Fertilizer industry passes on Rs374bn benefit to farmers in last 5 years

Karachi: Fertilizer Manufacturers Pakistan Advisory Council (FMPAC), a representative body of domestic fertilizer plants has said that despite the unprecedented gas curtailment in last five years, domestic urea manufacturing plants have passed on Rs. 374 billion benefit to the farmers by keeping local urea prices significantly below international levels.

Executive director FMPAC Shahab Khawaja said that there is a misconception that Fertilizer manufacturers enjoy raw material subsidy from the Government in the form of reduced feed gas prices. This subsidy is not for the manufacturers, but is in fact passed on to the farmer via reduced prices. Therefore, he said that not only is the fertilizer industry passing on feed gas subsidy to the farmer, it is also passing on a much larger benefit voluntarily in addition to paying taxes to government.

He informed that in 2013 average delta between domestic and import price was Rs. 846 per bag out of which Government provided subsidy through concessionary feed gas of Rs. 66 per bag (net of taxes) and remaining Rs. 780/bag is passed to farmers by the Fertilizer Sector resulting in billions of rupees of benefits to farmers due to local urea production. He said that this happened despite the fact that there is no and legal or moral obligation to maintain such differential between locally produced urea and imported urea.

Local urea price has increased by Rs. 1,126/bag in the last 5 years with 89% of the increase due to government taxes and normal inflation. Only 11% of the price increase is due to gas curtailment as Government did not honour its gas supply contracts with the fertilizer manufacturers despite the fact that industry has recently invested $2.3 billion in the country based on the government approved policy designed to encourage investment in the sector.

He informed that Fertilizer sector produced 5 million tons of urea in 2008 against a capacity of 5.1 million tons, in 2009 5 million tons against 5.1 million tons of capacity, in 2010 5.2 million tons against 5.6 million tons of capacity, in 2011 4.9 million tons against production capacity of 6.9 million tons, in 2012 4.2 million tons against production capacity of 6.9 million tons and finally in 2013 the production remained at 4.8 million tons which was 2.1 million less than the total production capacity of 6.9 million tons.

He said that declining urea production in last four years from 2010 to 2013 has resulted in billions of dollars of loss to national exchequer in terms of urea import and subsequent subsidy to keep the prices at par with locally produced urea.

He informed that year 2010, 2011, 2012 and 2013 have been the worst years for fertilizer sector as instead of providing gas to local fertilizer plants to produce economical urea domestically, the government preferred to import Urea by spending a hefty amount of approximately US$ 2 billion from precious foreign exchange. He informed that in 2013 alone Government had to face a loss of US$ 335 million on importing 968,000 tons of urea and it also provided subsidy worth Rs. 17 billion on imported urea.

He said that government must realize that agriculture contributes around 21% to the GDP of Pakistan and it also provides raw materials to all the major industries of Pakistan including, Textiles and Sugar. For the economy of Pakistan to prosper, it is important for agricultural yields to go up which is only possible through the application of fertilizers in the right quantity at the right time. The decline in urea production poses a severe threat to the crops yield, resultantly the country might miss its agriculture and export targets and also aggravate inflation in the country which is already higher than the regional peers.

He informed that Fertilizer sector paid Rs. 73 Billion in taxes in last five years despite lower production and if government wants it can even earn foreign exchange by exporting the surplus urea production b ensuring gas to fertilizer plants.

He said that if local urea industry is closed down, it will cost approximately US$ 2.3 Billion to import required quantities of Urea and an additional subsidy of Rs. 96 Billion to maintain current domestic local prices. He said that if urea prices move to international parity, farmer’s community will possibly bear the burden of approximately Rs. 100 Billion on collective annual income and if this cost increase is passed on to end consumer it will result in rampant food inflation and food insecurity in country.

He informed that if urea prices increase by Rs. 150 to 200 per bag it is expected that urea application will decline by 8 to 10% resulting in approximately 8% drop in acreage which will translate into a loss of Rs. 70 Billion to Country’s GDP.

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