ISLAMABAD: The federal government has decided to do away with subsidised gas to the fertiliser industry for urea as the impact of subsidy is not being passed on to the farmers, one of the key demands of the International Monetary Fund (IMF).
This far-reaching consensus was evolved at a recent federal cabinet meeting when ECC decisions of May 7, 2024 were presented before it for ratification titled “fertiliser requirement for Kharif 2024 and measures to meet to requirement of urea fertilizer for Kharif 2024.” During the ensuing discussion, Cabinet deliberated on both decisions of the ECC in the context of direct provision of subsidies to the farmers.
The Petroleum Division explained that in case of the provision of gas to the plants at the OGRA notified price, the price differential would either have to be borne by the domestic consumers or subsidised by the Finance Division.
Ministry of Industries and Production explained that the benefits of subsidised gas to fertiliser plants had not trickled down to farmers, which was evident from the absence of any corresponding decrease in the price of urea. It was suggested that the distortion in the pricing of gas for the fertiliser sector should be removed. The Finance Division, in view of financial constraints, also did not endorse the proposal of provision of further subsidy on gas to meet the resultant price differential.
On consideration of these aspects, the Cabinet reached the unanimous conclusion that gas to fertiliser plants should be supplied at full prices, rather than subsidised rates.
Fertilizer manufacturers: Anomaly in gas prices creates price distortion
After detailed deliberations on fertiliser requirement for Kharif 2024, the Cabinet ratified the decision with the direction that the fertiliser plants shall be charged the full price of gas supplied to them, whereas subsidy shall be provided directly to the farmers, where required.
The Cabinet further directed the Petroleum Division to monitor the implementation of this decision. In January 2024, Apex Committee (AC) of Special Investment Facilitation Council (SIFC) had ordered the Federal Board of Revenue (FBR) to conduct tax audit of urea/ fertiliser companies to review the tax invoices on income earned by urea sellers and dealers against the quantity of urea sold/ distributed to farmers.
According to a report prepared by the former caretaker Minister for Power and Petroleum, Muhammad Ali, fertiliser companies are making huge profits due to stagnancy in gas prices for the fertiliser sector.
For instance, FFC’s profit after tax (PAT) will be Rs 33.165 billion in FY 2023-24 as compared to previous profit of Rs 20.410 billion. M/s EFERT PAT profit will be Rs 17.5 billion from Rs 16.003 billion and M/s Fatima Fertiliser Rs 14.494 billion from Rs 14.139 billion. FFC’s PAT profit is projected to be higher considering multiple urea price increases without any gas cost increase.
Muhammad Ali had proposed: “the era of providing cheap gas and subsidies must end” as according to him it is a strain on the fiscal deficit, allows undue profiteering by informal channels, and encourages smuggling worsening the trade deficit.
The fertiliser industry is receiving gas under various pricing regimes resulting in significant challenges.
The former caretaker Minister’s information had also revealed that subsidies are not being passed onto the farmers. The government was currently providing subsidy to 2/3rd of the fertiliser manufacturers.
The entire subsidy of Rs 90 billion was not reaching the farmers and instead being absorbed by informal channels that do not pay taxes, resulting in additional lost revenue of Rs 30 billion to the government. The government is currently losing over Rs 120 billion to informal channels.
An estimated 200,000 tons of urea is currently being smuggled out of Pakistan due to local urea being significantly cheaper than imported urea. The subsidies provided by the government are being enjoyed by farmers across the border. Chief of Army Staff General Syed Asim Munir at a recent meeting of the AC had stressed upon the former caretaker Chief Ministers and Chief Secretaries of all provinces to initiate a nationwide crackdown and take strict action against those individuals engaged in hoarding of fertilisers (urea) to sell at a higher rate to farmers, unethically expanding the dealer margins; and that fertiliser wholesalers and retailers must ensure transparency of operations for facilitating farmers across the country.
Copyright Business Recorder, 2024