The Fauji Fertilizer (FFC) reportedly increased 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 at the subsidised price of PKR 580/mmbtu compared to other manufacturers on SSGC and SNGPL networks that faced a tariff hike of 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 fertiliser industry, gas prices are key and account for around 70 per cent of the input costs. Suppose FFC cannot provide a convincing justification for the price increase. In that case, 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 given 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.
According to industry analysts, if the Government had removed the current price discrimination among fertiliser 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 stabilise the urea market is to immediately remove the current price discrimination among fertiliser manufacturers for the same homogenous product (gas). Through uniform gas pricing, 40% of the fertiliser manufacturing capacity on the Mari network should be charged the same rate as the existing 60% on the SSGC and SNGPL networks.
Government sources reveal that the IMF has already asked the authorities to end subsidies for all fertiliser manufacturers and develop a direct subsidy mechanism for the farmers. By continuing with the much-needed fertiliser 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 fertiliser sector.
Meanwhile, at the Spring Meetings 2024, the IMF once again stressed the need to “accelerate the reforms, double down on the structure of reforms to provide Pakistan with its full potential of growth.” Prime Minister Shehbaz Sharif has announced a committee to implement Weighted Average Cost of Gas (WACOG) and has tasked it with presenting recommendations next week. As WACOG impacts several industries, the committee will assess the impact of system-wide WACOG on domestic power, industrial (including fertilisers), commercial, and captive power sectors. It will also propose a technology-based, foolproof, and efficient system for disburse direct subsidies to farmers by provinces once the subsidies for fertiliser manufacturers are completely removed.