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Ogra has sent a summary to the federal government, which, if approved, would come into effect from January 2020. The price of gas, which is used as feedstock for fertiliser, would increase 136% from Rs300 per million British thermal units (mmbtu) to Rs707 per mmbtu while the price of gas used as fuel by the fertiliser industry would become costlier by 32%, going up from Rs1,022 to Rs1,345.
If the prime minister approves the proposal, it would push up urea prices by Rs730 per bag but, according to market sources, the premier may not approve the exact proposal.
“This will be the second gas price hike during FY20 by the Pakistan Tehreek-e-Insaf (PTI) government, reflecting an aggressive approach to bridge the revenue shortfall for both SSGC and SNGPL, under the IMF programme,” according to a report of Taurus Securities.
OGRA seeks a massive 214% hike in gas prices
“If notified, the hike is likely to impact the entire economy including households and industries, severely. Resultantly, we may even witness increase in headline inflation. Our current CPI forecast for FY20 stands at 11%.”
“Ogra’s recommendation is foreseen to augment the burden on all the industrial sectors and consumers of the country,” said a fertiliser industry source on condition of anonymity. This increase varies from one sector to another and goes up multiple times for certain segments.
“It is strange that on the one hand the government is asking the industry to reduce urea prices to support farmers and on the other hand it is going to take this harsh step,” remarked Sherman Securities’ research analyst Saqib Hussain.
“Although this step is clearly a continuation of the right efforts to resolve the circular debt problem in the gas sector, it is a bit hasty measure,” he said.
The gas sector has accumulated circular debt of Rs181 billion.
Gas prices are supposed to be revised every six months, said Hussain. “However, the previous government held up the prices for about three years, which created the balloon of circular debt.”
“The government is making the right and tough calls to ensure that we don’t have another circular debt crisis,” said the industry source. Having said this, the proposed pace of increase is not sustainable and would create massive inflation across the board.
As an example, the cost of roti (bread) may double or even triple and the CNG cost may go up by Rs24 per kg. In line with past practices, this increase in the gas cost would be passed on by the fertiliser industry and would lead to an increase in urea prices by Rs600-700 per bag.
With demand for other phosphorous-based fertilisers largely catered to by the local players, any increase in gas prices would cause a surge in prices of DAP and other fertilisers as well, he said.
Published in The Express Tribune, December 19th, 2019.
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