With a burgeoning population, food security is now a key challenge for Pakistan, especially when 38 per cent of children in the country are stunted due to insufficient dietary energy consumption.
To address food security challenges, Pakistan needs to pursue three strategic choices: expansion of the cultivated area, increase in per acre yield, and improvement in cropping intensity (crops in a year). However, successful implementation of all these entails greater consumption of fertiliser in the country.
Unfortunately, the previous fertiliser policies of 1989 and 2001 were production-centred and envisioned incentives for manufacturers and importers. In contrast, farmers are still awaiting a comprehensive policy on fertiliser subsidies that can ensure adequate and affordable fertiliser supply, rather than stop-gap reliefs announced by the government from time to time.
Fertiliser subsidies are essential due to multiple factors, including Pakistan’s soils deficiency in all three major crop nutrients (nitrogen, phosphorous, potassium), lower crop productivity than the world’s averages, low fertiliser usage (kilograms per acre) in comparison to other regional countries, and, most importantly, drastic price hike of fertiliser in the last year, which has resulted in a significant decrease in offtake of phosphatic and potassic fertilisers.
Ensuring DAP’s realistic and stable prices, free of anomalies, is a challenge that can’t be left to market forces alone, especially when a few players are controlling its manufacturing and import
Currently, the federal government is providing a subsidy on imported fertilisers. Additionally, it is also extending indirect subsidies in the form of tax relief and gas subsidies to fertiliser manufacturers. On the other hand, the provincial government of Punjab is providing a direct (targeted) subsidy to farmers on phosphatic and potassic fertilisers through e-vouchers. All these federal and provincial relief measures collectively amount to around Rs200 billion.
With a total country’s cropped area of 23.3 million hectares (57.5m acres) and a cropping intensity of 159pc; these subsidies total a mere Rs2,188 per acre per crop.
This is insufficient if Pakistan has to develop a globally competitive agriculture sector, especially when a bag of di-ammonium phosphate (DAP) and sulphate of potash (SOP) fertilisers cost Rs10,300 and Rs16,000 today, respectively.
Many consider fertiliser subsidies a highly inefficient policy measure to provide indirect relief to the general public. In fact, if the government transfers the said Rs200bn directly to 32.2m households in Pakistan as a relief package, each household would get just Rs517 per month.
Even if we add all direct and indirect subsidies, reliefs and incentives that are currently provided to the agriculture sector, the amount remains far lower than what the agriculture sector is paying back to a common household in terms of lower prices of essential food commodities and other crops in comparison to global prices.
Regarding subsidy delivery mechanism, farmers believe that gas subsidy, which goes to fertiliser manufacturers, not only paves the way for urea smuggling but also contributes to manufacturers’ profits and return on equity (ROE), which is way higher than their regional counterparts. In addition, such urea-focused subsidy has also promoted the unbalanced use of fertilisers in the country. In the given situation, direct subsidy to farmers through e-vouchers seems to be a viable solution to optimise its effectiveness.
On the contrary, abolishing the gas subsidy and allowing manufacturers to sell urea in the local market at international prices, without any price cap, may lead to an unexpected price increase for farmers, especially when international prices of urea fluctuate widely, even within a year. To cope with such a situation, the government may require a robust arrangement of subsidies to stabilise the prices and make them affordable. That is a lesson we have just learnt from the price fluctuations of DAP — the second most widely used fertiliser after urea.
In August 2021, DAP was available for Rs6,300 per bag, but surprisingly it jumped to Rs14,800 (notified price) in August 2022, which was quite out of sync with changes in international prices and rupee-dollar parity.
Moreover, companies’ strategy to sell overpriced DAP with urea as a bundled product contributed to overpricing of urea in the local market.
Therefore, ensuring DAP’s realistic and stable prices, free of anomalies, is a challenge that can’t be left to market forces alone, especially when a few players are controlling its manufacturing and import.
Farmers have been calling for and urgently need a mechanism that protects farmers’ interests. DAP import through the facilitation of the Trading Corporation of Pakistan, as recently proposed by the Economic Coordination Committee, could be made very workable in consultation with all stakeholders.
Farmers are in favour of a full-fledged track-and-trace system that includes digital tagging and tracing of every single bag (of all fertilisers) as it moves through the supply chain, right from production or import to distribution, and finally into farmers’ hands.
Such a system can discourage smuggling, counterfeiting of DAP and especially hoarding and black marketing of urea fertiliser, faced by farmers in the last Rabi season.
The Federal Board of Revenue introduced a track-and-trace system in April 2022, primarily to monitor the production of fertiliser. Unfortunately, manufacturers and fertiliser suppliers apparently oppose it on the pretext of implementation glitches.
Concluding, to preempt recurrent protests and demands of farmers, there is a need to establish an institutional mechanism which should periodically evaluate fertilisers’ share in the overall production cost of crops, market prices of crops, gas prices, as well as global and regional prices of fertilisers; and in turn, determine subsidy amounts for farmers.
Published in Dawn, The Business and Finance Weekly, November 21st, 2022