It would have been an insensitive trade-off to lose rural support after substantial public investment in the agriculture package while winning over the urban political base with incentives to exporters ahead of the 2018 elections.

Therefore, Prime Minister Nawaz Sharif moved swiftly, under widespread political pressure, to restore the subsidy on fertiliser 72 hours after the ministry of National Food Security and Research announced its withdrawal.

The latest decision was taken following a meeting of the Economic Coordination Committee (ECC) of the cabinet that noted surplus stocks, not only with private fertiliser companies but also imported stocks lying with the state-run National Fertiliser Marketing Limited (NFML).

The move meant diverting part of the subsidy to the NFML to clear around 300,000 stocks that would have otherwise led to the creation of another circular debt. Over the next few days, the government is expected to allow private sector export of substantial fertiliser quantities to improve cash flows on the back of enhanced international prices.

The NFML ran an advertisement campaign a day after the NFSR ministry notification, saying the subsidy would continue on imported fertiliser that was available in abundance throughout NFML countrywide outlets.

Prime Minister Nawaz Sharif moved swiftly to resume the subsidy on fertiliser 72 hours after the ministry of National Food Security and Research announced its withdrawal

Although the ECC did not take a formal decision to suspend fertiliser subsidy, it had signalled to the NFSR ministry to do so based on a position paper that claimed it had become a challenge for the NFML to compete with private fertiliser producers who were not only using the subsidy but also other price competition tricks to get rid of their surplus stocks, built over the past few months, owing to continuous supply of Liquefied Natural Gas.

The ECC was informed that fertiliser prices had dropped by almost one-third to Rs1,200 per 50kg from Rs1,785 in August. While scaling down urea prices to Rs1,310 per 50kg in August, the ECC had empowered a secretarial committee to suggest measures to trigger sale of NFML’s imported urea. The committee advised the price to be fixed at Rs1,100 per kg but it was set at Rs1,200per kg in the last week of September.

The ECC was also informed that the fertiliser industry had a surplus of almost 1.6m tonnes of urea in Rabi 2016-17 because of carryover inventory from Kharif 2016. Historically, urea was always imported to overcome any shortage in the domestic market and was never sold in a glut but the carryover stocks and better capacity utilisation by millers had compounded the problem.

Fertiliser producers also undertook marketing campaigns offering lower prices for various brands on credit and free transportation. Thus the NFML sold less than 15,000 tonnes between August and December.

The NFML also took a number of measures which included doing away with the historic condition of deposit-based registration of dealers, withdrawal of minimum uplift of 200bags — dealer’s price for provincial agricultural departments — and sale of urea against a bank guarantee for the current stocks and imported stocks to dealers against their past deposits.

The ECC was also informed that the industry had sold about 2.2m tonnes of urea against an estimated off take of 3.3m tonnes for Rabi 2016-17. The NFML target for Rabi was 276,000 tonnes. Until March this year it would need to get rid of about 260,000.

As the current Rabi season was now nearing its completion, the ECC was requested to allow the sale of imported commodity at Rs1,000 per 50kg.

The government, instead of further reducing the price of imported products, announced the discontinuation of the fertiliser subsidy scheme for 2016-17 saying the allocation under the prime minister’s agriculture package for subsidy — at Rs27bn, to be equally shared by the centre and the provinces — had already been exhausted.

The NFSR ministry said the discontinuation of subsidy would not adversely impact Rabi crops, which also include the major crop: wheat, because farmers had already taken full advantage of the reduced prices. The farming community, on the other hand felt threatened on the back of an incentive package announced by the prime minister for the major export sectors and noted diversion of funds allocated for agriculture to the exporters.

As the agriculturists announced protests and were supported by a major opposition party — the Pakistan Peoples’ Party — with greater rural roots, the prime minister took no time in reversing the decision. Saying that farmers are the most important contributors’ to the economy and declaring agriculture as its backbone, he ordered the continuation of provision of subsidy on fertilisers to facilitate farmers in achieving bumper crops for accelerated GDP growth.

Published in Dawn, Business & Finance weekly, January 16th, 2017