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In defense of fertilizer industry

Despite its contributions to the national economy and the country’s agriculture sector at large, the fertilizer industry in Pakistan often finds itself at the receiving end of criticism. The fertilizer industry has continued to evolve over the years and played a pivotal role in the development of the agricultural sector by going above and beyond to support the government’s initiatives. It should be realized that fertilizers have been contributing 40-50% in crop production, impacting 50% food requirement of the population of the country/world, hence the role of the fertilizer industry becomes imperative in food production systems, and maligning industry through populist rhetoric would not yield positivity for ensuring food security.

Yet, some quarters accuse it of flexing muscle to benefit from around Rs200 billion in subsidies every year, which have a negligible contribution to the reduction of fertilizer prices for the farmers. It is a great fallacy that the fertilizer industry is a major beneficiary of subsidies that are intended to keep the prices of essential food commodities at an affordable level.

It is important to understand that incentivized gas-pricing for the industry exists to ensure adequate availability of domestic urea at prices that are more competitive than international levels.

The Fertilizer Policy 2001 was introduced to encourage investment in the sector and make Pakistan self-sufficient in urea production. To incentivize investment in the sector – and this should not be confused with subsidies – the government introduced gas prices at globally competitive rates. The Policy was tremendously successful as it attracted Rs 162 billion in plant upgrades and capacity expansions. As a result, Pakistan has 7 million tons capacity of urea production against an average annual consumption of up to 6 million tons.

In the Covid-19 era, this self-sufficiency has meant that farmers in Pakistan enjoyed abundant and affordable urea supplies at around 60% cheaper prices (Rs 1768/bag) compared to the global market (Rs 4500/bag). Contrary to the global trend, urea prices in Pakistan have remained stable this year and hover around 2012 levels. It must be well acknowledged that the fertilizer sector has passed on 2.4 times the benefit – amounting to Rs 122 billion this year alone so far and more than Rs 600 billion over the last decade – to farmers in the form of lower urea prices as compared to the gas subsidy received on feedstock.

The country fulfils around 60% of its requirements through imports and 40% through indigenous production of DAP. Hike in international DAP & Phos Acid prices has put pressure on domestic prices of DAP in Pakistan.

To mitigate the effects of COVID, the government has done a commendable job to announce farmer-support programs and subsidies on phosphatic fertilizers to promote a balanced fertilizer use for a positive impact on crop yields. However, farmers have failed to benefit from these programs as the federal and provincial governments have not reached a consensus on the implementation mechanics. The populist narrative diverts attention from the real debate on the need to urgently finalize the subsidy implementation mechanism, and how these targeted and direct subsidies can prove to be more effective to increase farmer incomes.

It is also wrongly asserted that the industry will be provided gas subsidies and tax reliefs of more than Rs 200 billion in 2020-21. Having clarified the misconceptions about gas subsidies above, it must be highlighted that the sector does not get any tax relief as such. The fertilizer industry does not benefit from the reduced GST rate of 2% 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 Rs 230/bag in lieu of reduced GST. The fertilizer industry is burdened with high borrowing costs and cash flow challenges as the government has accumulated around Rs 60 billion of GST refunds and subsidies in outstanding since 2016. As a result, the industry’s investment and upgradation plans are likely to be compromised, which would not bode well for national food security and economic progress.

Based on misrepresented facts and information presented out of context, the fertilizer industry is unfortunately pictured as a ‘profit monger’ that thrives at the cost of farmers. A 10-year comparison of fertilizer companies’ financial results shows that Return on Assets of the industry (11%) was lower than other capital-intensive sectors, such as automobiles (13%), oil & gas (18%), and food & personal goods (19%). At the same time, its net profit margins were also lower than the sectors of oil & gas and cement despite assuming higher commercial risks through no assurance of uninterrupted gas supplies. In the form of levies and taxes, the fertilizer industry contributes to the national economy by paying almost an amount equivalent to its entire profits.

The agriculture sector remains the backbone of Pakistan’s economy and the government has shown a clear and prudent approach to transform it for sustained growth. We should look beyond the misconstrued arguments and focus on real issues that can uplift the agriculture sector. The fertilizer industry has always stood shoulder to shoulder with the government and will continue to do so, to improve farmer well-being and rural prosperity. This is not a zero-sum game; we all are partners in progress and committed to serving Pakistan.

Brig Sher Shah Malik (retd), "In defense of fertilizer industry," Business Recorder. 2021-09-22.
Keywords: Economics , Economic growth , Economic activities , National economy , Fertilizer Policy , Provincial governments , Pakistan-Economy , FMPAC , GST

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