Ban on sugar imports: who will be better off?

24Mar 2016
The Guardian Reporter
The Guardian
Ban on sugar imports: who will be better off?

The President’ decision was based on some few government officials who had been misusing their powers to permit importation of sugar for their own selfish interests

Late last month, President John Magufuli issued a new directive in Dar es Salaam on sugar imports that will have ramifications not only to consumers but also the whole national economy at large.

According to Tanzania Sugar Board (TSB), the country’s annual sugar demand currently stands at 590,000 tonnes, while the four domestic sugar plants supply capacity is 291,000 tonnes. That leaves a shortage of nearly 300,000 tonnes which has to be imported.

It is believed that the President’ decision was based on some few government officials who had been misusing their powers to issue orders on importation of sugar for their own selfish interests.

Let’s look at how the market will react following the ban. The law of supply and demand states that when the quantity of goods decreases, price of the goods in question increases to offset the gap between quantities demanded in the short term.

Before the ban and imposition of the 1,800/- tag, the price of a kilo of sugar was between 2000/- and 2500/-. Retailers are expected to take advantage of low competition by increasing sugar price to maximise profit.

For example: Graph 1, indicates that an increase in supply (imported) caused the price to decline and the quantity to rise from equilibrium P1, quarter (Q)1 to P2, Q2. In Graph 2, supply decreases thus causing an increase in price and a decrease in quantity.

Graph 2 indicates the short term effect of the sugar ban imposed by Dr Magufuli. The equilibrium point was at Q1, P1 (Quantity of sugar supplied annually at price 2000/- a kilo. The ban will push the supply curve to the left; tonnes of sugar will decreases from Q1 to Q2. Price per a kilo will increase from P1 to P2.

In the long term the equilibrium is expected to go back to Q2, P2 in graph 1 as sugar price will go back to normalcy if local farmers increase productivity to offset the supply and demand gap.

For consumers, there will be a rise in cost of sugar leading to low consumption in the short term, or some might substitute sugar to honey or go without sugar for those who can afford the price in the short run.

In the long term however, farmers will be attracted by the high price of sugar hence increase production to maximise profits. High sugar prices would also have meant more people/farmers would venture into growing the commodity.

Although the ban will benefit sugar growers in the long run as well as the economy in terms of revenues generated and increased employment, higher productivity will need government interventions in two ways: capital access to farmers notably cash and equipments such as tractors. Also the government need to invest in sugar plants to increase production and better the supporting infrastructure such as roads from farmlands to factories.

Currently there is minimal government support when it comes to supplying the new land, long-term credit with zero interest for farmers and transportation logistics that Tanzania farmers desperately need to expand.

The law of Import Substitution Industrialization implies that nations that wish to increase their self-sufficiency and decrease their dependency on foreign goods should focuses on protection and incubation of domestic infant industries so they may emerge to compete with imported goods and make the local economy more self-sufficient.

In order for the ban to be effective, it is up to the policymakers to make sure that resources are re-allocated effectively in sugar factories to increase productivity to full capacity. High imports weaken local currency in the exchange rate market, create trade imbalances and increase external borrowings.

As for the whole economy, one way to prevent money from leaving the local economy is to connect local demand for goods and services with the local suppliers of the same. Many of the things that individuals or businesses need for consumption or trading can be supplied locally but, due perhaps to lack of adequate information or convenience, or cheap prices, the goods are often externally sourced.

This represents another outflow of capital. By substituting demand for externally produced things with local products, communities can retain capital for use within their localities. For instance, sugar from Brazil was 100/- cheaper than home grown sugar per kilo in 2013. It means that consumers were more willing to buy Brazilian sugar because it was cheap, therefore benefiting Brazilian farmers.

The author is a Tanzanian economist based in the UK.
Email: [email protected]

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