Management of Public Stock for Improved Effectiveness of PFDS in Bangladesh

Quazi Shahabuddin, Paul Dorosh, Mohammad Yunus, Shahidur Rashid, and Siban Shahana

    The study has looked into selected aspects of public stock management with a view to improving the effectiveness of PFDS in Bangladesh. The selected aspects include, among others, the impact of rice trade on price stabilization and their implications for public stocks, especially in the light of 2007/08 experience, market integration of different qualities of rice, public stock needs and the political economy of food policy reforms in Bangladesh.

    Given the uncertainties of trade with India and the world market, a pertinent question is how much should public stocks be increased? Simulation analysis of the implications of higher public distribution (and implicitly stocks) in 2007/08 sheds some light on this question. Econometric evidence shows that trade with India was a major determining factor for this price stability. In particular, it has been shown that during this period, domestic wholesale prices of rice were co-integrated with import parity prices of subsidized Below Poverty Line (BPL) rice from India’s public stock.

    The results of co-integration analysis indicate that the prices of different qualities of rice are highly co-integrated with the following policy implications: (i) the government interventions by way of procurement and distribution, especially open market sale of coarse rice would have price stabilizing effect on other qualities of rice as well. (ii) Any intervention in one market would have impact through spatial arbitrage on other markets as well. (iii) The government interventions as to both procurement and distribution would most likely to have impact both across different qualities of rice and across markets in different locations/regions.

    The political economy of food policy reforms carried out in the past has been analyzed by gearing around policy reforms pertaining to restructuring of PFDS, especially public rationing system and related issues. The dynamics and politics of policy changes have been analyzed in terms of high stakes and the major actors (both reformers and resisters of reforms) and the sequencing of policy reforms (long waves and short bursts of reforms) that took place in the early 1990s.

    Public stock needs for different purposes have been projected (with breakdown between rice and wheat) for the next three years. A few aspects may be highlighted here. First, public stock is measured at a point in time that results from the accumulation of excess of inflow over outflow. This distinction between flow and stock is essential to comprehend accurately stock policies. Traditionally, Bangladesh measures its public stock as the monthly closing stock accumulated in government storage depot/godowns and reports these figures regularly. To cause a change in stock, one has obviously to look at how and when to cause necessary changes in the inflows (domestic procurement and imports) and outflows (monetized and non-monetized targeted distribution). Second, the projected public stock needs for FY 2013, FY 2014 and FY 2015 are observed to be almost double that of actual stocks the PFDS held over the last three years (average of 2008-09, 2009-10 and 2010-11). This can be largely attributed to the emergency stocks of 600 thousand tons including a dead stock of 175 thousand tons, and partly due to stocks needed for price stabilization purposes.

    The determination of the "desirable" stock levels (both at the aggregate level and in different locations) remains an important concern, keeping in mind that there are important constraints arising from the need to rotate food grain stocks. Among other issues, the potential trade-offs between the different uses of public stocks for regular distribution, emergency distribution and price stabilization need to be further analysed. Also, since PFDS is costly, the possibilities for balancing distribution through priced and non-priced channels should be further explored. There is an interface between distribution needs, stock needs and procurement needs. This has to be carefully assessed periodically, keeping in view the causality in proper perspective.

    There are divergent estimates of leakage and targeted programme which need serious scrutiny. The resolution of the divergence in different estimates of leakage can perhaps be achieved through a more carefully designed methodology to be uniformly followed in future estimates. Moreover, the effect of the PFDS has been evaluated more in terms of financial costs than in terms of economic and social benefits derived from food-based development programs. Although reduction in the financial costs of operation should remain an area of continuing concern, there is perhaps a need for devoting more attention to the measures of economic and social benefits arising from such programs.