Spearhead Analysis – 14.11.2017
By Anam Saeed
Research Analyst, Spearhead Research
Pakistan is an agrarian economy employing around 42.3% of the labor force directly or indirectly. The country’s abundant natural resources and fertile soil support the agricultural sector, which started receiving renewed attention after a negative growth of 0.19% in FY2015-16. During this period, production of crops declined by 6.25%, while the other sub components of agriculture sector like livestock, forestry and fisheries posted positive growth of 3.63%, 8.84% and 3.25%, respectively. The decline in crop production was attributed to the performance of the country’s three main sub sectors: important crops, other crops, and cotton ginning with declines of 7.18%, 0.31% and 21.26%, respectively.
Realizing the seriousness of the situation, the government came up with a support program: Farmers Support Package, with an allocation of Rs. 341 billion, similar to the programs and policies announced in the past. Given below is a snapshot of the support package announced by the Finance Minister as a part of the budget FY2016-17 (Figure 1).
Figure 1: Farmers Support Package
Source: Budget FY 2016-17 Farmers Support Package
On the books and in parliamentary debates, the policy of providing concessions and cost reductions through subsidized fertilizers, reduced electricity costs and low cost credit seem encouraging. The questions are: Has it helped in genuinely improving the agricultural sector? What is it that differentiates Pakistan from India when it comes to agricultural growth? Where can Pakistan improve and capitalize on its existing potential?
Pakistan has a vast natural resource base, which includes 22.04 million hectares of land under cultivation. Agriculture accounts for around 19.6% of the Gross Domestic Product (GDP) and employs 42.3% of the population. Pakistan ranks ahead of regional competitors like India, Bangladesh and others in terms of resource base and production of various crops. In global rankings, Pakistan is the 4th largest producer of Rice; 5th largest producer in Dairy; and 7th largest producer of Wheat. Over the years, dairy has emerged as one of the most promising sub-sectors in Pakistan alongside crops like wheat, rice, maize, and cotton.
The average annual growth rates in the Agricultural sector during the 1960s, 1970s and 1980s were recorded at 5.07%, 2.37% and 5.4%, respectively. The growth rate peaked at around 6% during 1997-98, but since the beginning of the 21st century, it has not been more than 4%. Growth rate fell to around 0.2% in FY2009-10 and entered negative territory in FY2015-16 at -0.19%. With renewed emphasis on agriculture in FY2016-17 the sector has shown positive results and met the targeted growth of 3.5%. On average, during the last decade Pakistan’s agricultural growth rate has been around 3.3% annually.
Performance of Pakistan vs. Regional Counterparts:
In FY2016-17 the three crop categories of major crops, other crops and cotton ginning experienced positive growth of 4.12%, 0.21% and 5.59%, respectively. However, in terms of exports, the sector declined by 7% versus last fiscal year. Comparing performance of the first half of 2016 to first half of 2017, the steepest decline was around 17.82% in meat, with a 13.6% and 12% dip in rice and vegetables, respectively. The agro-based export sector did have some positives as it witnessed an increase in export earnings of 21% in fish and seafood, 35% in tobacco, 100% in wheat and 21% in sugar.
In contrast, Pakistan’s regional counterparts are growing at much higher rates. In 2017 India’s Agriculture sector grew by 4.1% as India has emerged as the 7th largest exporter of agricultural products. Similarly, according to the Asian Development Bank, Bangladesh’s agri-sector experienced growth of 10% during FY2016-17.
According to the Global Food Security Index India has higher nutritional standards and urban absorption capacity than Pakistan, and has provided concessions to its agricultural sector, while the motivation for ensuring food security ranks Indian progress far ahead of Pakistan’s.
Pakistan does not have a formal ‘Agriculture Policy’ at the Federal level. Over the years, the Federal and Provincial governments have formulated and agreed upon goals, to try and improve the sector and raise the standard of living. Broadly these goals include:
- Steady and long-term growth in production,
- Reduction of income disparity by increasing yield per acre,
- Ensuring food security for the country,
- Maximization and conservation of natural agricultural resources.
To achieve these goals, policies and initiatives have been introduced on an ad-hoc basis. These policies include different initiatives and revolve around agriculture inputs like fertilizers, seeds, pesticides, agricultural credit and support pricing.
In 2017, the first National Food Security Policy was introduced, and the key goals and objectives of this policy include:
- Achieve agriculture growth at the rate of 4% per annum to improve food security and economic development
- Bridge the yields gaps and ensure farm profitability for sustainability of agriculture sector
- Legislate agricultural and food safety regulatory laws, and establish credible regulatory trade regime for food products
- Augment the existing water resource base by promoting efficient use through applying alternate sources of energy. Figure 2: Food Security Policy
Source: Food Security Policy: Ministry of National Food Security and Research
When it comes to trade protection, price controls and subsidization of the agricultural sector, Pakistan has gradually moved towards automatic correction of prices by market forces. Pakistan at the federal level provided electricity subsidy for tube wells throughout the 90’s and early 2000’s. However, since 2010 the subsidy has been removed and now farmers are charged higher prices for peak hour usage. The Government of Pakistan established an Agricultural Prices Commission in 1981, which recommended a price point control system to avoid losses for the farmers. The government introduced Minimum Price Support (MPS) under the same commission and price points were set for major crops including wheat, rice and maize. However, these price points were not successful in undermining the exploitation of small farmers by the middlemen. Currently, only wheat is given protection under MPS and other crops’ prices are determined by the market forces.
To resolve irrigation and drainage problems, Government introduced a recurring series of SCARPs (Salinity Control & Reclamation Projects). These initiatives did not receive good feedback and some were stopped midway due to the lack of cooperation by local small farm holders. Government also took the initiative to provide loans to small farm holders in the recent budget. According to the State Bank of Pakistan, local banks responsible for agricultural and farm-based loans ended up disbursing around Rs.704.5 billion in FY2016-17, which was 17.4% higher than the loans disbursed during FY2015-16.
In terms of policy, Pakistan’s biggest agricultural and regional competitor, India, has maintained a highly controlled regime for its core crops, controlling prices of more than 24 crops and imposed high tariff rates to support the farming sector. In the Overall Trade Restrictiveness Index (OTRI), India stands at 69.5% as compared to Pakistan at 5.8%. Indian policy since the beginning has been focused towards food security for its citizens. The Indian subsidies, diversification and price support have led to price corrections and most of these crops are now competing for export demand against Pakistan.
Pakistan is rated amongst the top ten countries vulnerable to climate change. A recent study by PIDE (Punjab Institute of Development Economics) showed that climate change can hamper long-term growth of sugarcane, rice and wheat. The extent of this negative impact can range anywhere from 1% to 9% yield declines. The rising temperature is causing the glaciers to melt, resulting in incremental floods and loss of agricultural produce every year.
According to a recent report published by the World Bank, “The State of Economy: Agriculture and Water”, by Shahid Burki, Pakistan is facing severe water shortage issues. On the supply side the issues include: “greater scarcity resulting from higher demand and the diminishing capacity of reservoirs, excessive (nearly 60%) conveyance losses, deteriorating infrastructure, high operation costs and an excessive ground water use.” The study reveals that that as a result of a declining water table and salt concentration, net benefits fall by Rs.50 billion. This shows the high cost of institutional failure in regulating groundwater use.
The country needs to consider critical issues like water shortage and address these through management and infrastructure building. Pakistan’s intricate irrigation system basically involves: “three reservoirs, 80 small dams, 19 barrages, 12 inter river link canals, 45 canal systems and more than 107,000 water-courses manage.” Changing the water system may require more than $60 billion worth of investment. The need of the hour, as outlined by Mr. Burki, is to change the water pricing system, introduce new management measures and further create awareness about water irrigation system used by the farmers. According to the study farmers in Pakistan rank 24% lower in water efficiency in case of wheat and 55% lower in case of rice fields.
Future Outlook & Recommendations
Capitalize on Regions & Crops of Revealed Comparative Advantage:
Pakistan is continuously undertaking a variety of measures and initiatives to boost its agro-based exports. The critics and market analysts compare Pakistan’s potential with India and Bangladesh based on the similarities in agricultural conditions between the regional countries. This comparison shows that Pakistan is not performing as well as its regional counterparts.
Regional Revealed Comparative Advantage:
The figures below show the regions where Pakistan possesses a higher level of comparative advantage. In case of dairy, Pakistan being the 5th largest dairy producer in the world can benefit the most from SAARC. ASEAN, SAARC and Gulf countries also provide a strong market and trading opportunities for rice, wheat, vegetables, and fruits.
It is crucial for Pakistan to establish stronger trading relationships with SAARC countries, Gulf countries and the counterparts in ASEAN. However, if one looks at the total cumulative exports region-wise during the past 3 years (Table-1), i.e., from 2014 till 2017, Pakistan’s exports have been steadily declining to countries including India, UAE, Saudi Arabia, Sri Lanka and other Southeast Asian countries.
Source: Pakistan Bureau of Statistics
China Pakistan Cross Country Trade:
Lastly and most importantly, agricultural and food trade with China is potentially the biggest opportunity. China is the world’s number one importer of vegetables and is eyed as a potential trade partner of food by the US, Brazil, India and several other nations. A variety of initiatives to develop the Pakistani agricultural sector are planned under the Chinese Pakistan Economic Corridor (CPEC).
Agricultural development is one of the core objectives of CPEC and involves development of irrigation systems, infrastructural development and crops productivity and mechanization programs. All farms and crops along the CPEC route will be subjected to infrastructural development. CPEC also promises to include crop improvement through awareness and mechanization of farms with better farming practices. Experts have pointed out that it is an opportunity for Pakistan to consider renegotiating “Free Trade Agreement” (FTA) with China. China is the world’s largest importer of agricultural products and Pakistan has to grab its due share through revisiting the FTA between the two countries.
China can be a potential source of cash inflows and Pakistan can negotiate better terms of trade and tariffs. The private sector also needs to act as a catalyst and explore further trading opportunities of agri-based products in the huge Chinese market. In fact, private and the public sector can co-invest to explore more lucrative exporting and trading opportunities with China. Through this relationship and CPEC Pakistan can reap benefits while improving food security. The country needs to capitalize on its regional relationships, and improve productivity to steadily build a nation secure in terms of food supply.