ISLAMABAD: The fertiliser sector has passed on a benefit of Rs600 billion over the last decade to the farmers' community in the form of reduced urea rates compared to international prices.
According to data released by the fertiliser industry during 2010-2019, the local urea prices have remained considerably lower than global markets, and in this period, the fertiliser industry received Rs180 billion in subsidy on lower feed gas price, which enabled it to pass on a three-fold benefit to the farmers by selling urea at decreased rates.
Currently, urea prices in Pakistan are approximately Rs1,200/bag lower than international level suggesting a significant discount of around 43 percent from international prices.
Latest urea tender in India have indicated CFR prices around USD 280-290/tonne, which are much higher than their previous levels of USD 260/tonne.
Since the start of this year, the fertiliser industry in Pakistan has fully passed on the benefit of the GIDC reduction to the farmers by cutting down the urea prices by Rs400/bag.
Despite its contribution to the national economy, some recent media reports have suggested that untargeted subsidies worth Rs148 billion are being obtained by the fertiliser industry and these should be reviewed by the government.
Under pressure to achieve budgetary targets aligned with the IMF programme, the government has established a "Subsidies Cell" under the supervision of former secretary finance Dr Waqar Masood to review untargeted subsidies in various sectors of the economy.
The reports have highlighted provision of Rs6 billion subsidy to two plants in the current fiscal year.
Contrary to the claims, this subsidy is based on concessionary gas under the Fertilizer Policy 2001 that envisaged providing regionally competitive and fixed gas prices.
Based on this policy, the local fertiliser players invested around Rs162 billion in state-of-the-art production facilities, which led to an increase of around 1.9 metric tonnes per annum of urea production capacity.
As a result, Pakistan has been able to save over Rs570 billion through import substitution and generate additional revenues for the government, while ensuring food security for the population.
Further, the fertiliser industry does not benefit from the reduced GST rate of two percent as the sales tax is collected upfront and recorded as output tax for the government.
In fact, the industry reduced urea prices from 2016 levels by around Rs230/bag in lieu of reduced GST.
On the other hand, a significant amount of sales tax refunds of the fertiliser industry has accumulated with the government, which has adversely impacted the manufacturers in terms of earnings and cash flow.
In addition to above, the fertiliser industry continues to face challenges in recovery of prior subsidy amounting to Rs20 billion from the government, even though the subsidy was timely passed on to the farmers.
Due to the ongoing challenges in recovery of previous subsidy amounts, the fertiliser industry recently turned down the broad-level subsidy package announced by the government on fertilisers.
Instead, the industry supported the government in offering direct and targeted subsidy to the farmers rather than through the fertiliser manufacturers.
Copyright Business Recorder, 2020
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