Saturday May 25, 2024

Government faces revenue shortfall amid fertiliser sector reform delays

By Munawar Hasan
April 20, 2024
This representational image shows a man holding urea in his hand. — Pexels
This representational image shows a man holding urea in his hand. — Pexels

LAHORE: The government has missed out on a potential revenue of up to Rs 100 billion due to the delayed implementation of much-needed reforms in the fertilizer sector, industry officials said on Friday.

They said the missed opportunity to earn billions in revenue becomes hard to justify, especially in view of the ongoing economic crunch amid securing loans from the International Monetary Fund (IMF).

"This revenue could be used for addressing the liquidity crisis as well as making investment in the agricultural sector through targeted projects and initiatives that generate economic activity and growth in the country."

The urgency for ending the distortion in the urea market emerged following an abrupt increase in urea price by one of the major manufacturers. On April 4, 2024, Fauji Fertilizer (FFC) increased its urea prices by Rs633/bag or 17 percent to Rs4,400/bag.

This price increase was made even though there had been no change in its gas input cost. It is still receiving Mari network gas at the subsidized price of Rs580 per mmbtu compared to other manufacturers on the Sui Southern (SSGC) and Sui Northern (SNGPL) networks that faced a tariff hike to a whopping Rs1,597 per mmbtu in February 2024.

Commenting on the development, industry insiders were of the view that if the government had removed the current price discrimination among fertilizer manufacturers earlier this year, it would have been able to collect between Rs80 – 100 billion in revenues. "This is a missed opportunity for the government and detracts from its objectives of reducing the national debt and achieving long-term urea price stability for the farmers," they added.

It has been suggested that the only way to bring stability to the urea market is to immediately remove the current price discrimination among fertilizer manufacturers for the same homogeneous product (gas).

Through uniform gas pricing, 40 percent of the fertilizer manufacturing capacity on the Mari network should be charged the same rate as the existing 60 percent on the SSGC and SNGPL network.

It is worth mentioning here that the IMF has already asked the authorities to end subsidies for all fertilizer manufacturers and develop a direct subsidy mechanism for the farmers. By continuing with the much-needed fertilizer reforms to completely remove all subsidies and any price discrimination, the government will be able to reduce its debt burden, promote efficiency, and attract new investments in the fertilizer sector.

According to Waqas Ghani, vice president of JS Global, the government has taken notice of this sudden urea price hike by FFC as there has been no increase in the manufacturers’ gas input costs. For the fertilizer industry, gas prices are key and account for around 70 percent of the input costs. In case FFC is unable to provide a convincing justification for the price increase, the Ministry of Industries & Production may take administrative measures against it under Section 5 of the Price Control and Prevention of Profiteering and Hoarding Order, 2021.

According to a circulating notice, Fauji Fertilizer Co (FFC) has been asked to submit the rationale behind the recent Rs663/bag increase in Urea price, taking it to Rs4,400/bag from April 9, 2024. The query arises on the back of no rise in input costs for FFC, especially gas prices that may justify the same.

It may be noted that Prime MinisterShehbaz Sharif has announced a committee on the implementation of the Weighted Average Cost of Gas (WACOG) and tasked it to present recommendations next week. As WACOG impacts several industries, the committee will be assessing the impact of system-wide WACOG on domestic power, industrial (including fertilizers), commercial, and captive power sectors. It will also propose a technology-based, foolproof, and efficient system for the disbursement of direct subsidy to farmers by provinces once the subsidies for fertilizer manufacturers are completely removed.