Arshad Mahmood Awan
Pakistan’s sugar industry has long served as a textbook example of market distortion, shaped by government intervention, protectionist policies, and political influence. For decades, the industry operated under a regime that shielded it from the forces of supply and demand, resulting in inefficiencies, lack of competition, and rising costs for consumers. Politically connected families, who dominate the industry, have enjoyed a host of advantages, including subsidies, guaranteed minimum support prices for sugarcane, and protection from both domestic and international competition. These artificial incentives not only created an uncompetitive market but also distorted price signals, leading to higher costs for consumers and significant strain on the broader economy.
However, after decades of such protections, the government of Pakistan has finally taken a step toward liberalizing the sugar sector, signaling a shift toward market-driven reforms. This moment of reform is a rare instance where economic rationality aligns with policy decisions, a crucial turning point in the country’s economic trajectory.
The move toward liberalization has been fueled by both domestic economic realities and external pressures. In particular, the recent agreement with the International Monetary Fund (IMF) in the fourth quarter of 2024 has played a significant role in urging the government to adopt market-oriented reforms. The IMF’s structural adjustment policies have consistently forced Pakistan to confront inefficiencies in its economy, especially in sectors prone to rent-seeking behaviors, and the sugar industry, long protected by political interventions, was an obvious candidate for reform. With fiscal constraints worsening, the government has been compelled to withdraw from its role in micromanaging the sugar sector, yielding a rare opportunity for market forces to take over.
As of December 2024, the sugar industry has begun to see the early effects of these reforms. For the first time, no minimum support price (MSP) for sugarcane has been announced by the provinces at the start of the crushing season, and sugarcane procurement is now happening at market-determined prices. This is a significant break from past practices, where the government imposed price floors, artificially inflating costs for millers, which were then passed on to consumers or used as a justification for subsidy demands. In the absence of MSPs, the current market rate for sugarcane is approximately 15% higher than it was in the same period the previous year. This shift represents a dramatic departure from the past and signals the start of a more market-driven approach to sugar pricing in Pakistan.
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In addition to domestic liberalization, trade restrictions on sugar have also been eased. The government has not imposed specific limits on sugar imports, and the industry has exported over 700,000 metric tons of sugar in the last seven months, at an average price of $540 per metric ton—significantly higher than the prevailing wholesale price of refined sugar in domestic markets. This newfound ability to trade internationally has allowed millers to capture value from global markets and improve their liquidity, which contrasts sharply with previous years when export quotas were granted arbitrarily, often favoring certain politically connected industry players.
Despite the promising signs of reform, the sugar industry is not without its challenges. In the last three months, sugar prices have surged by more than 16%, marking the end of a 17-month decline. This price spike is creating anxiety among policymakers, who are wary of the inflationary effects of rising sugar prices. Historically, increases in sugar prices have triggered ripple effects on other essential commodities, particularly wheat and flour, amplifying inflationary pressures. For example, in November 2021, sugar price hikes were responsible for nearly 10% of overall food inflation, highlighting the commodity’s outsized impact on the broader economy.
Some of the price increase can be attributed to seasonal demand spikes, with Ramadan and the summer season approaching, leading commercial and industrial users to stock up on sugar. However, the broader concern is that prices are rising even during the peak crushing season (December to February), when supply typically increases and prices tend to fall. This anomaly points to the possibility of a supply shortage or, more troublingly, the emergence of speculative profiteering in the absence of government controls. If speculation is driving the price hikes, it could undermine the very essence of the market liberalization effort and create a backlash against the reforms.
Despite the government’s stated commitment to deregulation, it is unlikely to remain passive if inflationary pressures continue to mount. If sugar prices keep climbing, the temptation to reintroduce price caps or trade restrictions may become irresistible. Policymakers, having spent the past two years controlling inflation, will be keenly aware of the political ramifications of soaring sugar prices. There is a real risk that, under pressure, the government may revert to old practices, introducing new regulations that would once again distort the market and undermine the reform process.
The price hikes cannot be fully justified by rising sugarcane prices alone. While sugarcane prices have increased, they do not account for the full magnitude of the retail price increase. Other factors, such as declining interest rates, have reduced financing costs for millers, yet prices have continued to climb. This suggests that the increase in sugar prices may not be due to higher production costs, but rather a strategic move by industry players to capitalize on the absence of government controls and extract higher margins from the market.
The sugar industry, having secured the deregulation it has long sought, must now exercise restraint. If millers exploit this new freedom excessively, they risk provoking a government backlash. The public outcry over food inflation could lead policymakers to reintroduce price controls or trade restrictions. To avoid this, the sugar industry must ensure that the market remains competitive and prices are kept reasonable. Excessive profiteering would not only risk the success of the liberalization effort but also damage the credibility of the sector and its political allies.
While the sugar industry may have secured deregulation, it will only truly thrive in a competitive market. To dilute the market power of sugar millers, the government must introduce real competition by removing barriers to sugar substitutes, particularly high-fructose corn syrup (HFCS). For years, HFCS has faced significant regulatory hurdles in Pakistan due to lobbying by the sugar industry. By removing these barriers, consumers and businesses would have access to alternative sweeteners, and the sugar industry’s dominant position would be weakened.
Additionally, introducing commodity futures trading for refined sugar would play a crucial role in the development of a competitive and transparent market. Futures markets allow for better price discovery, enable producers and consumers to hedge against volatility, and reduce uncertainty. This would provide growers with a mechanism to forecast earnings and mitigate risks before the planting season. Introducing sugar futures trading would bring transparency to the market, ensuring that price volatility does not lead to speculation-driven price hikes.
Pakistan’s decision to liberalize its sugar industry is a pivotal moment for the country’s economic policymaking. For the first time, the government has demonstrated the political will to dismantle entrenched protectionist policies and allow market forces to shape the sector. However, the journey is far from over. Rising sugar prices have tested the government’s resolve, and the risk of reintroducing old regulatory practices is very real.
The success or failure of this reform will depend on the government’s ability to stay the course and implement complementary reforms that promote competition and market transparency. Introducing alternatives to sugar, removing barriers to sweetener substitutes, and establishing a commodity futures market are all essential next steps in ensuring the long-term success of the sugar industry’s liberalization.
Pakistan stands at a rare opportunity to correct a longstanding policy mistake and create a more efficient, market-driven sugar sector. However, this opportunity will be squandered if the government fails to press forward with essential reforms and allows short-term challenges to undo years of progress.
