Food crisis in Pakistan
The inflation turned out to be 23.34 per cent during the month of December 2008 whereas it was 8.79 per cent in the month of December 2007 last year. The main contributor to this inflation has been the food inflation which stood at 27.92 per cent. Besides, the 32 per cent depreciation of the Pak rupee during July-December 2008 also helped in this exorbitant price inflation.
The increase in food and fuel prices has been an international phenomenon for last few years. As apparent from the table, the food inflation rate has remained higher than overall inflation rate in the country during January 2007 to December 2008. Usually, the poor spend about half of their income on food. As such, the consistent and rapid increase in prices of food items has been directly hurting the poor in developing countries including Pakistan. The sudden rise in food prices can be attributed to various factors but primarily due to increase in production of bio-fuels from food grains and oil seeds by USA and EU. Rising oil prices forced many countries to work for bio-fuels to ensure energy security for their countries. The increase in food prices started in January, 2002 but steep rise took place during January, 2007 to June, 2008. In many countries including Pakistan, food inflation has been higher than overall inflation. Similarly, in EU, the overall inflation was 6 per cent and food inflation was 6.4 per cent in 2006 but in 2007, overall inflation increased to 10 per cent and food inflation to 15 per cent. This price hike led to food riots in some countries while some took stringent measures like banning exports of wheat, rice, etc. and adjusting import tariffs.
The prices of both food grains (wheat, rice, maize, soybeans) and oil seeds (soy beans, rapeseed, sunflower, and cotton seed) started increasing in 2002. Prior to that year, food prices have largely been stable. Global grains production saw an increase of 10.2 per cent and 8.9 per cent during 2004 and 2005 respectively. Despite substantial increase, the demand for food grains continued to increase and so the prices. During January, 2005 to June, 2008, maize prices increased by 300 per cent, wheat prices by 127 per cent and rice prices by 170 per cent.
On the other hand, the production of global oilseed crops increased during 2004-2006. But its prices also increased during January, 2005 to June, 2008. During this period, palm oil prices augmented by 200 per cent and soybeans prices by 192 per cent. The increase in prices of grains and oils were accompanied by a boost in the prices of meat, sugar, citrus, etc.
Many factors like declining dollar, rising energy prices, increased in the cost of production, foreign exchange holding by major food importing countries, ban on exports of certain items by some countries etc. contributed to this exorbitant rise in the prices of grains and oils but many studies recognise bio-fuel production as a major driver of food prices. It is to be noted that bio-fuels comprises ethanol and bio-diesel. Ethanol is produced from sugar crops like sugar-cane or beets and starchy crops such as maize. On the other hand, bio-diesel is produced from vegetable oils (like rapeseed, soy beans oil, sunflower oil) or animal fats. The increased demand for bio-fuels led to increase in demand for maize and soybeans and reduced their supply for food use. The increase in prices of these products forced the people to substitute them with other food items like wheat and rice. This rise in demand for wheat and rice pulled their prices upward around the world. Even in USA, inflation increased by 20 per cent during 2000-2007 which was basically due to increase in prices of maize, wheat and rice by 47 per cent, 26 per cent and 25 per cent respectively.
Increase demand for vegetable oils for bio-diesel led to increase in their imports by major producer of bio-diesel. For example, EU increased the import of vegetable oils from 4.4 to 6.9 million tons during 2000-2007 and also increased the production of bio-diesel from 0.45 to 1.9 billion gallons during 2004-2007. Similarly, imports of vegetable oils in USA increased from 1.7 to 2.9 million tons during 2000-2007 whereas production of bio-diesel increased from 0.03 to 0.44 billion gallons during 2004-2007 in USA.
The increased demand for bio-fuels was driven not only due to its being cheap energy but also due to incentives offered by EU and USA. USA offered a tax credit for blending ethanol of $0.51 per gallon and an import tariff of $0.54 per gallon. Similarly, EU offered $1.0 per gallon tax credit for blenders of bio-diesel. These incentives made it possible for USA to increase bio-diesel production from 0.03 billion gallons in 2005 to 0.44 billion gallons in 2007 by using basically 3.0 million tons of soybeans oils. On the other hand, several EU members have introduced legislation for mandatory blending of bio-fuels and allowed exemption or reduced excise taxes on bio-fuels (EU has a specific tariff of Euro 0.192 per litre of ethanol and an ad-valorem duty of 6.5 per cent on bio-diesel. These measures led to an increase in bio-diesel production from 0.28 billion gallons in 2001 to 1.78 billion gallons in 2007. This was made possible by raising use of vegetable oils for producing bio-diesel from 1.0 million tons in 2001 to 6.1 million tons in 2007. These incentives promoted the use of oil seeds for producing bio-diesel and contributed substantially in raising their prices. The price of soybeans oil jumped from $354 per ton in 2001 to $1522 per ton in June, 2008.
As evident from the above, although many factors contributed in the unprecedented rise in food prices, but the main contributor has been the increasing use of grains and oils seeds for production of bio-fuels in some countries particularly USA and EU. Increased prices of food items led to reduction in purchasing power increase in poverty and slowing down of economic activities. In this regards, following points needs to be given due considerations:
The prices of petrol, wheat, rice, edible oil and fertiliser have come down substantially. For example, petrol prices have been reduced from $147 per barrel to around $40 per barrel, wheat prices from $440 per ton to about $200 per ton, edible oil from $1522 per ton to $585 per ton, fertilisers from $3125 per ton to $1300 per ton by November-December, 2008. The domestic prices of these products in Pakistan need to be adjusted downward in accordance with reduction in international prices. This will substantially reduce the inflation in Pakistan; increase the purchasing power, allows the State Bank to cut down discount rate which would stimulate the economic activities in the countries. Pakistan has recently entered into an agreement with IMF wherein she has committed to bring down inflation to 20 per cent by 30th June, 2009 and to 6 per cent by 30th June, 2010. Unless the reduction in the international prices and so the import prices of petroleum products, wheat, edible oil, fertiliser are accordingly passed on to people, the commitment made to IMF will not honoured. In order to bring down the prices of food items to provide relief to common man, the government has to take some specific steps like banning exports of all food items including vegetables, pulses, fruits as well as eliminating all taxes particularly the import duty and sales tax on food items (as has been done by Turkey, China, Argentina, Sri Lanka, Morocco, etc). Reduction in the petroleum prices will lead to reduction in transportation cost and so the inflation. Allowing import of food items from neighbouring countries will reduce the transportation cost and so the prices. The buffer stock and storage of all food grains and edible oils needed to be enhanced substantially to meet any price fluctuation by increasing supply at the time of price rise as has been done by India. The balance of payment affect of large and expensive food import has been very negative for Pakistan and was one of main factors for $20 billion trade deficit during 2007-2008. Stabilising the Pak rupee exchange rate vis-à-vis US Dollar which will help in controlling the prices of imported goods. The government needs to stop borrowing from State Bank which is highly inflationary. As the rising food prices mostly affects the urban middle and working class and can lead to socio-political unrest, hence their stability need to be ensured. It is presumed that all those who were previously on the poverty line (one dollar per day per head) would have been pushed below the poverty line due to rise in food prices. Therefore, the schemes of direct cash payments to targeted people need to be expanded as has been done in Sri Lanka, Bangladesh, Egypt, Jordon, Syria, etc. The government may also consider „food for work“ scheme by initiating a public rate to stimulate the economic activities.
It appears that the era of cheap food has over. As such, the governments in developing countries have to take long term measures to attain the self-sufficiency in the production of food grains and edible oils domestically on sustainable basis so that food security for their countries can be ensured.