KARACHI: A research paper published on Monday revealed that Direct and indirect subsidies to the are an inefficient policy mechanism to guarantee low prices of basic goods such as rice, wheat, maize, and sugar for low-income households.
The research paper issued by the Pakistan Institute of Development Economics stated the government allocates approximately Rs200 billion annually on subsidizing the fertilizer industry funds that have insignificant participation in the decline of prices. Nearly 84 percent of Pakistan’s entire fertilizer demand is reached by local generation and the gap is filled through imports.
In the last 10 years, local prices of urea continued to be lower than international prices essentially due to an indirect subsidy on feedstock gas, which is the main raw material utilized in producing fertilizer. The research paper emphasizes on diversion of funds to the advancement of production technologies in rural areas.
About 80 percent of the gas provided to the fertilizer industry is regarding feedstock. A difference of Rs721 per million cubic British thermal units is among feedstock and fuel stock prices.
This price differential estimates for Rs150bn per annum however does not cover the tax assistance to the fertilizer industry.
The paper further adds, “The government also provides a subsidy of Rs1,194 per 50kg bag on imported urea. “The aggregate subsidy of the federal government to the fertilizer sector is more than Rs200bn per annum and the subsidies given by the provinces are in addition to this.”
Pricing and Gains:
From 2020 to 2021 a 50kg urea bag’s retail price was Rs1,686 following a subsidy of Rs865 per bag on feedstock gas. Around 65 percent of the retail price formed the cost of production and 35pc held the profit which was distributed between various stakeholders, such as production units.
The research paper states that the selling price of urea ought to raise Rs2,551 per bag if the subsidy was removed. The paper reveals that this cost structure of the urea bag exposes fertilizer companies acquiring profit from the fertilizer subsidy instead of keeping a ‘reasonable’ level of urea costs for farmers.
The research paper concludes that to build the scope of the subsidies sustained by the fertilizer industry, one must analyze the amount with the federal Public Sector Development Programme (PSDP) funds of Rs650bn for the years 2020-21.
The result of this comparison shows that the addition of tax relief and provincial subsidies and incentives to the fertilizer industry estimates up to 31 percent and 22 percent of federal PSDP for the years 2020-21 and 2021-22.