While world sugar prices tumble, domestic prices set to soar

The National Board of Revenue (NBR) massively increased the import tax on raw sugar from Tk 2,000 to Tk 7,000 per ton, and that on refined sugar from Tk 4,500 to Tk 10,500 on August 26, less than two months after the parliament had ratified the 2015-16 budget along with the import duty schedule.

The reason apparently is that the domestic sugar mills of the government owned and run Bangladesh Sugar and Food Industries Corporation (BSFIC) has piled up a large stock of 140 thousand tons of refined sugar, which they cannot sell even at much less than  the cost of production. The same reason has been used on several occasions in the past to raise the domestic sugar price to give respite to inefficient BSFIC sugar mills at the expense of the consumers.

Despite the generous price support, the domestic sugar industry that produces sugar from sugar cane (essentially BSFIC mills) has been unable to be competitive in the global market. The problem is mounting with the world sugar price on a trend decline. It lost market share very substantially as it could not even maintain the level of its output. During the five year period 1994-95 to 1998-99, the average annual rate of production of the BSFIC mills stood at 165,620 metric tons. This fell to 93,441 metric tons during the period 2009-10 to 2013-14 despite the large increase in the market demand for sugar.

The amount of land devoted to sugar cane cultivation fell from 435 thousand acres in the first period above, to only 285 thousand acres in the second. Sugar cane output declined accordingly. Since sugar cane is cultivated by private farmers, there is little doubt that it lost some of its comparative advantage to other crops and farmers switched to these other crops.

The production of refined sugar by BFSIC mills can meet only about 10 percent of the total demand for refined sugar, which is estimated to be about 1.5 million metric tons. The rest is supplied by a burgeoning private sector.

It is interesting to note that despite the overwhelming dominance of the private sector in the production of refined sugar, none of the private sugar producers have attempted to produce refined sugar from sugar cane. They import raw sugar, mostly from Brazil, and produce refined sugar to sell to the domestic market. A small quantity is also exported. The fact that they have not shown any inclination to produce refined sugar from sugar cane, a crop that can be raised domestically, is indicative of the lower profitability of this strategy of production of refined sugar due to the international and local price structure.

Obviously Bangladeshi producers do not have a comparative advantage in the production of raw sugar, but they can and do produce refined sugar profitably.

This characteristic of the domestic sugar industry could mean that the sugar cane producers cannot deliver cane to the private millers at a sufficiently low price that would make the production of raw sugar profitable. But if sugar cane price is lowered sufficiently to make it profitable for the production of raw sugar, it would be no longer profitable for the farmers to devote their limited land to cane production. They have already reduced sugarcane acreage, especially during the new millennium, suggesting its declining profitability relative to other crops.

One might ask why BSFIC mills are able to procure sugarcane from farmers, but private millers are reluctant to compete with them. The answer could be either that the price received from BSFIC mills by farmers is inflated, which the private millers would be unwilling to pay, or the former is willing and able to bear the higher cost of sugar cane, both because it can incur losses indefinitely, and because NBR gives them the opportunity to raise the market price by imposing import taxes of various denominations. BSFIC is not restricted by the same market discipline as are the private millers.

Economic history is replete with examples that trade support given to industries seldom improves the efficiency of beneficiary industries. The generous support given to the domestic sugar industry also has not raised the efficiency of the BSFIC mills. If at all their efficiency level seems to have declined over time.

The annual net loss incurred by the corporation has ballooned from Tk 38 crore in 1995-96 to Tk 523 crore in 2014-15. The total loss during the 7-year period 2007-08 to 2013-14 amounted to Tk 2,277 crore, i.e. Tk 285 crore taka per annum.

Just to put it in perspective, the Annual Development Plan expenditure for the development of Science, Information, and  Communication Technology during the period 2008-09 to 2012-13 was Tk 173 crore per annum and that for Labour and Employment was only Tk 120 crore.

Although the purpose of the tax hike is apparently to benefit the BSFIC mills, the imposition of the import taxes will raise the domestic price of all sugar sold in the market by about Tk 6 per kilogram.

Since BSFIC mills supply only a small fraction of the total market supply, the real gainers will be the private millers. The rise in market price will transfer Tk 9 billion (1,500 million kg x Tk 6/kg) from the consumers to the millers over a year. The private millers will get a bonanza of Tk 8.1 billion.

Such a large scale unilateral transfer of money from the ordinary consumers to an inefficient government corporation and rich business people is morally unacceptable and economically inefficient.

Normally when a government takes such a step that goes against the interest of the ordinary people, opposition groups are expected to engage in widespread protests, as are currently happening in India over the hike in onion prices. Unfortunately the official opposition within our parliament has been fully domesticated, while the one without has been severely restricted. The so-called civil society and the media have been tamed, or are too nervous to make much noise. The consequences of a polity without an effective opposition should now unfold.

Dr. M. A. Taslim is Professor of the Department of Economics, University of Dhaka.