The federal government and the representative body of sugar mills — Pakistan Sugar Mills Association (PSMA) — are currently at loggerheads. PSMA is seeking permission from the government to export surplus sugar from the country. When Prime Minister Shahid Khaqan Abbasi was briefed on the state of the sugar industry, he postponed the decision on exporting surplus stock of sugar. Let’s first see the concerns of the government and PSMA before drawing any conclusions for — or learning any lessons about — the economy of Pakistan. The price of sugar in the international market has been declining consistently this year, and it is now placed at 35 cents, or Rs 40, per kilogramme. On the other hand, the retail price of sugar in Pakistan’s domestic market is Rs 65 per kilogramme. PSMA demands that this differential in price of sugar should be pocketed by the federal government through export subsidy of Rs 19 per kilogramme in order to clear the prevailing glut in the domestic market. They are of the opinion that if sugar mills are not allowed to export the surplus stock, they won’t be able to make payments to sugarcane growers who will then go out of business. The government, on its part, is concerned about the fiscal burden of granting export subsidy; plus the impact of shipping over 1.5 million tons on the domestic market.The fiscal concern of the federal government appears perplexing. Let’s conduct a cost-benefit analysis of the situation. If the federal government does grant the subsidy on exporting 1.5 million tons of sugar, it will have to pay Rs 28.5 billion to the sugar mille Rs Given that the price of sugar in the international market is Rs 40 per kilogramme, export of 1.5 million tons of sugar will fetch Rs 60 billion. The net benefit to the Pakistani economy will amount to Rs 31.5 billion. There is an added benefit to the economy of earning foreign exchange as well, which Pakistan desperately needs at the moment. But until the export subsidy is paid, the sugar millers will not be interested in exporting sugar because of the higher prices at home. If the federal government does grant the subsidy on exporting sugar and pays Rs 28.5 billion to the sugar millers, exporting 1.5 million tons of sugar will fetch Rs 60 billion. The net benefit to the Pakistani economy will amount to Rs 31.5 billionThe real reason why PSMA is demanding an export subsidy is because the differential in the price of sugar is indirectly created by the government itself. Sugarcane is the most significant input in the sugar production, and the government has currently fixed the price of sugarcane to Rs 180 per 40 kilogrammes. This high price of sugarcane has made it costlier to produce sugar, which can also explain the high price of sugar in the domestic market. If the government had never fixed the price of sugarcane so high, there would have been no fiscal burden of exporting surplus sugar. In fact, there would have been no surplus sugar in the first place.Encouraged by the high prices, a lot of farmers have switched to sugarcane. A lot of sugarcane means a lot of sugar. But the domestic market can’t clear so much of the sugar stock. In this case, the government’s intervention in the pricing mechanism has distorted production decisions of both sugarcane growers and sugar millers. Responding to the regulated price of sugarcane, both growers and sugar mill owners have created an overabundance of sugar. In 2014, when the Sindh government reduced the support price of sugarcane to Rs 155 per 40 kilogramme — which was then the actual market price — there were clear cost advantages. The government’s policy to fix sugarcane price above market levels in order to protect growers of sugarcane from the exploitative activities of sugar mills have actually made them more prone to financial losses.To resolve this serious issue of the sugar industry, the Prime Minister has directed the Ministry of Commerce to work with the Sugar Advisory Board in order to propose short- and long-term solutions. In the short-term, the Prime Minister should be recommended to pay the export subsidy because the government has created this situation itself. Any further delay in this decision may prove costlier; if the price of sugar in the international market goes down, the delay becomes costlier still. As a long-term solution, the government should stop fixing the price of sugarcane and allow market forces to determine the price. Unless that happens, situations like these will be a recurrent feature of the sugar industry. Policy lessons from the sugar industry crisis for our economy are clear. The government should never regulate prices, because only market-determined prices can truly coordinate production decisions in view of the capacity of the market. And as long as government keeps the prices artificially high in the name of protectionism, no producer of any product will be interested in exporting. The writer is a researcher and works in the development sector of Gilgit Published in Daily Times, September 15th 2017.