Food inflation and disparity in prices

ByIzzat Hayat

works in the private sector


January 14, 2023

Food inflation and disparity in prices

Izzat Hayat casts a glance at an unnerving situation

The incessant Food inflation and disparity in prices hike has made lives miserable in Pakistan with inflation hovering at double-digits and its chances of coming down assessed as nil. The high inflation level has most glaring affect on prices of food items particularly fresh fruit, milk and chicken are having a major impact on the livelihoods and nutrition levels of all families. The most worrying aspect of this situation is that much of its burden falls on the poor as higher prices put protein and vitamin-rich foods out of their reach. Analysts are of the view that primary causes of price increases are stagnant and fluctuating agriculture productivity, inefficient use of key natural resources particularly water and limited innovation as well as weather-related shocks.

It must be taken into consideration that food inflation in Pakistan has been on the rise as elsewhere in the world. A surge in the cost of most food commodities last year, as the disruption caused by Russia’s invasion of Ukraine raised concerns of shortages, sent the United Nations food agency’s average price index to the highest level on record. The Food and Agriculture Organisation’s (FAO) food price index, which tracks international prices of the most globally traded food commodities, averaged 143.7 points in 2022, up 14.3 per cent from 2021 and the highest since records started in 1990. The index had already gone up by 28 per cent in 2021 from the previous year as the world economy recovered from the impact of the pandemic.

The problem became a global one when food prices surged after Russia’s invasion of Ukraine in February last year on fears of disruptions to Black Sea trade. They have pared some of their gains since, in part because of UN-backed grain export channel from Ukraine and the prospect of improved supplies in producing countries. In December the benchmark index fell for the ninth consecutive month to 132.4 points, compared with a revised 135.00 points for November. The decline in the index in December was driven by a drop in the international price of vegetable oils, together with some declines in cereal and meat prices, but mitigated by slight increases in those of sugar and dairy. It was noted that over the whole of 2022, four of the FAO’s five food sub-indexes — cereals, meat, dairy and vegetable oils — had reached record highs, while the fifth one, sugar, was at a 10-year high.

In the context of Pakistan food inflation that was already high before the 2022 monsoon floods in Pakistan further accelerated after the floods, particularly in rural areas. In rural areas food inflation rate crossed 30 per cent in August amidst super floods and remained above that level for the next four months, peaking at 37.9 per cent in December 2022. In urban areas, people witnessed food inflation rising and persistently high rates were primarily the outcome of domestic food shortage that aggravated after the floods, higher food prices in the international market in most of 2022, rupee depreciation, disruptions in domestic supplies and delays in imports due to import restrictions, and the failure of authorities in enforcing administered prices.

The economic slowdown that crept in the second half of 2022 and is expected to last until the first half of 2023 is making it harder for the government to provide subsidies to the food sector to mitigate the effects of rising food inflation. And people with lost jobs and fast declining real incomes find it too difficult to brave it anymore. But the bad news is that there is little scope for a substantial relief in food prices even in 2023, not at least during the year’s first half. The reason is that the impact of global prices of agricultural inputs in our domestic economy takes at least six months to materialise and new drivers of overall inflationary pressures often make the impact impossible. Subsidising domestic output of fertiliser or other agricultural inputs is not an option right now as Pakistan is desperately looking towards the IMF for the release of funds and the IMF conditions are such that they leave little or no room for subsidies.
It is also noted that higher import and transportation costs, crop availability, demand and supply gap, hoarding and exchange rate issues have also led to massive price disparities in prices of essential food items in various cities of the country. Such disparity points out to the utter lack of coordination and control in the provision and distribution networks. The government agencies mandated to keep a check on commodity prices have simply failed to properly do their job. The uneven distribution is also responsible for this phenomenon but the controlling mechanism in this respect appears to have completely broken down.

Currently the biggest crisis is taking place in respect of wheat flour as both its price and availability have become problematic. The prices of flour have not shot up but has also caused wide disparity in them that could be gauged from the fact that the rate of 20kg flour bag in Karachi has reached a record Rs.2,800-3,000 as compared to Rs.1,295 in Islamabad, Lahore and Gujranwala, while the same bag is being sold for Rs.1,300-2,880 in Larkana, Sukkur and Hyderabad. In Quetta and Peshawar, these flour bags sell for Rs.1,295-2,700. One reason of the extremely high level of price disparity witnessed in Karachi in the price of flour bag is that wheat supply and availability depends upon arrival of grains from the interior of the province.

In this context, the government had set the objective of stabilising the wheat market principally through its wheat procurement programme on which it has spent, and continues to spend, billions of rupees but consumers, particularly belonging to the poor segments of the population have not benefited from it. What has emerged in this matter is that the main beneficiaries of the system are large farmers who have a saleable surplus along with the middlemen who buy from small farmers and sell to the government. It is also mentioned that the flour mills that have access to subsidies obtain them for their benefit and do not let it pass on to consumers. It is emphasised again and again that the only way out of this problem are reforms in the wheat procurement system aimed at reducing the government and giving it at the disposal of the private sector.

Most analysts mentioned that the government should stop doling out billions of rupee subsidies on edible items as the majority of the population has failed to get the advantage of such huge expenditure. They pointed out that vegetable rates usually fluctuate daily on demand and supply, transportation charges and arrival/suspension from the producing areas. Due to the season-wise cycle of crops in Pakistan, provinces meet each others’ requirements and on many occasions, one province feeds the entire country resulting in putting extra pressure on prices. The current crisis has been exacerbated because floods have destroyed crops in the country. Moreover, livestock has also suffered greatly due to widespread destruction caused by flooding. The floods have also caused havoc to the poultry as the stagnant waters have resulted in spreading widespread disease that made a large number of birds to die. TW


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