ISLAMABAD: The government's Rs 36 billion subsidies on urea and massive cut in sales tax will help reduce domestic fertilizer prices by a 20 per cent during the upcoming crop season, analysts said on Tuesday.
"Fertilizer prices are being reduced by around Rs 390 per bag, which is a 20 percent cut in the prices," said Ruhail Mohammed, Chief Executive Officer of Engro Fertilizers.
"Of the total price cut, Rs 50 is being borne by manufacturers, whereas the remaining will come from reduction in GST (General Sales Tax) and subsidy from the government," Ruhail said in a statement here.
The government has proposed Rs 36 billion subsidies on urea, cut in sales tax to 5 per cent from the current 17 per cent and a cap in gas tariff in the budget for the fiscal year 2016-17.
The move is likely to result in fertilizer prices plunging from the current Rs 1,800 per bag to Rs 1,410 per bag by the start of the next fiscal year.
The government, in the Finance Bill for the next fiscal year, proposed to bring fertilizer price down to Rs 1,400 from Rs 1,800 per bag, and DAP to Rs 2,500 from Rs 2,800 per bag to ease financial problems of farmers due to persistent low agriculture growth.
Ruhail said the manufactures wanted removal of GST on natural gas, as otherwise they "will be in a constant GST-refund situation."
"Fertilizer companies had already taken a hit on the margins by absorbing gas price increase in September last year, and decrease in prices would further reduce the manufactures' margins at least by Rs 50 per bag."
Industry officials said manufacturers have around 1.5 million tons of urea, excluding around 0.27 million tons held by the National Fertilizer Marketing Limited.
"This level may slightly come down post July period, however, the industry will see piling inventories up to one million tons at the end of the ongoing fiscal in the absence of any measures to export," Ruhail added.
"Fertilizer manufacturers have a potential to bring in foreign exchange of more than $200 million if urea export is allowed."
Ruhail Mohammad further said the stakeholders were in the process of taking up the export issue with the government and expected that a rational decision for the benefit of the country would be made.
Industry officials said the announced incentives, along with the summer crop season, would foster demand for urea in the country.
"Demand for this year was forecast at around 5.3 million tons before the price decrease which is now expected to be somewhere close to 5.5 million tons for this year," Ruhail said. "Unless there is a change in any other factor, we will see the same levels next year," he added.
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