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Boro Harvest

Long-term effect on rice price unlikely

Inam Ahmed
As Boro harvest has started, deeper questions like whether the country's domestic price could remain disconnected from international prices and whether traditional stockists would be allowed to play their role in food security have arisen.
Economists say although the harvest could cause a temporary price disconnect, there are little chance of longer term price dampening because of the international situation. While speculations are rife about the future rice situation, global major crop season is still eight months away and wheat news is bad.
Already Bangladesh rice price is disconnected from the international market where price is much higher; further and deeper disconnect will lead to a messy domestic market situation.
Meantime, the government is
now faced with a challenge of giving a huge subsidy on rice for open market sale, fuel and fertiliser, and quick creation of employment because ultimately people's income has to adjust to the higher price regime that is expected to prevail for unforeseeable future.
All this poses a longer term macroeconomic management challenge for Bangladesh - it has to target inflation with monetary and fiscal policies and exchange rate management.
Already the economy has a few comfort zones that the country should carefully manage to get the best output, but there are also some strains and paradoxes that it should address soon.
Look at the economic situation first. The external sector is witnessing an upsurge in the last three months with a highest of 52 percent increase in year-on-year exports in January. This helped swing the negative growth in exports to 9
percent growth in the first seven months of this fiscal year. With orders pouring in, a double-digit export growth is once again expected when the year ends three months from now in June.
"Even when the US economy is under duress and consumer spending there has shrunk, our basic garment exports will retain its steam because consumers will shift to lower-end products," said Mustafizur Rahman, executive director of the Centre for Policy Dialogue (CPD). "With a healthy EU economy and taka-euro exchange rate competitive, our exports to Europe will also march ahead.’’
/Analysis now show that GSP utilisation rate, which was in the ratio of 20:80 for knit and woven products, has shifted to 50:50. This means generation of more local employment and value addition as well as more retention of foreign exchange. Remittance flow is also strong, clocking $4.6 billion or a 28 percent growth in the first seven months and it is now safely predicted a $7 billion inflowbyyear-end. If exports closely follow the target of $ 14.5 billion then together with the remittance, the total foreign exchange inflow will stand at around $20 billion.
Square it up with import obligations and a new picture will emerge. In the first seven months of this fiscal year, import bills stood at $10,5.billion or an 18 percent surge. With Boro harvest, rice import obligation is likely to ease in the next five months and import bill for petroleum products has very insignificantly increased by 1 percent over last year. All this means there would be little pressure on balance of payment and foreign exchange reserves, providing a comfort zone for the government.
"This is why when we bonowed on hard terms for oil imports, we should have analysed this scenario," said Mustafiz.
Dr Wahiduddin Mahmud also talked in a similar tone at a seminar earlier when he was critical of the government's decision to borrow to import oil.
The Central bank's foreign exchange management has also proved prudent when it pumped in around S500 million into the market to keep taka stable against dollar. Had the local currency sank further, it would have built up a case of importing inflation.
Revenue collection, now on a 28.5 percent growth streak --income tax, a component of it, clocked an all time record of 64 percent increase, is another comfort zone for the government in balancing its budget.
But the major concern remains ADP utilisation, which is at its lowest at 25 percent in the first seven months of the fiscal year against last year's 31 percent. At a time when cost of living is shooting up, low ADP implementation means lesser employment and lower income opportunities for the rural people.
As construction material prices spired out of hand, contractors are simply unable to proceed with works. Unless the construction price is refixed there is little chance ofrevamping development work.
Meantime, a paradox has been created in the investment situation. Disbursement of term loans used for project investment has taken an upswing of 65 percent in the first six months of the fiscal year. However, this is not matched by capital machinery import, which showed only a 2 percent growth in LC opening and an even worse 3 percent negative growth in settlement.
"One possible explanation for this may be that money is going into land and township development," Mustafiz says.
Unlike the economic situation analysis, rice situation looks a little bit tricky because of its political implications. There are many hard and clever decisions to be made — whether to depress price forcefully and dismantle the traditional stocking system, whether to bank on the future production and abstain from further imports and so on.
Dr Sajjad Zohir of Economic Research Group (ERG), an independent think tank, explains the coming Boro harvest in four ways.
First, there is an expectation of increased production, even if the optimistic 17% increase may not be realised. Second, politics over the last year has significantly intimidated the traders (and the rhetoric continues) and there is strong apprehension that the traders may not adequately engage in the private procurement (out of fear) and thereby depress price.
Third, Dr Sajjad says, one would anticipate that the prices of urea and other inputs will soon go through upward adjustments, which will induce many farmers to sell early to support fruitful engagement in Aman production and early sales is likely to further depress the post-harvest rice price. Fourth, the world price of food grain is expected to remain high in the coming year (and possibly beyond), and even an increased Boro production will not secure us with food as a nation it will take two consecutive good crops at the least.
"A depressed Boro price will encourage leakage into the 'world' market, worsening the national food security status," he says. "At the same time, it will dampen the incentive of farmers to put the extra effort in Aman rice production."
"Basic economics suggests that we are likely to be more food-insecure if the farmers are deprived of reasonable prices after the harvest. While the rice prices are expected to fall with the coming of the Boro, we have to get used to high nominal prices, and face it with expanded employment and higher wages and salaries backed by higher productivity. In the face of an 'unfriendly' outside world, such transitions will be possible if we can ensure higher degree of self-sufficiency in food production. And the latter requires ensuring right incentives to those who produce food," DrSajjadsays.
The purpose of 'procurement policy' in the coming season should be to ensure a floor price quite contrary to the idea of bringing down rice prices.
Dr Sajjad says obviously the prices are expected to decline with the harvest but they should not be allowed to go below a floor price. There is a need to make the best possible judgment in fixing such a price, which should be immediately announced openly and the government should be ready to procure any amount at that price.
Such procurements should ideally be made in the form of rice, and the signals should go on board to the millers, who are an important agent to integrate markets across transformed products (paddy to rice), across locations, and over time through making decisions on stocks to smooth seasonal variation in prices (often unintelligently identified as hoarding!).
"Such an announcement will hopefully be read as putting trust back on the business community who may then actively engage in their usual role and contrary to the popular views, the self-motivated traders may serve better to ensure the incentives to the farmers in a tight food market world-wide," Dr Sajjad says "This will also save the resources of the government in micro-management. And given the uncountable numbers of 'paikars' and aratdars' getting the space with less hostile attitude, the economy is bound to get a fresh breathing in the coming months."
"This year, Boro production cost has been around Tk 18-20 a kg. When fixing procurement price, this cost has to be kept in mind," said Mustafiz. "Whether the government could meet its target of procuring 10 lakh tonnes of rice will depend on a competitive price. We have to keep in mind that the government could purchase only 2 lakh tonnes or half the target of 4 lakh tonnes of Aman rice."
The international rice market is now full of speculation and Thailand, the top exporter of rice, is now selling rice at a prohibitive $780 a tonne. Apprehensions are that price will increase further. Cambodia, another rice exporter, does not want to sell rice because of fears of domestic price hike. Vietnam also wants to keep its market closed. Internationally, December is tlie major rice harvest season as against Bangladesh's Boro season in April. So, the global market is expected to remain tight until then, and as it seems now, even if the market loosens up a little at the end of tlie year, rice price may settle at around $400 a tonne as against the previous $200.
Any stock decision of the govern -ment has to be based on this reality.
"We have to think from now on how to smooth out fertiliser distribution problem for Aman rice. Availability has to be balanced out with fertiliser price, which is now highly subsidised, to ease pressure on budget."
But whatever be the situation, the government is faced with the unpalatable truth of providing huge subsidy -- it would not be anytliing less than $1,700 million with $700 million on rice, $500 million on fuel and $500 million on fertiliser. And the money has to be collected internally. And this will need prudent policy choices about the source of funding.