Government misses opportunity to earn billions by delaying gas reforms in fertilizer sector

On April 4, 2024, Fauji Fertilizer (FFC) increased its urea prices by Rs 633/bag (17%) to Rs 4,400/bag. This price increase was made even though there had been no change in its gas input cost. It is still receiving Mari network gas on the subsidized price of PKR 580/mmbtu compared to other manufacturers on SSGC and SNGPL networks that faced a tariff hike to PKR 1,597/mmbtu in February 2024.

The Government has taken notice of this sudden urea price hike by FFC as there has been no increase in the manufacturers’ gas input costs. For the fertilizer industry, gas prices are key and account for around 70 percent of the input costs. In case FFC is unable to provide a convincing justification for the price increase, the Ministry of Industries & Production may take administrative measures against it under Section 5 of the Price Control and Prevention of Profiteering and Hoarding Order, 2021.

The missed opportunity to earn billions in revenue becomes difficult to justify, especially in view of the ongoing economic crisis and IMF loan discussions. This revenue could be used for investment in the agricultural sector through targeted projects and initiatives that generate economic activity and growth in the country.

Accorsing to industry analysts, if the Government had removed the current price discrimination among fertilizer manufacturers earlier this year, it would have been able to collect between PKR 80 – 100 billion in revenues. This is a missed opportunity for the Government and detracts from its objectives of reducing the national debt and achieving long-term urea price stability for the farmers.

It has been suggested that the only way to bring stability to the urea market is to immediately remove the current price discrimination among fertilizer manufacturers for the same homogenous product (gas). Through uniform gas pricing, 40% of the fertilizer manufacturing capacity on the Mari network should be charged the same rate as the existing 60% on SSGC and SNGPL network.

Government sources reveal that the IMF has already asked the authorities to end subsidies for all fertilizer manufacturers and develop a direct subsidy mechanism for the farmers. By continuing with the much-needed fertilizer reforms to completely remove all subsidies and any price discrimination, the Government will be able to reduce its debt burden, promote efficiency and attract new investments in the fertilizer sector.

Meanwhile, at the Spring Meetings 2024, the IMF has once again stressed on the need to “accelerate the reforms, double down on the structure of reforms in order to provide Pakistan with its full potential of growth.” Prime Minister Shehbaz Sharif has announced a committee on the implementation of Weighted Average Cost of Gas (WACOG) and tasked it present recommendations next week.

As WACOG impacts several industries, the committee will be assessing the impact of system-wide WACOG on domestic power, industrial (including fertilizers), commercial, and captive power sectors. It will also propose a technology-based foolproof and efficient system for the disbursement of direct subsidy to farmers by provinces once the subsidies for fertilizer manufacturers are completely removed.