The decision negates the basic policy objectives

Aug 18 - 24, 2003

The 7.5% increase in price of gas (feedstock) became effective from 1st July 2003 and it should have also reflected in retail price of urea. However, the government has prohibited manufacturers to increase urea price. Apparently the feudal lobby prevailing at national politics and also enjoying majority in the elected government succeeded in convincing the government to take a decision that does not support the much talked about free market policy.

It is believed that urea manufacturers were told not to increase the price as this juncture because farmers were facing problems due to heavy rains. However, this claim seems contradictory because government has not withdrawn the 15% GST applicable on the imported DAP fertilizer. Ever since the government has imposed GST on DAP its use is on the decline. The demand for urea and DAP during the first half of year 2003 declined by 6% and 21% respectively as compared to the corresponding period of year 2002.

The decline in urea sales is attributed to the large stock lifted by the dealers in December 2002. The sharp decline in DAP sales was due to the steep increase in the price of imported DAP, which was further burdened by 15% GST and 6% unadjustable withholding tax. The high price of DAP and other phosphatic and pottasic fertilizer is adding to the problem of unbalanced use of various fertilizer. This is a matter of concern and a serious limitation in increasing the productivity of agriculture sector in the country.

There are indications that offtake of urea is increasing, This hints towards a serious problem, farmers applying more urea to compensate the lower usage of other nutrients. According to some agriculture experts, "On the one hand it is waste of resources and, on the other hand, it further reduces the yield of various crops." If the government is really serious in resolving the problems of farmers, it must withdraw GST on DAP and all other types of fertilizers. An arbitrary decision of not allowing the manufactures to increase price despite increase in cost of feedstock is unjust.

According to industry sources, "The government disapproved the increase in urea price on the grounds that would lead to substantial inventory gains for the manufacturers." However, it is the weakest argument. Historically, the state-owned Pakistan State Oil Company (PSO) has been making fabulous inventory gains in the past. If allowing inventory gains were legitimate in case of PSO, why should the private sector be deprived from making inventory gains?

Fertilizer sector experts say, "The inauspicious Fertilizer Policy 2001 has already bleaken the prospects for establishment of grassroot urea manufacturing plants in the country. The unrealistic attitude of government may force the urea manufacturers not to undertake debottlenecking programme. It is feared that inspite of making investment in the sector, the existing players would look for alternate investment options.

Engro Chemical Pakistan has already gone for diversification. It has also signed an MoU for establishment of a urea manufacturing plant in the Middle East. Fauji Fertilizer, after the acquisition of Pak Saudi Fertilizer does not seem to be in the position to add another grassroot plant. In the prevailing scenario, it seems that Pakistan would once again become a net importer of urea. The country already meets its entire DAP requirement through import. The DAP plant established by FFC-Jordan was closed some time as its operation was not viable and constantly adding to losses of the company.

The analysts have been warning the government about the potential short fall, demand increasing but production capacity almost stagnant. Minister for Industries has been reportedly saying that National Fertilizer Corporation has the plan to establish two grassroot plants, each capable of producing 850,000 tonnes urea annually. Such statements clearly negates the government's policy objectives. The government has already privatized Pak Saudi Fertilizer and also intends the other state-owned fertilizer units. The government also has been saying that it does not wish to remain in the business of managing business and wants to play the role of facilitators.

Many people fail to understand that despite very low interest rates and strong economic fundamentals why the private sector is not making investment. A closer look at the fertilizer sector provides the replies. As soon as the Fertilizer Policy was announced in 2001, the general consensus was, "It does not offer the required incentives and no grassroot urea manufacturer will be established." People and governments learn from their past mistakes.

One does realize that the government was under tremendous pressure of multilateral lenders when it announced the Fertilizer Policy in year 2001. The ground realities have changed and above all the attitude of lenders has also become most favourable. Why not come up with a revised policy that ensures large-scale investment in fertilizer sector. The country is blessed with basic raw material and finished product also has the market.