The inauspicious Fertilizer Policy may lead to fleeing of capital from Pakistan and result in annual outflow of foreign exchange to be spent on import of urea


Dec 02 - 15, 2002

No sooner did the GoP announced its Fertilizer Policy in the middle of year 2001, analysts warned about its negative repercussions. It was said that the policy would force the local investors not to make further investment in the sector and find new destinations for investment in the Middle East. The GoP failed to read the writing on the wall. However, after nearly a year, one of the leading urea manufacturer of Pakistan, Engro Chemical Pakistan (ECPL), has signed an MoU with Oman Oil Company to establish a urea plant in Sultanate Oman.

It may be recalled that over the years ECPL has not only expanded its urea production capacity but also established a NPK plant. Following the diversification policy the company also established a PVC resin manufacturing plant and liquid handling and storage facility. This investment was made at a time when most of the local investors were shy. The international financial institutions like International Finance Corporation (IFC) and Commonwealth Development Corporation (CDC) not only extended credit to Engro's fully owned subsidiaries but also acquired equity stake in these units.

The ECPL's decision to invest outside Pakistan talks a lot about the failure of the GoP to convince the International Monetary Fund (IMF) on the issue of sale of gas (feedstock) to fertilizer plants at subsidized price. Many Pakistani analysts present convincing argument and prove that sale of feedstock at lower price does not fall under the connotation of subsidy. It is sale of low quality gas at discounted price. It is understood that the IMF was also convinced and did not insist on a 5% increase in gas price due on 1st July 2002, as per the schedule agreed with the Fund.

It is necessary to reiterate that the local fertilizer manufacturers want the local feedstock to be comparable with 'the gas prices' prevailing in the Middle East. This demand is based on two tangible facts: l) in the recent past Pakistan experienced massive dumping of urea from the Middle East and 2) the region is the only reference point for gas price for Pakistan. Though, the gas price is much lower in Central Asian countries analysts do not wish to refer to that due to the inability of these countries to market their gas at international prices. Most of these countries are land-locked and lack infrastructure for the sale of their gas in the global markets. Therefore, they have to be contended on the dismal price they get in their domestic markets.

It may also be recalled that sector experts stressed on expansion of existing urea capacity to produce additional two million tonnes of urea annually. They also suggested a road map for the expansion by debottlenecking of the existing plants and establishing of three grass-roots plants of 600,000 tonnes/annum each. They also suggested that such a mega investment cannot be ensured without guaranteeing feedstock price up to year 2010. However, the GoP did not pay any attention to the apprehensions expressed by the experts.

It was also made clear by the experts that the country needed to expand urea manufacturing capacity due to two key reasons. These are: 1) the nutrient deficiency of the area under cultivation and 2) imbalance use of fertilizer in the country. The area under cultivation is grossly deficient in nitrogenous contents and also need added doze of DAP type fertilizer. Since the DAP cannot be produced in Pakistan at optimum cost, it was also suggested that surplus urea should be produced and exported to finance the import bill of DAP.

The GoP was pressurized by the IMF as well as the local critics to abolish subsidy on feedstock. The allegation against the local urea manufacturers was, "They are minting money and the advantage of subsidy is not being passed on to the farmers." However, the critics ignored a few facts. 1) the amount invested by the urea manufacturers for the expansion of installed capacity, 2) the sale of urea in Pakistan below its international prices and 3) the contribution made by these units to national exchequer. If one takes into account the above mentioned facts, the GoP's policy of sale of feedstock at lower price is justified. Any policy must support the local manufacturers and should also lead to self- sufficiency. On these two parameters the GoP's previous policy, regarding feedstock price, has delivered the desired results.

It is still not too late. ECPL has only signed an MoU and the money has not left the country as yet. Therefore, the GoP must re-examine its Fertilizer Policy to ensure the required investment in the urea manufacturing sector. The country needs to expand this capacity to avoid annual expenditure on import of urea.