The World Bank today released a report on the recently introduced quota system for grain exporters in Ukraine, according to a WB press release. The report, prepared jointly with the German Advisory Group to the Ukrainian Government, studies the impact of the quota on domestic grain prices and consumer protection, export revenues, and investments in the grain sector. The World Bank argues that the quota is ineffective in protecting domestic consumers against rising international grain prices, inefficient because it causes large losses of export revenues, and prone to corruption, leading to a loss of Ukraine’s investment reputation.
In particular, World Bank experts emphasize the following pitfalls of the new system:
The introduction of the quota is not justified, because domestic grain supply is amply adequate to cover all domestic needs and allow considerably higher grain exports than estimated by the government. This year’s grain production is well above the average of the last ten years and high beginning stocks contribute to the good supply of grain in the 2006/07 marketing year.
Ukrainian food consumers gain very little from the quota. Although wheat prices have been constant, prices for flour and bread have actually increased since the quota’s introduction. In fact, wheat prices contribute only to a certain percentage to the final bread price. The impact of lower feed prices on the prices of meat and dairy is expected to be very limited.
At the same time, the quota system imposes large losses on grain producers and significantly affects export revenues. Total lost export revenue until the end of 2006 are estimated at US$300 million, while the estimated reduction in farmgate prices by around US$25/ton could lead to cumulative revenue losses of hundreds of millions of US dollars. The proportion of the poor engaged in agriculture in Ukraine is larger than the average for the country, hence this reduction in revenues for grain producers may actually increase rather than decrease poverty.
The administration of the quota system so far has been highly non-transparent, and thus creates opportunities for corruption. Companies able to secure an export quota can presently cash in a profit of US$ 25/ton (the equivalent to the lost revenue for producers). Additional losses due to incentives to smuggle grain out of the country are likely. The negative impact of the quota on grain producers and traders and the risks of corruption negatively affect Ukraine’s investment reputation.
“Our main recommendation is therefore to abolish the quota system as soon as possible” - said Paul Bermingham, the World Bank Director for Ukraine, Belarus and Moldova. “Though these market interventions were done with the intention to guarantee food security and protect domestic consumers from rising international wheat prices, they are not achieving these goals. Instead, we would recommend alternative measures that would protect the poor from rising food prices, including the use of means tested cash transfers.” added Paul Bermingham.