Opinion Archive

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 biofuels, 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.