The Onion War

On the face of it Pakistan may have bigger things to worry about, but recent weeks have seen it fall out with India over the humble onion:

The pungent vegetable is now at the centre of a mini diplomatic storm that has further soured relations between both countries over the past few days. The Pakistani commerce ministry banned the export of onions across the border by road and rail due to high prices and shortages at home.

Food inflation is running high across South Asia and onion prices are soaring in both Pakistan and India, as the two have had bad harvests of the crop. Reported hoarding and speculation in India have added to the crisis.

Onions are a touchy subject in India and past price hikes have brought down governments. In retaliation, farmers in Indian Punjab have stopped exporting vegetables to Pakistan.

A sideshow, surely, to the really big issues like Kashmir or religious extremism? Maybe not. You can’t spend anytime in Pakistan without noticing the powerful role played by resource scarcity in the country’s politics.

It all goes back to the global food and energy price spike of 2008. According to the IMF, growth had been robust up until that point and government finances were in reasonably good shape.

Conditions deteriorated in mid-2008 with the sharp increase in international food and fuel prices and worsening of the domestic security situation. The fiscal deficit widened, due in large part to rising energy subsidies, financed by credit from the central bank.

As a result, the rupee depreciated and foreign currency reserves fell sharply. Inflation reached 25 percent in mid-2008 [mostly food], causing harm to vulnerable social groups.

The country has never really made it back onto an even keel. The global economic crisis gave Pakistan a little relief, pushing commodity prices sharply lower, but the public finances never recovered.

And as food and energy prices have risen again, Pakistan has been hit by a succession of mini-commodity shocks (the sugar crisis of 2009 and 2010, the flour crisis of 2010). Some estimates suggest that higher food prices have led to a precipitous decline in caloric intake (though robust data is hard to track down).

Gas and electricity are in critically short supply, leading to frequent load shedding, for consumers, business, and industry in winter. Around the major cities, one sees trees being stripped bare by people desperate for heat for their houses and businesses:

Shopkeepers operating in the streets and mohallahs are using pieces of wooden and cardboard crates and other packing material to brace the chill in the air.

Many Lahorites are having ‘bonfires’ even during day time. An empty tin of cooking oil is usually converted into a hearth by making holes in it. Old newspapers, textbooks and copies besides parts of broken furniture are used to make fire as it is hard for many to afford Rs1,200 per 40 kilo fire wood or Rs40-50 per kilo coal.

There are no easy solutions. Pakistan has also been under intense pressure from the IMF and the United States to reduce fuel subsidies, in order to cut its deficit and meet the conditions of its IMF loan.

But its attempts to comply simply fuelled political instability. The PPP-led government came close to falling when it attempted to push up the cost of petrol at the end of 2010. Backing down was the price of getting its junior partner, MQM, back into the coalition late last week.

The result, though, has been unwelcome speculation that Pakistan may on the road to default – a worry that is likely to intensify as oil prices head ever higher.

Inflation is now up to 16%, with food prices expected to rise 20% in December 2010 (year-on-year). In November last year, onions jumped in price by 67% in just one month alone.

As in 2008, many of the drivers of the crisis are regional and global. While the attention of the world is fixated on Pakistan’s struggle with religious extremism. In the background, the struggle for resources seems to be doing as much to push this country towards ruin.