Story Publication logo January 11, 2010

Sweet Agony


Media file: south asia economics of security.jpg

"The Economics of Security" explores the threat of extremist violence in South Asia, especially...

Media file: atal sugar.jpg

Even with near-daily terrorist attacks claiming 2,000 civilian lives last year and the frontier war against radicals taking an additional 1,000, most Pakistanis are not focused on the jihadis. Rather, the underlying cause of their upheaval "is a crisis of governance," says former commerce minister Zubair Khan.

And that crisis traces to economic mismanagement. Signs are everywhere, from daily power outages to commodity shortages that put staples, including the sugar that Pakistanis heap into their tea, out of reach. Look for the sweetener in a local bazaar and you'll find there's none on the shelves; ask for it at the counter and you'll hear there's a black market supply available--at more than a full day's wage. The elected government headed by President Asif Zardari and Prime Minister Yousuf Raza Gilani gets blamed. "Their party slogan is 'Food, clothing and shelter.' They should be ashamed," laments Mansoor Hassan, a driver in Islamabad.

The sugar crisis has its roots in the fragmentation of Pakistan's sugar sector. Growers, millers, wholesale distributors and retailers each have their own regulatory overlords offering protectionist perks and their own cartels to defend such gains. Though this structure goes back to the 1950s, recent policy decisions and the worldwide spike in prices of commodities like sugar have aggravated its effects.

This year Pakistan faces a shortfall of 1.4 million tonnes, and, along with the government, millers are prime targets of public outrage. Indeed, many leading political families are mill owners. (Focusing the ire gets tricky: One such clan includes Nawiz Sharif, a vocal foe of the ruling party.)

Taking the flak on behalf of the millers is Iskander Khan, who runs a $10 million sugar business--including Pakistan's oldest and largest mills--and chairs the Pakistan Sugar Mills Association.

Alarmed by the public anger, Khan has virtually gone into hiding. Though his firm, the Premier Group, owns a large glass building in Islamabad's Kings Arcade shopping plaza, the company name is nowhere on the door. A visitor enters through the unmarked back gate, identifies the plainclothes security guard smoking in the corner and asks to be taken upstairs via a private elevator.

Media vans stake territory outside the headquarters, and frustrated consumers stop Khan in the streets. "Too many people recognize me. I've got to get a haircut," he jokes, combing back his distinctive shoulder-length coif. "I don't need this," the 53-year-old Khan complains. "I'm a businessman, not a politician."

In Pakistan that's a not an easy distinction to make. Economic problems provide rallying cries for opponents like Sharif and radical insurgents eager to bring down the government, while a weak and dysfunctional state contributes to economic distress. In the case of sugar, whose consumption in Pakistan is approaching developed-country levels (see table), the danger is acute: In 1969 a sugar shortage helped bring down the rule of military dictator Ayub Khan.

Leaders have drawn a historical lesson to bend over backward to keep prices down to appease public opinion, though this invites shortages that soon rebound on the state. With centers of power as diffuse as the sugar industry itself, contradictory directives are colliding with one another, exacerbating the crisis.

The threat is not lost on Iskander Khan. Nearly 18 months ago, as farmers switched crops from sugar to wheat to capitalize on new subsidies, he urged the government to import a buffer stock of raw sugar, which he and other millers could refine. But regulators at three ministries that share oversight for the sugar sector feuded over whether it was cheaper to import raw or refined sugar. By the time imports reached Pakistan in early 2009, a public panic had set in.

"The moment you give a perception of shortage, hoarding takes place. Where we did not have an actual shortage, we created one," regrets Petroleum Minister Naveed Qamar, who was then minister of finance. "Then it took on a life of its own."

Wholesalers hoarded their stocks, prices doubled to over 100 rupees a kilo (about $2) and retail consumption fell 20%. By March millers were faced with a paradox: declining sales and rising prices. Khan tried to sell his stocks to the federal government to bypass the wholesalers and break the price hike, but he says officials refused, insisting that Khan--who does not own retail franchises--could sell to consumers directly. "They kept shouting, 'sugar barons' and 'retail price,' but retail has got nothing to do with us. They were attributing the retail price to the millers."

The confusion Khan cites has impaired policymaking throughout the crisis, which is set to continue through this year. The State Bank and the Ministry of Agriculture took measures to raise the mandatory support price for farmers, trying to increase next year's cane yield. At the same time, provincial governments intervened to fix the wholesale price at which millers sell. The nation's courts, acting on their own, ordered seizure of wholesale stocks and fixed a third price, for retail sugar, at 40 rupees per kilo, which was half the price in neighboring Afghanistan. Fumes Minister Qamar, "That [fixed] price means nothing, because once you bring out the sugar, if there is huge arbitrage between our price and the prices in our neighboring countries, sugar that comes out at our price is easily smuggled out." Indeed, Khan and the Sugar Mills Association estimate that 3 million tonnes of sugar, or 75% of Pakistan's annual need, left the country this way.

Moreover, to simply break even while buying sugar cane at the government price of 100 rupees per 40 kilograms, mills say they'd have to sell refined sugar at 48 rupees per kilo; now they are mandated to sell at 40 rupees. Millers cannot meet both requirements at once.

Some mills, including one of Iskander Khan's, have closed, reducing the output of Pakistan's sugar sector to half its capacity. Others, encouraged by the Sugar Mills Association, are reviving zoning systems from the 1970s, agreeing not to compete for cane. With only one mill buying from each region, millers say farmers may be persuaded to sell below the state-fixed price. Now the Competition Commissioner is investigating the Association for cartelization. Many growers, meanwhile, say the behavior from mills only encourages them to shift even more land away from sugar to other crops.

Both business and government officials disdain the activism of the courts. The fledgling democracy in Pakistan is the product of a popular resistance to Pervez Musharraf's dictatorship that had, as its centerpiece, support for the restoration of judges--including Chief Justice Iftikhar Chaudhary, sacked by Musharraf in 2007 and returned to office in 2009. Because they rode his movement into office, elected leaders feel beholden to the chief justice; and he owes his power to the public, rather than to the elected parliament. Chaudhary's office won't comment.

Reeling him in will require a surge in trust between branches of government and between the public and the state. Though Minister of Industries Manzoor Wattoo has promised to lift price caps for the next fiscal year, he finds it's hard to sell voters on the efficacy of a free market when "some elements [of the opposition] are trying to create misunderstanding." Moreover, Wattoo's new rules won't have an effect until late this year, and the government, beset by terrorism and political unrest, can ill afford to wait.

Iskander Khan feels the pressure more than most. Premier's mills are situated in the valley around war-torn Peshawar, though so far they have been spared. Why? Khan smiles. "It's Pakistan. Everyone needs sugar."







Support our work

Your support ensures great journalism and education on underreported and systemic global issues