Fertiliser sector seeks end to gas subsidy
The fertiliser industry has made an investment of Rs162 billion in capacity expansion and plant upgrade, which has helped Pakistan to become self-sufficient in urea production. PHOTO: FILE
The fertiliser sector has proposed complete deregulation of the industry without any gas subsidy, saying it is internationally competitive and can thrive in a fully deregulated environment.
Talking to media, Engro Fertilisers CFO Imran Ahmed said that the fertiliser industry was currently providing urea at a significant discount of Rs5,000 per 50kg bag compared to the imported urea.
By deregulating the industry and introducing a weighted average cost of gas for all manufacturers, including locally produced gas and imported liquefied natural gas (LNG), the government could earn more revenue and reduce the country’s fiscal imbalance, he suggested.
“This will, however, mean that domestically produced urea will be available at higher prices compared to the import parity cost,” the CFO said.
“Agri-productivity and farmer income, especially at the bottom of the pyramid, can take a huge hit if no countermeasures are taken. To mitigate this adverse outcome, the government needs to implement a smart subsidy mechanism for small farmers.”
He suggested that higher gas revenue of Rs89 billion from the fertiliser industry could fund the targeted subsidy of around Rs65 billion for small landholders.
“Around 90% of farmers own around 48% of land with a size of less than 12.5 acres. Post-deregulation the government can utilise the benefit of reduced feed gas subsidy to offer targeted subsidy to small farmers,” Imran said.
“The removal of feed gas subsidy on the production of urea and DAP (di-ammonium phosphate) will not have a significant impact on prices of major crops and the resultant expenditures of family households in Pakistan.”
Imran pointed out that the fertiliser industry was often accused of earning excessive profit, however, a sector-wise review of the past 10 years revealed that its returns had been lower than many other industries.
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“Return on equity and return on assets stand at 33% and 11% respectively in the fertiliser industry, which are lower than many major industries, including food and personal goods, automobile, and oil exploration and production. Return on equity and return on assets for other industries are as high as 67% and 19% respectively.”
During the 10-year period, he revealed, the fertiliser industry made an investment of Rs162 billion in capacity expansion and plant upgrade under the Fertiliser Policy 2001, which helped Pakistan to become self-sufficient in urea production.
As a result, Pakistan farmers were shielded from Covid-19 shocks in the global urea market where prices have surged 86% since last year.
On the other hand, according to the CFO, the fertiliser industry has played a critical role in ensuring food security by providing adequate and affordable urea supplies.
“The government is providing the industry feed gas subsidy of Rs842 per bag on spot basis, while the industry is passing on six times more benefit to the farmers through a discount of Rs5,000 per bag compared to international prices.”
Through import substitution, the fertiliser sector would contribute more than $3 billion to reducing the trade deficit in 2021, he said, adding that as a result of significantly lower urea prices, the fertiliser industry would save farmers from an additional burden of Rs363 billion during the year.
Published in The Express Tribune, October 21st, 2021.
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