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Need to address issues facing fertilizer manufacturers

One of the prime focuses of economic managers of Pakistan should be ‘achieving food security’ to fill the stomach of over 220 million people living in the country. To keep the prices of eatables affordable two-pronged policy has to be followed: 1) keeping prices of inputs low and 2) offering subsidies to farmers to protect them from the adverse impact of spikes in commodity prices. Anyone who does not subscribe to this statement must examine policies being followed by other developing and even developed countries.

In countries like India and China, consistent and focused effort by public sector support programs has played a key role in improving per acre yields. India uses superior quality (temperature and drought resistant varieties) and high yielding hybrid seeds for achieving higher. Moreover, in case of wheat, their use of certified seed is almost 100%, whereas in Pakistan use of certified quality seed is as little as 25%. Similarly, to promote balanced use of fertilizers, India is giving 70% subsidy on urea, 50% on phosphate fertilizers and 50% on potassic fertilizers. This has helped them achieve desired NPK ratio. They have long term farmer support programs e.g. under drought years diesel subsidy is given for tube wells. Moreover, bio fertilizer subsidy has also been introduced to promote its use.

In India, agriculture universities and extension department are also playing a key role in technology transfer to farmers that are helping them in achieving higher yields.

It is often said that for achieving higher production, there is a need for increasing area under cultivation. Experts say that at present only 22 million hectares are under cultivation, as compared to country’s total cultivable area of 79 million hectares. A bigger threat is that area under cultivation is on constant decline due to urbanization and industrialization, while the population is also on the rise. Various impediments don’t allow any significant increase in area under cultivation. However, analysts say that yields can be doubled by overcoming shortage of nutrients, ensuring better water management and improving crop management.

In this article only one topic has been discussed briefly that is ensuring availability of fertilizers at affordable price. Since 2010 urea demand has averaged 5.7 million tons as against an average supply of 4.9 million tons. The Government of Pakistan (GoP) has been bridging the gap by supplying imported urea at subsidized rate, in-line with the locally produced. Beginning 2016, the demand-supply dynamics have reversed due to: 1) increase in local production capacity and2) idle capacities coming online due to increase in gas supply from Mari and LNG. As a result, production for 2016 increased to 6 million tons as against a demand of 5.5 million tons. This resulted in an oversupply situation with industry carrying an inventory of 1.1 million by the end of 2016. To contain the glut the GoP allowed one-time export of 600,000 tons and also offered subsidy on export of urea, which has eased the prevailing glut.

However, manufacturers continue to face serious financial crunch as there have been significant delays in the payment of subsidy. Under the 2015-16 subsidy scheme the FBR was involved in the subsidy verification process which resulted in payment of the claims with a lag of 6 to 8 months. However, as per2016-17 subsidy scheme, payments are pending due to: 1) procedural hiccups, 2) non-involvement of FBR in the verification process, 3) unnecessary involvement of provinces in the verification of claims and4) the GoP also suffering from liquidity crunch. According to industry sources a meeting was held in July 2017 where it was agreed that 80% of 2016-17 pending claims would be released immediately and remaining 20% would be released after third party audit, for which tender has been issued for the appointment of a chartered accountant firm. However, to date no significant payment has been made on the pretext that GoP does not have funds.

Pakistan has graduated from urea-deficit to urea-surplus country. Therefore, the government’s approval to export urea was a good strategic decision. Exporting surplus urea offered an opportunity to balance the market dynamics. It is suggested this policy must continue whenever the market conditions allow. The policy enabled the country to earn valuable foreign exchange. Initially, there was positive margin on exports when oil prices were less than USD 50/bbl, but with hike in international price of crude the dynamics are likely to change. The industry exported urea at an average FOB of US$225/ton. All cost of exports, including port clearance expenses were borne by the industry without any subsidy from the government.

Reportedly, National Fertilizer Marketing Company (NFML) has recently requested the government to approve import half a million tons of urea for the upcoming winter season. Experts expect the industry to carry an inventory of about half a million tons inventory 2018 with production to remain close to the demand, negating the need to import any urea. Moreover, urea price has surged to US$290/ton due to seasonality factor. Therefore, any import at this price would severely impact the national exchequer negatively.

Pakistan has become self-sufficient in urea production. However, going forward, sustainability of gas supply to the fertilizer sector is going to be a huge challenge for the government and also to the manufacturers, as the government has recently diverted gas (17%) to the power sector which was specifically dedicated to the fertilizer sector. This may result in faster depletion of gas reserves.

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