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Sugar sector hit by cash crunch

ISLAMABAD -The caretaker government has been informed by the sugar industry that it was facing a cash shortfall of Rs30-42 billion on account of sugarcane price and the production cost of sugar that would lead to major defaults by the mills, crop losses to the farmers.

Informed sources, however, said the caretaker minister for finance Dr Salman Shah was reluctant to offer any rescue package to the industry on the grounds that it would be politically too difficult for the government to defend dolling out subsidies to sugar industry that it accused last year of amassing indecent profits.

Sources said that a secretaries committee has been directed by the caretaker prime minister to look into the sugar crisis in detail and consider some of the proposals presented by the industry. The secretaries committee is yet to hold a meeting but the industry has recommended exemption of 15 per cent GST on sugar at least for the current year coupled with purchase of surplus commodity by the government at a fixed price rather than tenders that was sure to crash sugar prices.

The sugar mills have told the government the sugarcane prices of Rs65 and Rs67 per 40kg were fixed by the provincial governments on the assumption of mill-gate sale price of sugar at Rs29/50 kg of last year that has come down to Rs22-23 per kg matching a sugarcane price of Rs40-45 per 40kg. They said with the present sugarcane prices, the sugar mills would be able to utilise about 50 million metric tonnes and able to generate Rs80 billion to pay the growers without adding any financial charges.

On the other hand, the return expected from the sales with the present price would be in deficit of about 30 per cent. After including the general sales and special excise duty, the total manufacturing cost of 4.4 million tons sugar would reach Rs121 billion while the companies would be able to generate revenue of Rs91.58 billion on the sale price of Rs21 per kg ex-mill fixed by the government. This would leave cash shortfall of about Rs30 billion and if shareholders minimum profit of 10 per cent is included the net profit would surge to Rs42 billion.

In the meanwhile, the total sugar availability for the next year has been estimated at 5.36 million metric tons including a carryover stock of about one million tons as of October 2007. With a total consumption of 4.2 million metric tons per annum, the industry expects a surplus of about 1.16 million metric tonnes for the current year and add to the glut in the market.

To resolve this problem, the government has indicated to purchase about one million tons of sugar from the mills to reduce their cash problems. But the industry believes that international market was also experiencing surplus production that would create problems for the farmers during the current season. Not only that many sugar mills could lead to closure due to liquidity problems, their inability to pay due to the farmers would lead to discouragement to the growers who would tend to avoid sowing sugarcane crop next year because of problems this year.

Historically, Pakistan's sugarcane and sugar production have an erratic cycle of low production and better prices in a year followed by two years of good crop and bad prices.