Government proposal on GIDC elimination raises ambiguity on fertilizer prices

Karachi, January 23, 2020: The Government’s decision to withdraw GIDC on fertilizer sector will result in a lot of ambiguity pertaining to future urea prices since the GIDC is not payable on the complete gas mix of all the fertilizer manufacturers.

Fatima Fertilizers has GIDC payable on none of its Feed gas whereas Engro Fertilizers’ 70 percent of Feed gas procurement is on fixed price without GIDC. In these circumstances while FFC may reduce its prices by Rs 405 per bag, Fatima would not be able to reduce any. 

This implies that urea will be sold at multiple prices to fertilizer dealers who will have the liberty to sell at the maximum price and hence would benefit from the price disparity with no benefit to the emerging gas circular debt and farmers.

A well- informed industry representative confirmed that a leading Fertilizers player has committed to reduce the Urea prices by PKR 405/bag reduction in urea prices in line with its cost reduction due to elimination of GIDC.

Fertilizer industry sources informed that an alternate proposal made by the industry called for abolishment of prospective GIDC coupled with an increase in fertilizer feed gas prices which would have provided relief to the burgeoning Gas Development Surcharge (GDS) deficit while ensuring no change in urea prices.

This would have resulted in almost Rs 50 billion revenue to the government in the form of GDS reduction whilst bringing the prices of Fertilizers Feed somewhat closer to the general industry – though still almost half even with the proposed increase.

In a supply constrained industry with varying GIDC in the cost structure, waiving GIDC will lead to varying price levels and create confusion. Who will benefit in this confusion is the big zameedar, due to his purchasing power, and dealer who will buy from FFC at reduced rate at sell at Fatima and Engro’s rate (whose rate would be on higher side due to lowest reduction in cost for them) Small farmer will continue to suffer.

It is important that the Government makes commercially viable decisions which support the national interest of the country by enabling sustainable economic progress. Keeping that in mind, it is vital that the Government focuses on mechanisms to support its fiscal revenue while ensuring that relief be provided to small farmers with programs like its envisioned smart subsidy program enabled through Kissan cards.

Fertilizer industry is overall supply constrained with demand of 6MT vs indigenous supply of 5.5MT. All the industry players have varying level of Feed GIDC – with Fauji on 100 percent and Fatima on 0 percent. The industry players did not agree to the level of Urea price reduction with MoI&P.

GIDC is already part of the Federal Budget therefore waiver of GIDC will further exacerbate the piling fiscal deficit. Government is discriminately benefiting an industry at the cost of nation at large.

Progress on TAPI and similar other pipeline projects would be seriously jeopardized with the decision of government to eliminate GIDC for the Fertilizers sector.

PTI government once again takes a short term myopic approach to facilitate influential large zamindars by pursuing an out of court settlement of GIDC, thereby benefiting the Fertilizers industry against others.

The proposed mechanism of eliminating GIDC discriminately for the Fertilizers Sector only to benefit big zameedars would seriously undermine the ongoing litigation on GIDC settlement. To support big zameedars and certain influential business groups, the government is compromising its GIDC case that may cost the nation in excess of Rs 800 Billions.

In a meeting of MoI&P held with the Fertilizers industry, EDG Petroleum Division has categorically raised his concerns on the proposed GIDC settlement stating that relief to a particular sector will jeopardize government position in the current GIDC litigation.

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