February 15, 2024 (MLN): Food inflation and volatility in Pakistan have been high and exceed those in other neighboring countries, highlighting the need to strengthen its food system, the World Bank highlighted in a policy note published on Tuesday.

According to a recent FAO report on food security, 68% of Pakistan’s population cannot afford a healthy diet.

On average, a Pakistani household spends 36% of consumption expenditure on food (1st quintile – 47%; 5th quintile – 28%).

The global lender stressed that food price inflation is a crucial agenda for the government to protect the poor from price shocks and to tackle undernutrition due to unaffordable nutritious food.

Pakistan's Food Inflation

However, the unintended consequences of government interventions often distort the market, leaving it increasingly less efficient and responsive than it was before.

It is important that the costs of these unintended consequences are weighed against the benefits when making policy decisions, it said.

To note, Pakistan remains a net food importer and thus exposed to international price volatility and exchange rate fluctuations

Underlying causes of the price hikes include inappropriate policies and regulations that distort markets, inhibit competition, and discourage private investment, as well as limited and poorly implemented efforts for research, innovation, and technology dissemination.

Food price inflation is driven by the interaction of demand and supply factors influenced by diverse actors in the system, the WB said.

These interactions often do not result in optimal outcomes due to challenges like uncompetitive market conditions (e.g. faster pass-through of global surges in food prices to domestic prices than global falls) and market failures (e.g. higher food inflation in rural areas compared to urban areas, possibly due to higher margins in urban markets).

To better manage food price inflation policymakers must understand the role played by the different nodes of the food system and steer it towards desired outcomes with minimum distortions and unintended consequences.

The World Bank, working with other partners, is preparing a series of Just-in-Time (JIT) Policy Notes that aim to address pressing issues related to agriculture and food security in Pakistan and propose improvements in the short and medium term.

The specific objective of this work is to assist the government at the federal and provincial levels to move forward with the implementation of policies and reform actions that are potentially of high impact and politically critical.

The overall objective is to make the agriculture sector more dynamic, efficient and climate smart, and to act as an engine of growth of rural areas.

This Note is the first in the series. It examines the features of Pakistan’s food system that make it vulnerable to food price inflation and volatility.

It focuses on the broader trends in supply and demand and reviews the role of the government in ensuring that the markets perform efficiently while fulfilling its development outcomes.

Based on this, the paper provides recommendations to strengthen supply, address market and policy inefficiencies, and ensure that the population's food needs are met.

The paper says that the government should remove information asymmetry between stakeholders including federal and provincial governments, government and private sector, farmers and middlemen, markets and end consumers.

This requires an open data policy that encourages the use of technology to ensure high transparency, traceability, and quality testing.

It also requires the government to maintain stable and predictable policy positions that are well communicated to facilitate the ease of doing business.

Moreover, the country should eliminate distortive policies that drive resources away from high-value crops through minimum support prices, reduce producers returns to invest in value addition or quality through price caps, and put the government in direct competition with the market through public procurement.

The paper called for the need to encourage private sector participation in a way that rewards performance and efficiency rather than capacity.

While the PAMRA Act approved in Punjab is a step in the right direction, its operationalization and monitoring are important, it noted.

Sindh approved a similar act in 2010 (Sindh Wholesale Agricultural Produce Markets); however, the rules and regulations required to operationalize it were never prepared.

The World Bank said that research and development (R&D) should be made a national priority with an enabling environment that includes adequate funding and appropriate legislation.

While plans have been made in the past, they have not been supported by adequate resources.

A demand-driven R&D ecosystem requires collaboration between universities, industry, farmers, government institutions and private investors.

It also requires legislation that protects intellectual property and ensures smooth approval processes to incentivize the private sector to invest in research in Pakistan.

Furthermore, the nation should use well-targeted social protection tools as a consumption-smoothing instrument instead of untargeted subsidies.

While many distortive policies claim to support producers and consumers, the benefit to both is less, if any, than the cost of a market vulnerable to manipulation.

It would be more efficient and less distortive to use targeted social protection programs to protect the poor.

Study: Distribution of Household Expenditure on Major Food Items

More than half of the household’s food expenditure is spent on three categories, cereals, meat, and dairy.

However, when comparing the poorest quintile to the richest one, there are significant differences in dietary patterns with the poor spending more on cereal and vegetables and the rich spending more on fruits and meat.

With higher incomes and urbanization, there is an increasing demand for a diversified package of foods, but inefficient markets do not convey these demand signals to producers to incentivize changes in the production mix.

Direct interventions like incentives (cash transfers) and behavior change messages can be used to influence the affordability and consumer choice demand forces.

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Posted on: 2024-02-15T15:24:39+05:00