Revamping of food subsidy plan proposed

Source: http://dawn.com/2008/04/01/ebr1.htm

KARACHI, March 31: The State Bank of Pakistan has proposed revamping of subsidised food programme for low-income groups, suggesting involvement of private sector to make it more effective.

In the second quarterly report, the SBP said due to persistent high food inflation, the contribution of food group in overall inflation increased from 55.4pc in Feb 2007 to 59.9pc in Feb 2008.

“The high food inflation implies that it is hurting low-income groups disproportionately,” said the SBP report.

Although the government is providing essential food items at subsidised rates through utility stores, a large segment of deserving population cannot avail this subsidy due to limited outreach of utility stores.

The SBP said since food prices are likely to remain high in the medium-to-long-term, the targeted food subsidy programme for low-income groups needs to be revamped to make it more effective.

“Private sector’s involvement is also necessary as it will be difficult for utility stores to cater to all needy people,” said the SBP report.

The CPI food inflation started to strengthen since September 2007 and recorded 16.0 per cent in February 2008 after reaching a local peak of 18.2 per cent during January 2008, the highest level seen since April 1995.

This persistence in CPI food inflation reflects the dynamics of international markets as well as factors specific to domestic economy, said the report.

In the domestic markets, the prices of have seen an uptrend throughout FY08.

The rise in domestic wheat prices is mainly attributed to speculative hoarding done on the insufficient stocks position of the government.

The low level of stocks impaired government’s ability to intervene in the market to stabilise the prices.

Moreover, since replenishment of government stocks needed import at substantially higher international prices, hoarders took advantage of the situation. As a result of supply shortages, domestic prices rose to record highs.

“It is also important to note that continued export of wheat flour to Afghanistan and illegal cross-border movement of wheat further aggravated the supply shortages,” said the SBP.

The report said there was an urgent need to increase the productivity of key food staples to ensure smooth domestic supply. It can be achieved through appropriate incentives to farming community, increased use of fertiliser and certified seeds, as well as research and development to develop new high yield varieties.

It said a below-target FY08 rice harvest in Pakistan, coupled with strong demand for Pakistani rice in the international market, has resulted in persistent pressure on domestic rice prices.

Similarly, high international prices of edible oil have led to an increase in domestic vegetable ghee and oil prices as its production is based on imports from the international market.

Prices of wheat, edible oil and rice are following the trend of international prices, domestic milk prices are showing a secular uptrend despite a recent downtrend in international prices.

The contribution of individual food items in the overall CPI inflation has been significant as four out of top five items contributing to overall inflation during February 2008 were from the food group.