PAKISTAN TO IMPORT A MILLION TON UREA

Failure to rectify a bad policy causing extra pressure on foreign exchange reserves of the country

By SHABBIR H. KAZMI
May 08 - May 14, 2006

The current situation prevails only because of the stubbornness the policy planners. First they came up with a policy devoid of basic requirement and second they failed to rectify the mistake despite lapse of nearly five years. The policy didn't assure feedstock tariff, which was the basic requirement for the establishment of grass-root fertilizer plants. It is worth mentioning that prior to announcement of the policy all the stakeholders had agreed that about 2 million tons urea production capacity had to be created up to year 2010 to maintain self-sufficiency. However, inability of the government to guarantee feedstock price, did not allow establishment of additional capacity. To meet the domestic requirement approximately one million tons urea will have to be imported this year. The quantity is expected to grow at more than 5% per annum over the next five years.

Over the last five years the policy planners have not been able to decide, whether the country should guarantee feedstock price or let the yield of various crops go down due to inappropriate dosage of various types of fertilizers? No one doubts that the policy planners do not understand the importance of agriculture sector and dependence of yield on balanced use of fertilizer. However, they have not been able to guarantee the price only because they have been made to believe that fertilizer industry gets feedstock at subsidized rates. It has been stated repeatedly that fertilizer industry does not get feedstock at subsidized rate. It gets inferior quality gas at a discounted price. The gas being supplied from Mari gas field is much inferior to the quality of gas being supplied by the gas marketing companies.

It is important to reiterate once gain that the government had dedicated Mari gas field for the fertilizer industry. Therefore, all the future fertilizer plants have to be supplied gas from this field. The three major units, Engro, Fauji and Pak Saudi (now part of Fauji) are already getting gas from this field. Ideally these three plants should have been allocated gas for the establishment of additional production facility, for attaining greater synergy. However, the policy failed to convince these investors to add new capacity. Due to the lack of interest of the key players other investors were also not interested in establishing fertilizer plants. Engro at one stage was keen in establishing a plant in the Middle East but ultimately decided not to do so and establish a milk processing plant in Pakistan.

Some of the critic say that three plants (Dawood located near Lahore, and Engro and Fauji located at Bin Qasim) are being supplied feedstock at subsidized rate. They also say that according to WTO articles all the countries are required to stop providing all types of subsidies, therefore, Pakistan should also do the same. However, these critics completely ignore that the developed countries not only provide huge subsidy, but are also not ready to stop these. They say, "The subsidy is being provided to insulate the domestic farmers and producers from external threats". Doesn't it sound contradictory that the developed countries are asking the developing countries to stop providing all types of subsidies but they themselves are not ready to do the same?

Therefore, it may be said that 1) most of the fertilizer plants in Pakistan don't get feedstock at subsidized rates and 2) Mari gas field has ample reserves to feed gas to the existing as well as the new units. The operator has to increase gas production by drilling more production wells. Since the government has dedicated this field for fertilizer industry the supply of gas to WAPDA thermal power plants has to be stopped and diverted to existing fertilizer plants and the new plants. As regards supply of gas to Dawood located near Lahore, and Engro and Fauji located at Bin Qasim the level of subsidy and the mode of payment can be worked out.

As stated earlier the government should not bow down before the external pressure and stop providing the subsidy. Even the WTO articles do not stop a country from providing the subsidies. However, these articles demand a transparent procedure for working out the level of subsidy and the payment mechanism. According to some analysts the biggest objection of the lenders/donors in the past was that Pakistan's fragile economy could not bear the burden of subsidies. Another objection is that the government does not pay subsidy but other stakeholders have to bear the burden.

Assuming that Pakistan will have to meet the shortfall by importing urea and the quantity will continue to increase with the passage of time, the most prudent decision would be to guarantee feedstock price immediately. It is also expected that lenders/donors would also not object to payment of subsidy, if being paid according to their specified procedure. In order to attain self-sufficiency in food crops and enhance production of cash crops it is necessary that fertilizers are made available in the country at competitive and affordable prices. Pakistan has the potential to produce exportable surplus urea to finance import bill of DAP type fertilizer. Why not decide today?

GDP and Sectoral Growth Rates
(@ Constant Factor Cost of 2004-05)

(Percentages)

Sector

2001-05
Avg.

04-05

05-06
Target

06-07

07-08

08-09
Projection

09-10

5years
(Avg.)

Commodity Producing Sectors

5.4

8.9

7.3

7.6

8.0

8.3

8.7

8.0

A Agriculture

3.5

7.5

4.8

5.0

5.2

5.4

5.6

5.2

1 Major Crops

5.9

17.3

6.6

6.8

7.0

7.2

7.4

7.0

2 Minor Crops

1.0

3.1

4.0

4.4

4.8

5.0

5.2

4.7

3 Livestock

2.8

2.3

3.5

3.6

3.7

3.8

3.9

3.7

4 Fishing

1.2

2.1

4.0

4.5

4.8

5.1

5.8

4.8

5 Forestry

0.4

0.4

5.1

5.5

5.9

6.1

6.9

5.9

B Industrial Sector

7.4

10.2

9.5

9.9

10.2

10.6

10.9

10.2

1 Mining & Quarrying

8.1

5.0

5.2

5.4

5.6

5.8

6.0

5.6

2 Manufacturing (i+ii+iii)

9.5

12.5

11.0

11.34

11.6

11.94

12.2

11.6

(1) Large-scale

11.1

15.4

13.0

13.2

13.4

13.6

13.8

13.4

(ii) Small & Household

6.3

6.3

7.1

7.6

8.0

8.25

8.3

7.8

(iii) Slaughtering

3.0

3.1

3.2

3.2

3.20

3.4

3.2

 

3 Construction

1.2

6.2

7.5

8.0

8.0

8.6

8.7

8.2

4 Electricity and Gas & Water supply

1.1

2.1

3.5

3.7

3.9

4.1

4.5

4.0

II Services Sector

6.0

7.9

6.8

7.0

7.3

7.6

7.9

7.3

1 Transport, Storage & Communication

4.1

5.6

5.8

6.0

6.3

6.7

6.9

6.3

2 Wholesale & Retail Trade

7.2

12.0

9.3

9.5

9.7

9.9

10.0

9.7

3 Finance & Insurance

10.5

21.8

6.7

6.8

7.0

7.2

7.5

7.0

4 Ownership of Dwellings

3.4

3.5

3.6

3.7

3.9

3.9

4.3

3.9

5 Public Administration & Defense

4.5

-0.8

3.5

3.7

4.0

4.2

4.4

4.0

6 Community & Social Services

6.2

5.4

6.1

6.5

6.6

6.8

7.5

6.7

GDP (Factor Cost)

5.7

8.4

7.0

7.3

7.6

7.9

8.2

7.6