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COLUMN

Managing rice prices
Sadiq Ahmed
Inflation is of huge concern to an average Bangladeshi citizen. Nearly double digit inflation of the past 12 months, and especially the surge in rice prices, Is a key social concern in Bangladesh.
It is not surprising that the election manifestos of all political parties keep inflation control high on their economic agenda. This is laudable because there is adequate empirical evidence that inflation hurts the poor.
By implication, managing the price of rice to an affordable level is an important policy instrument for poverty reduction. Por example, the surge in coarse rice price at retail level from Tk 22 per kg to Tk 36 per kg between May 2007 and April 2008 is estimated to have serious adverse implications for poverty.
Fortunately, steps were taken to bring down the price of such coarse rice to Tk 28-29 per kg. The ongoing political debate believes this level is still too high and the price ought to come down to a much lower level This is an important political debate and needs careful scrutiny to avoid parties making promises that cannot be complied with.
One straightforward way is to look at the cost or production. Based on farm-level survey data and simplified farm models using present input-output configurations and prices, the average cost of producing a kilo of milled rice was about Tk 17 in mid-2007, allowing a normal profit margin for farmers (15 percent) and distribution cost (15 percent), it is hardly surprising that coarse rice was selling at Tk 22 per kilo. Prices of inputs have risen sharply since mid-2007. Accounting for the actual increases in the cost of fertilizer and diesel passed on to fanners, the average cost of production has now increased to about Tk 22 per kilo. Again, allowing a 30 percent producer and distributor margin, the unsubsidised price of rice per kilo to the consumer level stands at Tk 29. This is the current price at the Dhaka retail markets, based on the current average productivity level
(3.9 tonnes per hectare) and the prevailing (subsidized) prices of energy, water and fertiliser.
As is well known, there is considerable subsidy on agricultural inputs (fertiliser, diesel). Total subsidy on fertiliser and energy for agriculture is estimated at about Tk 54 billion (1 percent of GDP) last fiscal (2007-08). Selling rice around a third of the market price, which is already subsidised on the input side, will require a budget subsidy of Tk 570 billion (9.3 percent of 2008-09 GDP) on the output side. This compares with a food subsidy of Tk 60 billion (1.1 percent of GDP) in the 2007-08 budget. Along with input subsidy of 1 percent of GDP, total subsidies on production and consumption of rice alone will amount to 10.3 percent of GDP as compared with 2.1 percent of GDP in FY 2007-08. Total revenues of the government are estimated at 11.3 percent of GDP in 2008-09. One doesn't have to be an economist to realise the impossibility of the situation: A
government cannot spend over 90 percent of its total revenue on rice subsidy alone and stay float.
How about keeping this price for the poor only? Quite apart from the difficulties of designing a targeted food subsidy programme, the level of poverty (40 percent headcount ratio) is too large to make this fiscally sustainable. The total subsidy will fall from the earlier scenario, but will still remain around Tk 285 billion (4.6 percent of GDP). Along with the input subsidy (1 percent of GDP), the rice sector will absorb 50 percent of the total government revenues, which will still considerably impair the government's ability to meet other development needs.
Even if this were fiscally affordable, there is also an issue about whether this is the most effective way of lowering poverty.
The last time that Bangladesh saw coarse rice selling at Tk 10 per kg was the mid-1990s, which is some 13 years ago. Since then,
overall price level has grown by 105 percent; more importantly prices of key agricultural inputs have increased by more than 100 percent even after allowing subsidies.
Trying to bring down costs through additional input subsidies will arise the same question of how much subsidy is affordable.
This is not to say that nothing can be done to reduce rice prices in Bangladesh. The only sustainable way to reconciling increasing cost of production with lower prices for consumers is through productivity improvements. Bangladesh has made steady progress in raising rice yield that has on average climbed from 1.7 tonnes per hectare in 1970 to 3.9 tonnes per hectare in 2008.
Because of this progress, Bangladesh is amongst the better performers in rice production in South Asia. Yet, this performance falls short of the 6.5 tonnes per hectare achieved in North Africa,
5.5 tonnes in China and 4 9 tonnes in Vietnam. To sec how productiv ity gains can help lower prices, assume that Bangladesh is able to raise its productivity to 5 tonnes per hectare.
Other things remaining unchanged, that will reduce rice price by an average of 30 percent (toaroundTk22). Raising productivity to the North Africa level will lower the price to around Tic 17 per kilogram.
While it is understandable that climate, soil conditions etc differ by countries and regions, which also influence yields, there is no denying the fact that the potential for raising rice productivity in Bangladesh is substantial. The policy focus on raising yields will pay off much more handsomely in the longer term than seeking ultrapopulist and unsustainable solution of trying to lower the price of rice through heavy input and output subsidies
Securing productivity gains will require among other things public spending on farm research and extension, rural roads, water for irrigation: policy efforts to ensure the timely availability of key inputs such as fertiliser, seeds and pest control ingredients; and farm credit. There is no doubt that subsidies have a role to play when used judiciously and in a fiscally sustainable manner.
With limited fiscal resources, the government will face a serious choice of how best to employ these resources for supporting agriculture. So, the public policy question is not so much as whether or not to subsidise agriculture; the real choice is how best to subsidise to support greater farm productivity and incomes. Findings from international research suggest that the returns to public spending on rural infrastructure are very high. Working out the best configuration for allocating limited public spending among competing uses is a key policy challenge for Bangladesh moving forward.
The writer is with the World Bank. Washington DC. The views expressed in this note do not necessary reflect the views of the World Bank Group or its Executive Board