Pakistan’s sugar industry faces challenges with surplus and export limitations
Pakistan’s sugar industry, the second-largest agro-based industry after textiles, is navigating a complex web of regulatory and economic challenges.
Contributing significantly to the national economy, the industry accounts for 3.7% of value addition in agriculture and 0.8% of GDP.
It provides employment to millions and generates direct and indirect business activity worth Rs. 800 to 1000 billion.
However, despite its critical role, the sector faces stringent regulations that hinder its growth and sustainability.
Outdated sugar laws hinder market operations
The sugar industry in Pakistan operates under archaic laws designed for an era when the government ensured sugarcane supply to mills and bought all produced sugar for ration depots. These laws are now outdated in the context of a free market economy.
The Competition Commission of Pakistan recommended deregulating the sugar sector to allow market forces to dictate prices. However, the industry remains tightly regulated, with the government fixing minimum purchase prices for sugarcane and ex-mill prices for sugar, among other controls.
This regulatory environment creates a significant mismatch between procurement costs and cash flows.
Financial constraints and high mark-up rates strain the industry
The sugar industry’s financial operations are particularly challenging due to the short procurement period for sugarcane, which lasts only 3-4 months, while sales and revenue are spread throughout the year.
This results in a severe cash flow mismatch, as 80% of production costs are concentrated in this short period. Consequently, sugar mills rely heavily on working capital loans from banks at high mark-up rates of 25% or more, using pledged sugar stocks as collateral.
The sales proceeds are then used to pay growers, government dues, taxes, banks, and other operational costs.
Policy flaws and delayed export decisions exacerbate the crisis
The sugar industry has been in crisis for years, partly due to flawed policies at both the federal and provincial levels.
The minimum fixed price for sugarcane, determined by provincial governments, often does not align with the market forces that dictate the maximum purchase price.
Moreover, the federal government caps the ex-mill price of sugar, often below production costs, without setting a minimum price. This dual pricing mechanism forces sugar mills to sell at a loss, further straining their finances.
The government’s regulation of sugar exports further complicates matters. Export decisions are often delayed, resulting in missed opportunities for foreign exchange earnings.
The recent delay in approving the exportable surplus from the 2021-22 and 2023-24 crushing seasons led to significant losses in foreign exchange, estimated at millions of dollars.
The discrepancy between local and international sugar prices creates a lucrative opportunity for smugglers, further destabilizing the market.
High taxes and coercive measures deter investment
The sugar industry is subjected to an 18% sales tax, one of the highest in the world, adding to its financial burdens.
Moreover, government authorities often take coercive measures without thoroughly investigating issues or verifying the malice of sugar mills.
Such actions discourage future investments in the sector. Despite assurances from the government about deregulating the sugar sector, a viable mechanism is yet to be implemented.
Comparison with deregulated sectors highlights potential benefits
The challenges faced by the sugar industry contrast sharply with the success of deregulated agro-based sectors like rice and cotton. These sectors operate on free market principles, with no restrictions on import and export.
Rice and cotton growers receive international prices, encouraging investments in research and development, leading to better yields. In comparison, Pakistan’s sugarcane research institutions are under-equipped, lagging behind global advancements in crop yield and sucrose recovery.
Potential for exports and economic contribution
Despite the challenges, the sugar industry has significant export potential. Pakistan can achieve annual sugar production of 12 million metric tons (MMT) without additional investments, creating an exportable surplus of 6 MMT annually.
Consistent sugar exports could generate USD 4.5 billion in foreign exchange, with an additional USD 1 billion from ethanol exports. The industry also contributes to energy production using bagasse, a byproduct of sugarcane, supporting allied industries like steel.
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