Pakistan’s wheat subsidy problem has been feeding commercial banks instead of farmers and end-consumers. Why won’t the government get rid of this behemoth we do not need?
The long awaited process of wheat deregulation in Pakistan seems to be kicking off, but it is happening half-heartedly at best.
This comes as no surprise, since wheat deregulation was not an idea that came from the government itself, but rather has been mandated by the International Monetary Fund (IMF), which has been ruthless in its direction to cut down unnecessary spending by the government. However, it seems the government has found a process with the IMF’s instructions. They accept them, try to get away with doing not even the bare minimum but what looks like the bare minimum, getting reprimanded, and then finally acquiescing – sort of.
The IMF has stated clearly that provincial governments would be barred from setting crop prices as part of its $7 billion bailout package, board approval for which Pakistan secured only a few months ago. It is possibly one of the reasons why the Punjab Government has abolished the provincial food department, replacing it with a new autonomous body.
As of now, the government is mostly just mucking about. They are forming a committee here, and a panel there, and trying to get away with handing wheat over to the free market. The reasons for this are purely political. Actually, the government thinks they are political. Somehow all governments in Pakistan, and particularly those in Punjab regardless of political party (but mostly the PML-N) think they will get votes if they can somehow magically control the price of wheat, both for farmers and end consumers. Historically, the kind of subsidies this has created have not been productive. But how exactly did we get here?
The centrality of wheat in Pakistan’s economy
What is today modern Pakistan is the result of the British Empire’s appetite for wheat. The British constructed railways in what is now Pakistan in 1855, in no small part due to a desire to connect the wheat-growing parts of Punjab and Upper Sindh to the port in Karachi.
In 1886, the British were able to start building the Punjab Canal Colonies, which were a series of large, previously sparsely inhabited areas in Punjab, that were brought under cultivation through the use of canals that diverted water from the province’s five rivers. Those canals allowed for previously landless and poor farmers to settle in newly cultivable regions, and the railways helped them sell their surplus crop to the rest of the British Empire.
The British would begin building similar infrastructure for Sindh and Balochistan in 1923, with the construction of the Sukkur Barrage.
With the completion of these large rail and irrigation projects, the volume of commerce between Punjab and Sindh, in particular, exploded. On the eve of the First World War in 1914, Karachi had gone from being a small town on the coast of the Arabian Sea to becoming the largest grain port in the British Empire, and Punjab had become its principal bread basket. Karachi’s significance to the world was as the entrepot that provided access to Punjab’s wheat.
So central is wheat to Pakistan’s conception of itself that it is one of the four crops in the State Emblem (the other three being cotton, tea, and jute; the latter two were the principal crops of East Pakistan, but we will not spend too much time on that awkward remnant of history).
Yet despite this centrality of wheat, at independence, Pakistan’s population had grown so rapidly that it became a net importer of wheat. Indeed, a major initial bone of contention in the Cold War was the race between the United States and the Soviet Union to supply Pakistan with wheat. Between 1949 and 1952, nearly all of Pakistan’s wheat imports came from the Soviet Union. The US considered it a major foreign policy victory to get Pakistan to accept imports from the United States from 1953 onwards.
Within Pakistan, however, the reliance on imported wheat was seen as a national embarrassment, and one of the handful of the successful policies initiated by the pre-Ayub governments was to embark on a program to help Pakistani farmers improve the quantity of wheat produced in the country. By the latter half of the Ayub era, the government succeeded.
As a result of this, in 1968, Pakistan had a massive increase in wheat yield. This was the second year running this had happened, and farmers were struggling because the markets had not cleared all of their crop. This was a little embarrassing for the government, which had incentivised growing more wheat since at least the early 1960s to account for food security. Wheat makes up nearly a third of the caloric intake by an average Pakistani, and Pakistan’s per capita consumption of wheat is 124 kilograms annually, which is the highest in the world.
The government decided they would buy the excess wheat from the farmers and store it for a rainy day. This would give the farmers a buyer, their crop would not go to waste, and they could reliably plant it again next year. This was a slippery slope. Gradually, the government became the principal buyer and the private sector’s role shrank. To keep flour prices low for poor households, it established an extensive network of ration-shops, which provided subsidised wheat flour to low-income households. The ration system was abolished in 1987 due to partial targeting, inefficiencies and corruption.
The ration system was replaced with a subsidy on wheat issued to flour mills by the government from its procured stocks. Thus, a targeted subsidy was replaced by a general subsidy that ultimately became far more expensive than the one it replaced. The twin requirements of clearing stocks during harvest season and providing subsidised wheat to flour mills later in the year led the government to procure progressively larger volumes of wheat each year.
The next big change came in 2008, when the 18th amendment was passed and the provinces were made responsible for setting procurement prices and getting the wheat.
What this leads to
The wheat support price is a bigger problem than one might realise. The concept behind wheat procurement is that the government buys wheat from farmers at a set rate which is higher than what they would get on the market so they continue to grow what is a strategically important crop. The problem is, provincial governments borrow heavily from commercial banks to fund these operations.
In 2023, for example, the wheat procurement target was 40 lakh tonnes and the government had set a price of Rs3,900 per maund (a unit of measuring weight equal to 40 kilograms), or around Rs97.5 per kilogram. To buy this much wheat from farmers at this rate, the government would need around Rs394 billion. Now, the government sells the wheat they acquire to flour mills at this rate so they do recover this money. However, the government relies on borrowing this sum from commercial banks. At an interest rate of 23% in 2023, the government would be paying around Rs90 billion in monthly instalments of 10 months through selling wheat to flour mills. The government also always procures more wheat than it needs and consistently has leftover grain from previous years in storage.
On top of this, the government also needs to spend tens of billions of rupees on handling, transportation and storage costs incurred by the PASSCO on a federal level. The government regularly fails to live up to its commitment with commercial banks, and over time, this has led to circular debt. In 2020, this had risen to Rs757 billion.
How the wheat subsidy feeds commercial banks
And if you think farmers are benefitting from this, you are sorely mistaken. Data for wheat procurement is not updated, with the latest collected information available up to 2020. That is why in our explanation we focused so much on the 2018-19 season, which marked the 10 year mark since the Punjab government began this operation on its own.
What becomes clear is that farmers are not benefitting from this. Data on wheat production by farm size in Punjab shows that 13.3% of farms do not produce wheat at all. Of the 86.7% farms that produce wheat (comprising 63.7% of the total area of private farms), 90.5% percent are smaller than 12.5 acres. This means 78.5% of total farms producing wheat are small farms. These farms are only 40.5% percent of the total farm area and 63.6% of the area of farms reporting wheat. Very small farms of less than one acre do not sell wheat because they do not have a marketable surplus.
Data on wheat production by farm size are not available, but assuming that they produce at the national average of 800 kg wheat per acre and consume wheat flour at 140 KG per person, with an average household size of 6.3, they produce less than their own consumption even when they allocate the entire area to wheat production. Together, non-wheat-producing farms and very small farms are 22.2% of all farms in Punjab.
Then who is benefitting from this? One answer might be commercial banks. On paper, the Punjab Food Department’s (PFD) subsidy structure is meant to stabilise the market, protect farmers, and deliver cheap wheat flour to consumers. In reality, it is more of a balancing act on a tightrope of debt, where the government throws money around with one hand while borrowing furiously with the other. And as you might expect, it is the farmers—and the taxpayers—who ultimately bear the cost.
The subsidy system is straightforward in its premise: PFD buys wheat from farmers at a price that is often higher than the open market and then turns around to sell it to flour mills at a below-market rate. The idea is to keep flour prices stable, prevent market crashes that would hurt farmers, and provide cheaper wheat flour to consumers. On one front, it works—PFD has largely succeeded in smoothing out seasonal price fluctuations, reducing volatility, and keeping flour prices from skyrocketing (a win in a country where food inflation can lead to serious political unrest). But that is about where the good news ends.
Take 2017-18 as an example. That year, PFD’s wheat operations racked up a staggering cost of Rs.34.4 billion, with the bulk of this cost (over 70%) attributed to something that has little to do with actually feeding people: bank mark-up. The PFD borrows money every year to purchase wheat, and while it manages to sell that wheat to flour mills, the government never quite gets around to repaying the entire amount. Instead, it kicks the can down the road, paying off only part of its debts and leaving the remainder to accumulate. This results in PFD not only having to pay interest on its current loans but also on its mounting, unpaid liabilities. For the past five years, this interest alone has averaged Rs19.6 billion per year—just the cost of borrowing money to keep the wheels of wheat procurement turning.
Why then do we insist on having these wheat support prices every year? The government will tell you that their aim is to give confidence and provide security to poorer farmers, as well as get cheap flour to the markets. They are lying. All indicators and an impressive body of academic literature on the topic tells us leaving crop prices up to market forces is what is best for farmers.
Farmers would make more money without a wheat support price, even though they have become heavily dependent on it. But breaking that habit might be a good thing. The removal of the wheat support price will allow farmers to possibly look towards other crops as well, and if the government moves on allowing GMO crops such as maize, it can prove to be a gamechanger.
The politics behind it
In many ways, wheat runs Punjab. Perhaps nothing points towards this better than the billion dollar wheat import scandal of 2023-24 that the Punjab and federal governments are still suffering from.
In this case, the ruling Pakistan Muslim League-Nawaz (PML-N) found itself embroiled in internal tensions over how to address a scandal that is as much about political manoeuvring as it is about financial mismanagement. Former Prime Minister Nawaz Sharif pushed for strict accountability against the caretaker government that oversaw the import of 1.2 million tonnes of surplus wheat. However, his brother, current Prime Minister Shehbaz Sharif, hesitated, reluctant to implicate members of his own coalition, including those with ties to the establishment.
The roots of the scandal go back to a bureaucratic blunder that allowed wheat imports far beyond what was necessary to compensate for the 2022 floods, allegedly driven by kickbacks to the caretakers. The result? A staggering loss of over $1 billion in foreign exchange at a time when Pakistan’s economy is in shambles, coupled with Rs300 billion in losses for farmers, who were left struggling to sell their wheat amid a surplus and crashing prices. Meanwhile, flour millers and traders are believed to have reaped enormous profits at the expense of both the government and the agricultural sector.
The handling of this scandal—and the broader wheat procurement process—has been chaotic. While the government set up inquiry committees, they have been hesitant to fully investigate key figures in the caretaker government. The Punjab government’s response to farmers’ protests was heavy-handed, deploying force to quell dissent rather than addressing the root cause of their grievances: a procurement system that is deeply flawed.
This scandal is not an anomaly—it is symbolic of a wheat procurement system plagued by inefficiency, cronyism, and an inability to balance the needs of farmers with broader economic realities. From bloated subsidies to reckless imports, Pakistan’s wheat policy has long been a patchwork of short-term fixes that only serve to deepen the long-term problems. By 2024, the situation had deteriorated even further, with wheat imports crashing domestic prices and leaving farmers in financial ruin—exactly the kind of breakdown that has come to define the country’s toxic relationship with its agricultural sector.
Where we stand
It seems simple enough, does it not? The wheat subsidy benefits no one, it is a political disaster, and we should absolutely get rid of it, promote financing for farmers, introduce robust policy that protects crops and land and let market forces handle the rest. Well, the government claims they are trying. Just for the sake of it, let us give you the spiel that the government has tried to give us in their own words:
“To formulate a comprehensive strategy, the Ministry of National Food Security and Research (MNFS&R) will host a National Workshop on Deregulating the Wheat Sector on Friday, January 24, 2025, in Islamabad. This initiative underscores the government’s commitment to transitioning towards a transparent and efficient wheat market while safeguarding national food security through strategic reserves.
Representatives from all provinces, including food secretaries and industry experts, will deliberate on key challenges and propose solutions for modernizing wheat procurement practices. The workshop will serve as a platform for stakeholders to address regulatory challenges, explore innovative approaches, and ensure that the deregulation process balances market efficiency with food security.
To encourage broad participation, the ministry has arranged accommodations and travel for outstation attendees. Prime Minister Shehbaz Sharif had earlier tasked a high-level committee, led by Finance Minister Muhammad Aurangzeb, with devising a wheat procurement plan for the Food Year 2024-25 in line with IMF recommendations. The committee also includes the Ministers for National Food Security and Research, Commerce, and the Advisor to the Prime Minister on Political Affairs and Inter-Provincial Coordination. Their mandate includes reviewing wheat pricing, procurement mechanisms, and ensuring price stability.”
All of this, of course, means nothing. The government is essentially renting out a big fancy venue with catering and lots of important people strolling around. The point will be to discuss deregulating wheat instead of actually doing something. They will then take some pictures, stick them in a powerpoint, and try to show the IMF that this is them trying their best. The IMF will, of course, call them out on it. Will this be enough to finally spur them on? Possibly. We just wish they would get on with it.
Courtesy Profit
The govt is kicking the wheat deregulation can down the road
