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Urea prices impact of govt policies and costs

Naveed Ahmad Khan

Islamabad

Recently, a news report is circulating in mainstream media detailing the rise in the prices of urea over the past one year attributed to demand supply. However, prices are more impacted by other factors like gas price increase, withdrawal of subsidy of GOP, USD – PKR parity, inflation and other related costs.
It further says that the prices had been pushed upwards thrice since July 2018 in sheer contrast to the government’s plans to provide relief to farmers. In order to understand the causes behind such increases, it is important that we should be cognizant of the link between government policies and the prices of Agri. Inputs, as those policies have significant impact on the prices of urea and other fertilizers.
In case of local fertilizers, the price of Urea was Rs.1,790/- per bag during June 2016. In budget 2016/17, GOP with the support of local Fertilizer Industry, reduced urea price by Rs.390/- per bag and capped it at Rs.1,400/-. Downward adjustment in price was made through reduction in General Sales Tax by Rs.184/-, GOP subsidy of Rs.156/- and voluntary contribution of Rs.50/- by the Industry.
In budget 2017/18, GOP reduced its subsidy contribution from Rs.156/- to Rs.100/- per bag, forcing local Fertilizer Industry to bear the additional burden of Rs.56/- per bag. In total, Industry contribution stood at Rs.106/- per bag, creating further increase in cost of doing business.
In budget 2018/19, GOP completely withdrew subsidy given to the farmers and adjusted GST from 5% to 2% which translated into net negative impact of Rs.61/- per bag on urea pricing. In addition to that, GOP increased gas prices w.e.f September 2018, which increased cost of production by Rs.129/- per bag. Total negative impact of subsidy withdrawal, downward adjustment of GST, increase in gas price and Industry contribution added up to Rs.296/- per bag.
Furthermore, due to depleting gas pressure at well heads, Fertilizer Industry is pushed to install compressors worth billion of rupees to maintain optimum gas pressure for urea manufacturing. In addition to that, every year considerable amount is being spent on the maintenance of those compressors. All these factors add up to the cost of production.
Combined impact of above mentioned factors translates into urea price of above Rs.2,000/- per bag but even after 3 years (June 2016- Mar 2019), Fertilizer Industry is maintaining urea price which is almost at par with price levels prevailed during June 2016, whereas the impact of yearly inflation (Approx. 7% p.a) is also not fully passed on to the consumers by the Industry.
The Fertilizer Industry has always made significant contributions to Pakistan’s economy and GDP. Simultaneously, it has also kept the interests of the country’s farmers at top priority through provision of quality products and related services. Historically, domestic urea has been sold at a much lower price than imported urea, thus resulting in a total advantage of nearly Rs.400/- billion to Pakistan’s farmers as well as country’s foreign exchange reserves. Currently the average cost of imported urea is around Rs.2,250/- per bag which is approximately Rs.450/- per bag higher than the domestic urea price. Fertilizer Industry is passing on this benefit to the farmers unconditionally.
Like any other industry, Fertilizer sector is also bound by government policies and costs (feed & fuel gas prices, taxation, inflation etc.), therefore it has to adjust its business strategies accordingly so that it is able to operate efficiently and continue providing for the betterment of its stakeholders as well as the economy. For the sake of farming community as well as the Agricultural Industry, it is imperative that all sectors related to agriculture including the Fertilizer Industry and the government work together to ensure domestic self sufficiency in inputs to ensure food security in future.