Opinion Archive

The News International Pakistan

http://www.thenews.com.pk/editorial_detail.asp?id=105821

'Agflation'

"Agflation," the latest twist in economic semantics, tolls the bell as the harbinger of
news just published by the State Bank of Pakistan in its second quarterly report. The
SBP reassessed its estimate of inflation to 8 per cent, a full 1.5 per cent upwards for
2008; which is still optimistic, considering the Economic Intelligence Unit's forecast
of Pakistan's inflation at 9.3 per cent, mainly due to "food inflation."

Underlying "agflation," this trendy, infectious word, is a "conflation of agriculture and

inflation--two major factors that are spelling the end of cheap food era."

Pakistan, like many other economies, is caught in the eye of the storm "agflation"--
i.e., increase in inflation fuelled by rising international food prices. High food
inflation has remained in double digits since September 2007. The Consumer Price
Index (CPI) reached 18.2 per cent in January 2008, its highest peak since 1997. Four
out of the top five contributors to rising inflation in February 2008 were food items:
wheat flour, vegetable ghee, fresh milk and rice.

Increasing demand for food due to increasing population and greater affluence, from
high growth markets such as India and China, is understandable. Shortage of food due
to unfavourable weather conditions beyond man's control is also consolable. But
when the major culprit of the recent spike in inflation turns out to be a fad for bio-
fuels, indirectly spurred by insecurities stemming from rising energy prices, it
forebodes both economic and political instability. The increasingly extensive use of
land and crops for bio fuels and the digression of grains for the production of ethanol,
a fashionable energy alternative, are playing havoc with food prices. The focus of
agricultural output has shifted from "feeding' to "fuelling" in the US, the world's
largest exporter of grains that meets two-thirds of the world's demand. Last year, the
price of maize nearly doubled as US farmers distorted the world market for cereals by
growing 20 per cent of the whole maize crop, for ethanol for vehicles, taking millions
of hectares of land out of food production. Maize is a staple food in many countries
which import from the US, including Japan, Egypt, and Mexico, and is used widely
for animal feed, and a multitude of processed food products. Mr Bush has set
ambitious targets for steep rises in ethanol production as part of plans to reduce petrol
demand by 20 per cent by 2017, promoting use of ethanol with subsidies. In the Far
East palm oil cultivation has been diverted for ethanol, escalating edible oil prices by
around 80 per cent over the year. In the EU the farmers are switching to fuel crops to
meet the EU's stringent energy requirement that 20 per cent of energy mix should be
from bio fuels.

In Pakistan, a similar trend is creeping in. Acreage under sugarcane increased by 11.5
per cent in 2007 at the cost of other Kharif crops, such as cotton and rice, due to
attractive prices for sugarcane and its increasing importance as a source for ethanol.
Last year, 250,000 tons of ethanol was exported and 1.2 million tons of molasses are
expected to be exported this year. A fact which is even more alarmingly is that while
sugarcane production is increasing, area sown for wheat has declined by 12 per cent
.Wheat production is expected to be 6 per cent less in 2007, leaving a demand-supply
gap of over 2 million tons and signalling a massive import and subsidy crisis.

Bio fuels may contribute to reducing greenhouse gas emissions, but at what cost? Is
ethanol production sustainable? Are we comfortable with its perverse consequences --
i.e., escalating prices of essential foods?

As the West looks to replace its oil, the world's two billion poorest, its 854 million
hungry people with four million more joining their ranks every year, play with death
from starvation. Should the poor pay the price merely to appease the 800 million
motorists who want to sustain mobility and the politicians who want "energy
independence" from imported oil?

"A hungry man is an angry man" is a proverb our leaders should well bear in mind, as
the impecunious populations struggle with soaring food, record oil prices, and greedy
speculators trade in commodity markets. In the last few months there have been
"tortilla riots" in Mexico, "food marches" in Indonesia, Indian villagers' clashes with
police, arrests in otherwise calm Burkina Faso, prompting the government to suspend
import duties on staple food, all these snowballed by escalating high food prices. The
death by stabbing in 1980 of Liberian President William Tolbert in an uncontrollable
situation spurred by protests over high rice prices is indeed a haunting thought.

This competition for grain between the politicians, the motorists and the poor is going
to emerge as an "epic issue," as food is simply priced out of the poor's reach.

So, let's not take price stability for granted, in Pakistan. Fighting agflation should be
our top priority, even if it is at the cost of curbing growth. Vietnam has revised its
targets to 7.5 per cent from 9 per cent in response to a 12-year-high inflation rate of
20 per cent. The ADB's forecast for 2008 for non-Japan Asian countries, in a recently
released economic outlook, is 7.6 per cent (a five-year low), compared to the highest
ever in 19 years of 8.7 per cent in 2007. Because, if the "agflation" genie gets out of
the bottle we are asking for a political, economic and an epicurean social crisis which
would bring the growth to a grinding halt anyway.