Rural Recovery in Pakistan: Can Government Policies Help Sustain Growth?

Pakistan's rural economy has struggled to find growth momentum over the past two years due to depressed farm incomes and weak rural demand. The government's confused agricultural policies have exacerbated this issue, particularly with its support-price regime and large-scale procurement practices.

However, there are early signs that this may be changing. Agricultural commodity prices have begun to rise, improving the economics of farming and putting more cash into rural hands. This is a welcome development, but it should not obscure the government's past mistakes.

The government sought to reform agriculture by dismantling the wheat support-price regime and retreating from large-scale procurement. However, it continued to intervene in the market whenever food inflation became politically uncomfortable, importing wheat when international prices were low and releasing public stocks to suppress domestic prices. This approach was neither a functioning support-price regime nor genuine liberalisation.

The contrast with 2019-22 is instructive. Domestic support prices rose sharply while global agricultural prices surged following Covid and Russia's invasion of Ukraine, lifting farm margins substantially. Farmers spent more on vehicles, housing, clothing, agricultural machinery, and consumer goods, with the benefits spreading through rural supply chains and contributing to two consecutive years of 5-6 per cent GDP growth.

The 2022 floods disrupted this momentum, after which international commodity prices reversed and a series of domestic policy mistakes compounded the damage. Rather than allowing local prices to adjust through the market, the authorities increasingly treated cheap agricultural commodities as another instrument for controlling inflation.

The government is now under pressure again, with wheat prices rising sharply. The familiar response would be to release stocks aggressively, facilitate imports, or otherwise force domestic prices lower in the name of protecting consumers. However, this would repeat precisely the mistake of the past two years and suppress farmgate prices.