ISLAMABAD: The fertilizer industry of Pakistan is internationally competitive and can thrive in a fully deregulated environment, even without any subsidies.
Talking to media, Imran Ahmed – CFO Engro Fertilizers shared that currently the fertilizer industry of Pakistan is providing urea at a significant discount of Rs5,000/bag compared to imported urea.
He was of the view that by deregulating the industry and introducing weighted average cost of gas (WACOG) for all manufacturers, including indigenous gas and imported RLNG-based plants, the government can earn higher revenues and reduce the country’s fiscal imbalance.
According to CFO Engro, with deregulation domestically produced urea will be available at higher prices comparable to import parity cost.
“Agriculture productivity and farmer income, especially at the bottom of the pyramid, could take a huge hit if no countermeasures are taken. To mitigate this adverse outcome, the government shall need to implement smart subsidy mechanism for small farmers,” he added.
He stated that higher gas revenue of Rs 89 billion from the fertilizer industry can fund the targeted subsidy of around Rs 65 billion for small landholders.
He maintained that around 90 percent of the farmers own around 48 percent of the land, with a size of less than 12.5 acres.
“Post deregulation, the government can utilize the benefit of reduced subsidy on feed gas to offer targeted subsidy to small farmers”.
“The removal of feed gas subsidy on production of urea and DAP will not have a significant impact on the prices of major crops and resultant expenditure of family households in Pakistan”, he added.
Imran pointed out that the fertilizer industry is often accused of earning excessive profits, however, a sector-wise review over the last 10 years reveals that the returns have been lower than many other industries. During this period, the industry made an investment of Rs 162 billion in capacity expansions and plant upgrades under the highly effective Fertilizer Policy 2001 that has helped Pakistan to become self-sufficient in urea production. As a result, the farmers of Pakistan remained shielded from COVID-induced shocks in global urea prices that have surged by 86 percent since last year.
He highlighted that, “despite introduction of the Fertilizer Policy, return on assets for the fertilizer sector have remained lower than other sectors. The return on equity and return on assets of the fertilizer industry at 33 percent and 11 percent, respectively, are lower than many major industries, including food and personal goods, automobiles, and oil exploration and production. The return on equity and return on assets for other industries are as high as 67 percent and 19 percent, respectively”.
On the other hand, the fertilizer industry has played a critical role to ensure the food security of Pakistan by providing adequate and affordable supply of urea. The government is providing the industry a feed gas subsidy on spot basis of Rs 842/bag, while the industry is passing on six times more benefit to the farmers through a discount of Rs 5000/bag, compared to the international levels.
“Through import substitution, the fertilizer sector will contribute more than $3 billion towards reducing the trade deficit in 2021.
As a result of the significantly lower prices, the local fertilizer industry will save farmers from an additional burden of Rs 363 billion in 2021 as well”, he said adding that 96 percent of the income attributable to shareholders of the fertilizer companies was contributed towards national exchequer last year. No other industry in Pakistan operates at the level of transparency with all listed companies and contribution to tax revenues of the government.
Copyright Business Recorder, 2021