Wheat support price loses utility: report


ISLAMABAD: Wheat support price has lost its utility, as subsidy mostly benefits large farmers and millers, according to a report issued by the Pakistan Institute of Development Economics (PIDE).

In its report ‘economy watch’, the PIDE said that despite increase in wheat support price in 2007-08 and 2011-12, the total area under wheat crop declined.

The price volatility in international markets is not too common, the price support mechanism creates inefficiencies if coverage is limited and that Asian economies with liberal regimes are outperforming interventionists. Under the support price mechanism, the government has to procure wheat, which involves huge financing from banks at concessional rate under the commodity operations.

Estimates suggest that amount of untargeted subsidy on account of wheat support price is quite large and lending for commodity operations crowds out other productive sectors.

Some studies take the view that the economy stands to benefit if support price is gradually replaced with subsidies on input and targeted cash transfers in short run and gradual liberalisation in the long run.

Though the stock market performed well during the last nine months, various factors make it difficult to rely on the KSE index to predict the long-term trend of the country’s economy, says the report.

These factors include under-representation of major sectors, like agriculture and services in the stock market, tilt of the index towards large firms, small capitalization value and volatility of the stock market relative to other stock markets.

According to the report, other than some agro-based industries, the agriculture sector is completely missing from the KSE, though at times changes in the index value bear some correlation with cotton prices and the weather changes that may affect agriculture one way or the other. The services sector though represented at the KSE is dominated by financial services, energy and retail, wholesale and number of other services of professionals, which contribute significantly to the GDP are not represented on the KSE.

“The KSE index cannot predict much about the sectors of the economy which are not represented in the KSE market,” it says.

Moreover, by construction the weight that the share of a company enjoys in the index is determined by the size of the firm – the larger the firm, higher the weight. The KSE index being a weighted index, firms with greater weight, influence the index relatively more.

Out of 100 scrips included in the KSE index, 20 enjoy a combined weight of around 65 per cent and thus the index is more sensitive to changes in share prices of these 20 companies.

Out of these 20 scrips, six are energy firms, (with a combined weight of 30), four are banking firms (combined weight: 15.5), three are fertilizer firms (combined weight: 9.5) and five others (combined weight: 11).

The PIDE report outlined a scheme to increase the financial inclusion using mobile phones. The document argued that branchless banking can help increase the extremely low level of financial inclusion in the country.

With mobile phones being increasingly used to transfer money from one place to another, now banks through their agents can visit potential customers to accept small deposits and make small loans.

Courtesy Dawn

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