FOOD CRISIS IN PAKISTAN: REASONS BEHIND THE SHORTAGES

UNCLAS SECTION 01 OF 02 ISLAMABAD 002061

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV PREL PK
SUBJECT: FOOD CRISIS IN PAKISTAN: REASONS BEHIND THE SHORTAGES

REF: A. Islamabad 1715

B. Islamabad 1705

C. Islamabad 669

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1. (SBU) Summary: While rising fuel prices, nation-wide power cuts,
insufficient irrigation water and global price trends are all to
blame for the shortage of basic agricultural commodities in
Pakistan, government mismanagement remains a primary cause of the
country's agricultural problems. The prices of basic food
commodities have steadily risen over the past year and will
negatively impact the country's poor. Wheat serves as a prime
example of how market distorting price structures have led directly
to domestic shortages and rent seeking behavior among wheat hoarders
and smugglers. With over 100 million Pakistanis living on two
dollars a day, a large segment of the population remains vulnerable
to rising food prices. Whatever the cause of Pakistan's food
crisis, the nation's poor are increasingly concerned about the price
and availability of food. Without a comprehensive plan to alleviate
the food crisis, poverty levels and malnutrition are likely to rise,
erasing years of success in poverty alleviation. End Summary.


2. (SBU) The prices of basic agricultural commodities have steadily
risen over the past year, including the cost of key staples such as
wheat, rice and cooking oil (Ref A). Pakistan has been suffering
from monthly double digit food price inflation since September 2007.
The World Food Program (WFP) identified Pakistan as one of 40
countries at risk for food insecurity. The WFP recently raised its
estimate of at-risk individuals from 60 to 77 million, or 48 percent
of Pakistan's population. The World Bank estimates that 19 percent
of Pakistanis are already malnourished (over 30 million people) and
38 percent of the country's children under the age of five are both
malnourished and underweight. Economists from Lahore's Beaconhouse
National University report that the prices of basic agricultural
commodities will soon become unbearable for Pakistan's poor, erasing
recent poverty alleviation gains (Ref B).


3. (SBU) Rising fuel costs and nation-wide energy shortages are
taking their toll on the agricultural sector, increasing the cost of
transporting produce and limiting the utilization of irrigation
systems. Power demand in Pakistan currently outstrips supply by at
least 4,000 megawatts per day. Not a single megawatt of electricity
has been added to Pakistan's national grid since 2000 despite record
economic growth and population expansion. Agricultural production
in Pakistan is dependent on the country's one million wells, all of
which utilize either electric or gas power.


4. (SBU) Pakistan faces a shortage of utilizable irrigation water,
mainly affecting rice, cotton, fruit and vegetable crops. The GOP
estimates that 40 percent of available irrigation water never makes
it to crops because of inadequate irrigation technology. Most
agricultural producers do not use sprinkler or drip irrigation
systems. Members of the Pakistan AgriForum report that cotton
producing regions of Pakistan have 77 percent less useable water
this year. GOP meteorological estimates predict that irrigation
water supplies will be negatively affected by a 25 percent decline
in snowfall in Pakistan's northern watershed areas.

WHEAT AS AN EXAMPLE OF MISMANAGEMENT
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5. (SBU) Pakistan's 2008-09 wheat marketing year began in May, amid
concerns that domestic wheat shortages would continue. Pakistan
expects this year's final domestic wheat production to be between
20.8 and 21.8 million metric tons (MT),well below the target of 24
million metric tons. If forecasts prove true, Pakistan will need an
additional one to 1.8 million metric tons of wheat in 2008-09 to
meet domestic demand. During the 2007-08 marketing year, Pakistan
imported 1.7 million metric tons at a cost of USD 800 million. On
May 13, the GOP announced plans to import up to 2.5 million metric
tons to both meet domestic demand and augment a system of national
strategic wheat reserves.


6. (SBU) On the domestic market, price differentials exist between
the official government wheat purchase price and the going market
rate. The GOP provides fertilizer and irrigation subsidies to wheat
producers who in turn sell their wheat at a below market price to
government procurement agencies. Government procured wheat supplies
are then sold at a discounted rate to consumers, keeping the cost of
wheat low. The cost of wheat in Pakistan is among the cheapest in
the world, currently selling at USD 234 per metric ton versus a

ISLAMABAD 00002061 002.2 OF 002


world price of USD 375 per metric ton. This price differential
between the domestic and international cost of wheat is directly
responsible for Pakistan's wheat shortage. The relative low price
of Pakistani wheat increases the incentive to smuggle wheat and
wheat flour to neighboring India, Iran and Afghanistan, further
exacerbating domestic wheat shortages.


7. (SBU) Farmers are reluctant to sell wheat to government brokers
at below-market prices. The GOP currently pays Rs 625 (USD 9.3)
per 40 kg bag while wheat trades on the open Pakistani market at Rs
800 (USD 11.9) per 40 kg bag. As of early June, the GOP had
procured 3.294 million metric tons, well below its internal
procurement target of five million metric tons. The provincial
governments of Punjab and Sindh, the country's largest wheat
producing regions and home to the nation's most food insecure
groups, have banned inter-district and inter-provincial wheat
transportation. The move is aimed at limiting large-scale private
sector wheat purchase, transportation and hoarding. As fuel costs
and agricultural commodity prices rise, speculators have reportedly
set up nation-wide networks to buy and hoard key agricultural
commodities, regulating domestic supply and manipulating prices.
Although local police have been mobilized to restrict inter-province
transport and hoarding, wheat flour continues to move freely
throughout Pakistan.

WHEAT EXPORTS TO AFGHANISTAN
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8. (SBU) Pakistan has officially banned wheat exports to neighboring
countries, with the exception of Afghanistan. Traditionally,
private sector wheat flour sales to Afghanistan average 600,000
metric tons per year. During the 2007-08 wheat marketing year,
sales tripled to almost 2 million metric tons, prompting the GOP to
prohibit the export of wheat to Afghanistan. The Government of
Pakistan announced that it will lift the prohibition this year but
will allow only 50,000 tons to be exported on a
government-to-government basis. Private sector sales remain illegal
and smuggling is still rampant.

WORLD FOOD PROGRAM
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9. (SBU) Both World Bank and UNDP reports indicate that over 100
million Pakistanis live on less than two dollars per day, including
25 million living on less than one dollar per day. The WFP
currently provides food assistance to 3.7 million Pakistanis. WFP
analysis further indicates that the purchasing power of Pakistan's
poor has declined by almost 50 percent in the past year. WFP
officials in Islamabad indicate that the organization will likely
seek to temporarily increase food recipients to between six and
eight million. The WFP will field a food assessment mission to
Pakistan beginning June 10 in an attempt to identify the number of
Pakistanis at risk of starvation and propose WFP options.

COMMENT
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10. (SBU) Pakistan is not a food deficit country and should be able
to feed itself. However, poor public and private sector management
of the agricultural sector is to blame for the country's rising food
prices and insufficient domestic supply. Market distortions,
particularly price differentials in the cost of agricultural
commodities, are the main sources of the problem. By changing the
official government purchase price to more accurately match market
prices, the GOP could purchase more wheat and other basic
commodities for government-owned utility stores that cater to
Pakistan's poor, replenish strategic grain reserves and reduce the
rent-seeking incentive to smuggle and hoard.


11. (SBU) Comment continued: Whatever the cause of Pakistan's food
crisis, rising food prices are increasing insecurity for the growing
number of Pakistanis hovering around the poverty line. The
country's poorest groups remain vulnerable to malnutrition and
starvation. Without a comprehensive national plan to both reform
the management of the agricultural sector and protect at-risk
groups, poverty levels and malnutrition-related diseases are set to
rise. End Comment.

PATTERSON