availability of improved inputs like seed, inefficient fertilizer use, weed

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infestation, shortage of irrigation water, drought in rainfed and terminal heat stress, soil degradation, inefficient extension services. Moreover, farmers are not aware of modern technologies because of weak extension services system. Non-Availability of Seed: The non availability of seed of improved varieties to farmers is not only resulting in lower yield but also placing them on the risk of crop failure due to disease. Late Planting: In Pakistan, farmers generally plant wheat late due to late harvesting of kharif crops (cotton, rice, sugarcane and summer crop growing areas) which results in low yields because the crop is exposed to heat stress at grain filling period leading to the formation of shriveled grain. Currently, only 20% of wheat is being planted at optimum planting time (15th October to 15th November). Any delay in planting would reduce yield drastically. Non-availability of soil moisture in rain fed areas also delays wheat sowing in these areas.

Water Shortage: Wheat crop need water for the whole growth period, but their are some stages which are more vulnerable to water shortage and any water shortage during this period may result in serious yield loses. The shortage of irrigation water at crown root initiation, booting and early grain fill period results in significant yield losses.

Other factors include inefficient fertilizer use and weed infestation etc.

EXPORT / IMPORT

Pakistan's economy has taken a new turn with the country for the first time entering the wheat export market with the shipment of 35,000 tons to Iraq in 2001. Depending upon production and inland consumption, export quantity varied from year to year.

Export (Wheat + Wheat Flour)

Import Per Capita availability (kg/year)Quantity Value Quantit

yValue

2000-01 80.5 671.7 - - 113.82001-02 642.6 4361.6 - - 115.02002-03 1535.6 10713.3 - - 119.22003-04 334.7 2833.6 - - 119.32004-05 521.7 5413.3 1368.0 - 113.4

Source: Agricultural Statistics of Pakistan 2004-05

Through the table we see that after 2004, country started to import wheat. It has been explained before that in fiscal year of 2007 import bill increased by 1970% which is a very large figure. And this was due to the wrong anticipation of surplus production due to which wheat was allowed to be exported. This cost not only the society but also made the country to import a large amount of wheat despite of being top ten wheat producer in the world.

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3.3 TEA

“Pakistan is the second largest tea importer country in the world”

Tea is the cheapest and most popular beverage that is served at both professional and social gatherings all over the world. In Pakistan it is counted as a staple food item of common man and is an integral part of our culture and heritage. Due to these causes Pakistan consumes a substantial quantity of tea and our country enjoys the distinction of being the world's second largest non-producing tea importer. Its consumption is increasing at a much faster rate because of population growth, food habits, and comparatively cheaper means of entertainment.

REASONS FOR IMPORT

The amount of tea required for consumption not only increased the foreign exchange burden but also encouraged the smuggling of tea. Approximately more than 20 percent of yearly consumption is being received by smuggling, counted as a major cause of losses in government revenue. Some reasons for the import of tea are:

The rising trend in the import of tea is attributed to the indigenous increase in the consumption of teaThe reasons for increase in the indigenous consumption are connected with the population growth, food habits, and comparatively cheaper means of entertainment.The high amount of consumption and higher unit value of tea not only increased the foreign exchange burden but also encouraged the smuggling of tea.

Various policy measures have been introduced to encourage cultivation of tea for eliminating foreign exchange burden and to curb smuggling by further reduction in taxes and import duties. Unfortunately all these measures always appeared ineffective due to bureaucratic apathy (laziness) and lack of will by the political leadership. To get rid of these economic disasters, there is a need to take rigorous and severe measures.

COUNTRIES EXPORTING TEA TO PAKISTAN

The world market is dominated by four leading exporters of tea, namely India, Sri Lanka, China and Kenya and by four leading importers of tea, namely, United Kingdom, United States of America, Pakistan, and Egypt. The major tea suppliers

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to Pakistan are Kenya, Sri Lanka, India, and Bangladesh. To analyze the performance of imported tea into Pakistan during 1988-99, the compiled data in terms of volume and value are documented in the following table:

3.4 SUGARCANE

“Time for a clear defined policy”

Believe it or not, sugar industry in Pakistan operates without any definite policy framework. The industry, which is the second largest after textile industry and has a direct bearing on life of millions of farm workers and rural population, is at the mercy of those who hardly understand industry mechanics. They (the decision makers) are very sensitive to any increase in sugar price but are least bothered about

spending millions of dollars on ill-timed import of sugar.

The result of lack of policy framework has been responsible for financial turmoil and economic distress for sugar industry during the past six years in succession. The millers faced problems whether there was a shortfall in sugarcane supply or surplus production of sugar. The dilemma of sugar industry is a very high component of raw material (sugarcane) cost. In addition to this, other costs, i.e. taxes, operating expenses, depreciation and financial cost do not allow any scope for economies of scale. Low level of capacity utilization (around 45%) and cost/price disequilibrium in domestic and export markets are other impediments. However, persistent increase in sugarcane support price can be termed the root cause for the current malady (problem).

INDUSTRY SCENARIO

At present the installed capacity for sugar production is estimated above 5.5 million tonnes, whereas the demand is estimated around 3 million tonnes. The large-scale capacity was added in the nineties and was the outcome of entry of politicians in sugar industry — both in Punjab and Sindh. It is feared that politicians, who enjoy power as sugarcane growers, are resisting efforts to increase sugarcane output in the country. They fear if the output is increased there would be a reduction in sugarcane price. The result is, over the last many years millers were forced to pay a much higher price for sugarcane as compared to the official support price.

A key factor, which has the potential to increase sugar production is clear cut sugar export policy, has been missing. Whenever, there was sugar production above domestic consumption, millers found it difficult to export the surplus. Export of sugar is not solely aimed at earning foreign exchange but more importantly to optimize cost through higher capacity utilization. It is worth noting that during

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1999-2000 crushing season eight mills did not operate and another three could not be commissioned. Had all of them were fully operational the level of chaos (disorder) would have been beyond any one's expectation.

Three mills owned by Sindh Sugar Corporation: Dadu, Larkana and Thatta have been non-operational for years. Also in Punjab some has not commenced operations as yet. Non-operating mills and those which could not commence sugarcane crushing are a burden on economy in general and financial sector in particular. The apathy (lack of concern) of government is unpardonable. Most of these mills are located in Sindh where the conditions are better suited for cultivation of sugarcane. Besides, yield and average recovery are higher, as compared to Punjab. Therefore, the efforts should be to make all the units functional at the earliest. Shortage of sugarcane should not be used as escape goat.

SUGAR IMPORT

Everyone agrees that sugarcane is an agricultural commodity and there are various factors, affecting output, beyond human control. Therefore, import of sugar is a makeshift arrangement to overcome a temporary short supply. However, history shows that sugar import has caused damage to industry rather than containing price of commodity in the open market. It has been mainly due to two reasons: ill-timed imports and quantity imported being much higher than desired. An ill-timed import, that too in large quantities, affects lifting of sugar from mills.

Recently the policy planners have made a totally absurd decision about import of sugar. It is estimated that over 750,000 tonnes has already landed Pakistan when the crushing was in full swing. The rationale for this was said to be, "to contain price hike." However, an industry expert has a very strange explanation for this. He said, "The aim of large scale import was not to contain sugar price in local market, the objective was to raise extra revenue — import duty on sugar — to satisfy the IMF about revenue collection target. The central bank has supported this, may be unknowingly, by buying dollars from kerb market to finance sugar import." In my opinion it’s such a novel idea to meet shortfall in revenue collection!

REASONS FOR SHORTFALL IN PRODUCTION OF SUGAR

There is an urgent need to examine the deteriorating economics of sugar industry (sugaronomics). While there is an urgent need to increase production of sugarcane, it is also evident that some of the units are not economically viable. They have been just adding losses to their balance sheet. Therefore, an option to explore is the liquidation of such units without further delay. It is suggested that financial institutions should take the hit by liquidating these units. They should write-off those amounts which are not recoverable and transfer management of

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persistently sick sugar mills to new sponsors. The purpose of such write-offs is to make debt servicing sustainable. Such decisions are difficult and need political will. Creation of CIRC has paved the way and the ultimate decision should not be delayed.

3.5 EDIBLE OIL

Major reason to import bulk of edible oil is the low production of oil seeds in Pakistan

Import of edible oil consumes a lavish proportion of our import bill of food items. Pakistan's total consumption of edible oil stands at 1.9 million tonnes out of which only 0.6 million tonnes meets from local production but huge 1.3 million tonnes are imported from different countries like Malaysia and Indonesia.

In Pakistan, cotton, rapeseed, sunflower, soybean and safflower are major oil seed crops but oil seed crop still fall into the category of minor crops due to their seasonal nature. Oil seed is not grown at large and wherever it is grown it gives low yield per acre. Oil extraction from seeds is further poorer than its yield.

REASON FOR IMPORT

Major reason to import bulk of edible oil is the low production of oil seeds in Pakistan, low yield per acre and then under utilization of present capacity of extraction of oil from seeds. The fact to be pointed out is that the production of vegetable ghee and oil have been showing a consistent declining trend due to the poor technology state, under utilization of capacity, lack of value addition, off dated tool and techniques which forced to import oil and fats from abroad.

In Pakistan we have different climatic conditions which are not as supportive for oil seeds as for other crops. So a comprehensive planning is needed to cultivate the crops at larger scale. Cost of locally produced edible oil is higher so it seems irrational to produce locally when it proves uneconomical as compared to the import.

Also the unavailability of basic infrastructure is the main detriment to harvest oil seed at large. For the local sufficiency first we need to develop basic infrastructure for the local production of oil seeds for instance in Malaysia and Indonesia thousands acres of land are under cultivation with all facilities available nearby which provides economies of scale. Scattered farming at small pieces of land does not provide economies of scale to the farmers as well as country, he added.

C HAPTER NO.4

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COMMENTS & SUGGESTIONS

Falling Exchange Rate is an implicit tariff on imports: We are living in an era of liberal trade regime. Using a floating exchange rate in a market economy, trade balance is the most important factor (besides interest rate and inflation) in determining our exchange rate. Vice versa, the floating exchange rate is also a corrective to negative trade balance. As the trade deficit rises sharply (like in our case), the rupee starts to depreciate against dollar and other currencies of our major trading partners. This automatically would make our imports more expensive (for the local population) and our exports cheaper and more attractive for our trading partners. Thus as the basic economic theory would predict, imports should fall (if they are elastic) and exports should rise (if there are no supply constraints), correcting our deteriorating trade balance. In such a scenario, the talk of using tariff measures to restrict imports is not advisable, as the depreciating currency is already taxing the imports. In case of Pakistan, rupee-dollar exchange rate has changed from Rs.61 to Rs. 72 (in August 2008), thus imposing an implicit tariff of around 20 percent on all of our imports. In such a situation, imposing tariff on even non-essentials would be of dubious use, besides creating distortions in the economy, resulting in what economists term as a ‘net welfare loss’.

To increase your exports you have to increase your imports: A mercantilist mindset of the 1960s is still strong and kicking in Pakistan when it is suggested that somehow we can strategize and boost our exports while at the same time cutting our imports through imposing tariffs. In this day and age of integrated trade and intra-industry trade, this dictum does not work. The more one aspires to boost exports, the greater is the need to allow imports freely. China is a great example. While its annual exports are around one and a quarter trillion dollars, its imports are not far behind being near to the trillion dollar mark.

Rising world food prices could become an economic bonanza for Pakistan: World food prices have risen sharply in recent months and the trend is likely to continue as more and more agricultural land is converted from the growing of food crops to crops like sugar cane and maize that can be turned into ethanol – for use as a substitute for petrol in automobiles. This change is being driven by high oil prices, which have made ethanol a cheaper substitute.

As a big producer of food crops and other farm produce, Pakistan has the potential to cash in on this rising trend in prices by formulating and implementing medium- and long-term strategies aimed at making the country a major exporter of cash crops and value-added agribusiness products. For that to happen, however, the government needs to substantially increase budgetary spending for programmes and projects in the agricultural, rural development, irrigation, horticulture, livestock, small and medium enterprises and trade promotion sectors.

China is now a big importer of farm produce, with the rising demand being fuelled partly by the growth in population and partly by rising per capita income levels and high GDP growth that has made the Chinese economy the fastest growing major economy in the world over the last twenty years.

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Fruit exports to China (not just mangoes but many other types of fruit as well, including citrus fruit) could become an important source of foreign exchange earning for Pakistan, with volumes eventually running into hundreds of millions of dollars a year.

4.1 SUGGESTIONS FOR DAIRY PRODUCTS

Dairy farming is one of the best projects if professionally done on small land holdings. The return of the land used for feeding animals is higher as compared to land used for traditional cropping.

The prices of dairy products are shooting up day by day. In such a situation, the only way to control prices is to develop the dairy industry on scientific lines, which will not only provide meat and milk in abundant quantities to the domestic consumers but extra quantities can also be exported.

In spite of having a large population of Livestock, the country is spending some $40 million annually on the import of formula milk only, which is the highest amount spent by any country in the world on this particular commodity. Currently, there are some 160 varieties of infant formula milk available in the markets. While breast milk is the best a mother can give her infant in terms of a balanced and healthy diet.

To meet the domestic demand of milk and meat, the rate of growth must be at least 5 to 7 percent per annum. Despite an increase in milk and meat production, the prices have moved upward abnormally.

4.2 SUGGESTIONS FOR WHEAT

In the current year, the government should be very careful, and closely watch the local production, and distribution, to discourage speculation, and hoarding. Moreover, an export ban, along with tight border control to thwart smuggling, would assure that high import of wheat is not required this year.

4.3 SUGGESTIONS FOR TEA

This study also recommended some important suggestions to curtail foreign exchange burden and to curb smuggling of tea. These include:

To encourage endogenous cultivation of tea to save valuable foreign exchange earnings.To facilitate local farmers for the cultivation of tea.To encourage a few national companies for setting up tea gardens in Pakistan, in areas befitting for the cultivation of tea.To avoid foreign companies (Lipton and Brooke Bond) for setting up tea gardens in the county in the overall national interest.National brands should be preferred for consumption.

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To establish dairy farms, because neglection of these farms also increased the consumption of tea.To reduce consumption through de-marketing of tea.There is need for further reduction in import duty, because, it still provides incentives for smuggling of tea into the country.

4.4 SUGGESTIONS FOR SUGAR INDUSTRY:

Taxes and levies - the government should cut down level of tax to keep sugar price at the modest level. At present the industry pays 11 different taxes — five federal and six provincial Sugar pricing - Sugar industry deserves a fair market price keeping in view its production cost plus economic return on equity. Since sugar production cost is entirely dependent — to the extent of about 85 per cent by the government policy framework — only the government should resolve the outstanding issues. The government has discontinued the practice of fixing support price of cotton, why can't the same be followed in case of sugarcane? Let the market forces determine the price of sugarcane as well as sugar. The government can still play the role of intervener by not allowing the prices move beyond a specified bandwidth.Zoning system should be introduced once again without further delay. The country needs to double sugarcane output. This increase can be achieved by improving yield and without increasing land under sugarcane cultivation. It will help all the stakeholders, i.e. growers, millers, lenders and consumers. However, the post of 'Cane Commissioner' should be filled by hiring competent people from the private sector.Last but not the least; the government must announce sugar export policy valid for three years. The industry does not need to export sugar for earning foreign exchange but to optimize cost.

4.5 SUGGESTIONS FOR EDIBLE OIL

Having agricultural base is the competitive edge to produce edible oil locally but it demands comprehensive planning and research, high yield and proper utilization of resources to be a big producer of edible oil. Positive attitude by government has raised hopes in this concern being Pakistan a big producer of edible oil but all the steps should be focused for the development and enhancement of the infrastructure for oil seed crops and its extraction.

Modernizing the process of extraction of oil from seeds can increase the production of edible oil. Furthermore area under cultivation for oil seeds should also be expanded with high yield per acre which will increase the local production of vegetable oil. Increased production of edible oil can help in curtailing the import bill and create export opportunities if linked with the establishment of basic infrastructure and sound policies.

CONCLUSION

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The need of the hour, therefore, is to make all possible efforts to achieve food autarky. By doing so, we would be able not only to bring down our food import bill but, also, to boost our foreign exchange earnings from the exports of agricultural products.

The Government has already taken some steps and is understood to be considering a number of other measures to cut down the import bill, such as bringing down the soaring trade deficit and improving the country’s foreign exchange earnings.

According to recent reports, appearing in the national Press, the is reportedly considering import of bulldozers from friendly countries, in order to be able to bring more agricultural land under cultivation, in a bid to boost agricultural production and earn additional foreign exchange from the export of agricultural surplus.

It is high time for this country to start a determined effort to put the economy on the path of export-led growth. There is no justification for us to spend our limited foreign exchange on the import of food when we can save billions of dollars by boosting our agriculture sector. If the private sector feels shy to invest in these industries, let the public sector come forward and do the needful.

REFERENCES

Magazine ‘Industry & Economy’, high imports of edible oil http://www.jang.com.pk/thenews/investors/aug2003/right.htm www.pakissan.com http://www.fao.org/es/ess/top/prices_en.htm http://www.icumsa45.com/trading-manual-for-intermediaries/ www.parc.com

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http://www.parc.com/

http://www.icumsa45.com/trading-manual-for-intermediaries/

http://www.fao.org/es/ess/top/prices_en.htm

http://www.pakissan.com/

http://www.jang.com.pk/thenews/investors/aug2003/right.htm


Magazine ‘Industry & Economy’, Pakistan’s tea import performance

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Date post:	18-Nov-2014
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Impact of Imported Food Items on Trade Balance of Pakistan

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