Pakistan and the Edible oils
Periodic lockdowns in the cities, soaring death rates and people compelled to stay indoors have also brought changes in their lifestyles. This is one side of the coin while on the other, the world saw a rising trend of trade deficits, high inflation rates and issues of food security due to a downward trend in harvesting many food-related items, which has even threatened the developed economies and forced them to take drastic steps to safeguard the interest of their countries and communities. In such a scenario, a developing country like Pakistan with a fragile economy, that too, dependent on international support and IMF conditional programs, has been hit from many directions. As a result, we have seen a soaring inflation rate and rising dollar parity. Electricity is becoming more and more expensive while gas is to be rationed. On top of that, a record increase in fuel prices has hit the common person from all sides. Thus, making it a huge task to meet day to day expenditures with the issue of food security becoming more serious.
Due to the unfavourable PKR-US$ parity, there is a constant and unprecedented increase in the import bill of the country.
In Pakistan, one of the essential food items is edible oil and 80-90 per cent of its total demand is met by imported Palm Oil from Indonesia and Malaysia. According to the United States Department of Agriculture’s (USDA) estimates, the per capita consumption of cooking oil in Pakistan is 24 kg. The imported palm oil in Pakistan is being used for making a range of goods like Vanaspati Ghee, chocolates, soap and various bakery items.
Market sources project that the country’s food import bill will go up further in the current FY 2021-22 as compared to last year. This is evident from the figures of the quarter of July-September, which went up by 66.11 per cent to the US $18.74 billion against the US $11.28 Billion over the corresponding months of last year; whereas edible oils import also witnessed a substantial increase both in terms of quantity and value. Due to the unfavourable PKR-US$ parity, there is a constant and unprecedented increase in the import bill of the country.
Furthermore, it is envisaged that the edible oil import bill is set to go up by 30 per cent in the ongoing financial year due to rising prices in the global markets and the opening of Afghan Trade after the change of government. Whereas, the import of Palm oil grew by 53.91 per cent in the 1Q (July-September) for the FY2021-22 to $891.2 million from $579 million over the corresponding months of last year. When we look at the comparative fluctuation in the FOB prices of Indonesian Crude Palm Oil (CPO) between November 9, 2020, and November 8, 2021, we see an upward movement of US$ 530/MT from US$850/MT to US$ 1380/MT, whilst for the same dates, PKR to 1US$ parity was 158.91 and 170.51 respectively. With the local demand for imported palm oil increasing at four to five per cent year over year, the ultimate burden of increasing prices is being transferred to the general public.
Affordability of the finished product of Vanaspati Ghee and Cooking Oil by the consumer is further compromised by the government’s current duties and taxes structure, which as of now in terms of percentage basis stands at 29 per cent of the import CNF value, amounting to PKR 68,506/MT as compared to PKR 31.501 in 2018. The overall increase of PKR 37,005 or approximately 117.5 per cent, has ultimately been a pass-through to the consumer. Resultantly, the prices of Vanaspati ghee and cooking oil are showing a continuous upward spiral in the domestic market since January 2021.
The current prices have soared to an unparalleled level of PKR409/Kg of vanaspati ghee and PKR 399/Litre of cooking oil, with an ongoing pressure on PKR against US$ and current rate jumping to PKR 178. This will further drain the already dwindling resources of an average consumer unless the government intervenes to support through some kind of subsidy. The Palm Oil importers and Pakistan Vanaspati Manufacturers Association (PVMA) have been very vocal on the recent increase in the import price of edible oils, especially Palm Oil, in the market. The Chairman of PVMA, Mr Tariqullah Sufi, has pointed out that an increase in import prices has not only contributed to an increase in duties and taxes but has also compromised the cash flow situation of the industry.
On the other hand, regional countries have kick-started the withdrawal of sales tax, import duty and other levies on edible oils in a bid to provide relief to the general public. The foremost example is India, which has already taken this step and reduced the import duties on RBD Palm Oil and Olein from 37.75 per cent to 19.25 per cent. The industry in Pakistan has called upon the government to withdraw all taxes and duties on edible oils to mitigate the surge in food inflation. If the government withdrew the customs and duty of PKR 9,180/MT, 17 per cent federal excise duty (FED), two per cent Additional Custom’s Duty, 5-6 per cent adjusted Sales Tax after Value Addition of two per cent Income Tax for just six months, edible oil prices would go down by 25-30 per cent immediately. Meanwhile, the Minister of Planning & Development had announced a proposed reduction in duties and taxes; the proposal is to waive two per cent Additional Custom Duty, Custom Duties and Sales Tax to be cut to half while no reduction in Federal Excise Duty (FED) is suggested. But, this is still on paper as it is yet to be notified by the Federal Board of Revenue (FBR).
On the other hand, as per the news coming out, the negotiations between the government and industry stakeholders are still inconclusive. To prevail the government should take some immediate measures to stabilize Rupee-Dollar parity and to rationalize the duties and taxes on the import of edible oil especially Palm Oil, which amounts to 90 per cent of the total imports. Moreover, the Government can also take steps in modifying the Trade Agreements signed with both Indonesia and Malaysia for preferential treatment as far as the export of Palm Oil to Pakistan is concerned. Unless these remedial measures are taken, the middle and lower segments of the population will remain under economic pressures with no respite. But as of now, we don’t see enough light at the end of the economic tunnel
