Wheat Import Subsidies in the Sudan: Problems and Alternative Policy Options for Poverty Alleviation

1 Background About 2.6 million metric tons (MTs) (IndexMundi, 2015) of subsidized wheat is the current amount imported by the three major wheat importers in the Sudan, namely, Sayga, Weeta and S. This amount according to experts is believed to be far more than the domestic consumption of the Sudanese bakeries in terms of wheat flour that is suitable for bread making with the remaining amount being smuggled to neighboring countries. Sudanese households are vastly moving away from the consumption of traditional cereals such as sorghum and millet towards the consumption of wheat in the form of bread in its different forms. This is driven by urbanization, rural-urban migration and different forms of adopting the city-like life style even in villages and rural areas of the country. This led the imported amount of wheat to grow rapidly specially during the last decade from 0.96 million MTs in 2003 to 1.5 million MTs in 2004 and to 2.6 million MTs in 2014. Within the government poverty alleviation strategies, all imports of wheat are subsidized. The subsidy is set to guarantee the following: (1) A fixed price for the consumer of SDG 0.33 (about USD 0.04) per bread (weight of the final piece of bread is 70 grams). (2) This goes up to the bakeries as they receive the subsidized wheat flour from the three major millers at the price of SDG 120 per 50 kg sacks. (3) The major milling companies (Sayga, Weeta and S) import the suitable wheat grain from different sources and they receive the amount of the subsidy in the form of a preferential exchange rate. This happens by that the companies deposit the value of their desired amount of wheat imports in local currency (SDG) to their accounts with the Central Bank of Sudan (CBoS) and receive the equivalent foreign currency required for imports. According to experts, the applied exchange rate is almost 50% below the official exchange rate to be counted as a subsidy. The official exchange rate in the Sudan is 5.98 SGDs/US$ (CBoS, 2015), which is far below the black market exchange rate of more than 7.5 SGD/US$. This means that the selected milling companies gain about 4.5 SDGs for each US$ they withdraw from their CBoS’s accounts for the imports of wheat. The intention of the government is to supply the importing companies with their requirement of foreign currency they need for importing wheat against the deposited local currency with the subsidy included as a difference in the applied exchange rate. This is expected to translate into subsidized wheat flour delivered to the bakeries through the companies’ agents. The bakeries are then expected to sell each 70 grams’ bread to the consumers at the price of SDG 0.33 (about USD 0.04). 2 The problem The effectiveness of this wheat subsidy depends on many factors, but the most important one is the assumption that all the steps of this chain including importing, milling, distribution to agents, transportation and delivery to bakeries across the country are working competitively and the subsidy is fully transmitted to consumers. Unfortunately, that is not always the case. The following problems are constantly reported leading at the end to considerable shortages in the supply of wheat bread to Sudanese households across the country: (1) Consumers: bread is not available, not according to the designated size/weight or not according to the normal quality (the flour used is a mixture of different qualities, including cheap local types of wheat flour). (2) Bakeries: wheat flour is not available in the amount they require to satisfy local bread demand, the subsidized flour is far below what they need and therefore, they are forced to mix it with other types of flour. (3) Agents: the subsidized flour they receive is less than what they are supposed to, not all the subsidized flour is sold to bakeries, but also in the black market to regional traders and exporters. A lot of informal trade of wheat flour is claimed by experts to take place internally and across borders to Ethiopia, Eretria and Chad. (4) Milling companies: importing ships arrive in Port-Sudan, but companies are unable to claim their imported amounts because the CBoS is unable to provide them with sufficient foreign currency to claim their imports. Therefore, companies produce 60% or less of what they are supposed to. 3 Objectives and research questions (1) Given the problems in implementing the subsidies and the losses of public funds due to these difficulties, would completely removing the subsidy and saving the public funds for the government lead to drastic implications for Sudanese households differentiated by income and region? (2) More than a decade ago, there was a government policy aiming at assuring self-sufficiency in wheat by cultivating large areas in the Gezira scheme by wheat. This policy wasn’t successful and one of the reasons was that the climate and soil of the Gezira scheme were not suitable for wheat production and northerly Sudan is better. Would channeling the amount of the current subsidy to domestic wheat producers in the northern Sudan, financing large scale cultivation projects or extending the irrigated areas grown by wheat improve the livelihood of the Sudanese people? (3) Due to the long chain through which the subsidy is injected starting from the importers and along the way down to consumers and the difficulties facing the government to reduce corruption and smuggling of the subsidized wheat flour through the chain, would it be better that the amount of subsidy be distributed in the form of food coupons to low income households and the rest of the chain be left without any intervention? 4 Methodology Due to the microeconomic and macroeconomic nature of this research problem, a single country CGE model is applied calibrated to a new post-separation social amounting matrix for the Sudan. The model is based on the STAGE model of McDonald (2007), which is an open economy static single country CGE model. The SAM provides data on 69 sectors and 63 commodities with wheat included among them and 14 production factors of which 12 are labor divided according to Rural/urban, skill level and gender. Households are disaggregated according State and Rural/urban with each category disaggregated to five income quintiles. The research questions are introduced in the model in terms of counterfactual simulation scenarios that start from the inclusion of the amount of the subsidy in the database as a base scenario. For the scenarios, the subsidy rate is varied, and other instruments (subsidies for the development of domestic wheat production, targeted food subsidy to poor producers) are introduced. The findings of the study are expected not only to provide quantitatively supported policy recommendations to the government, based on which the policies related to wheat subsidies can be revised, but they are also expected to elaborate the research and political discussions on this hot issue. Examples of similar government interventions are well established in the recent CGE literature especially on the fuel commodities of the oil rich countries. The Nigerian oil sector is a good example where despite huge subsidies are paid by the government to fuel suppliers, little is reaching the consumers (Siddig et al., 2014).