Flaws in Government Policy for Urea-Export
Over the past several months, the Fertilizer Manufacturers of Pakistan Advisory Council (FMPAC) has repeatedly urged the government to make strategic changes in its policy for allowing exports of a limited quantity of surplus Urea inventory in the country. The key stakeholders of this industry believe that; the current policy has several flaws, whereby the urea producers will not be able to take optimum advantage of this regulatory support.
Since the fertilizer sector in Pakistan is showing high productivity (6 million tons of urea annually, while the current domestic consumption of urea is only 5.4 million tons per year), Pakistan is currently accumulating a yearly surplus inventory of 0.6 million tons of urea. The carrying costs and storage of around 1.5 million tons of the current fertilizer inventory is a big financial burden on this heavily-taxed industry.
Although the government made a good decision to allow the exports of limited quantities, to reduce the excessive inventory burden on the fertilizer industry, but the progress on urea-exports has so far remained quite slow, due to some inherent constraints in this policy. Actually, the State Bank of Pakistan (SBP) had given a very tight timeline for exports, as the urea producers were expected to achieve the export-target by the 31st of October 2017.
One key factor was that; Pakistan is not internationally recognized as an exporter of urea, because it has never regularly exported this commodity over the past several decades. Thus the locally produced fertilizers currently have a limited market for exports. Hence, it will take some time before the foreign buyers can evaluate the Pakistani suppliers, their product quality and their service-reliability, whereby they can finalize the bulk-quantity transactions with Pakistan.
The domestic producers of urea were reluctant in seeking any fresh export orders, because this policy also imposes a non-performance penalty. In case the exporters are unable to complete their export transactions within the stipulated timelines, they will have to pay a penalty worth 15 percent of export-price.
Observing these hindrances and so far the slow pace of progress on this export opportunity, which will expire very soon without achieving significant results, the domestic fertilizer industry has expressed its concerns on this issue. More than two months ago, the key stakeholders had formally requested the government to make some policy changes like; removing the non-performance penalty and extending the timeline for urea-exports.
The urea-exporters of Pakistan are rightfully asking for more time to penetrate into the highly competitive and price-sensitive international markets. However, the government has not responded favorably to approve this collective request from the industry. The industry experts have expressed their belief that; a more liberal policy and sufficient time-frame for establishing an export market for Pakistan’s surplus urea is necessary for achieving the export-target and reducing the trade-deficit for economic stability.
The fertilizer industry currently needs relief from the big inventory burden. Hence, it is also advisable at this juncture, to extent the timeline for export of additional urea. If the last-year’s stock is carried forward, the country can easily export 1.2 million tons of surplus fertilizers, without disturbing the local supply, as this year, the domestic demand for urea is expected to remain flat. With such healthy export figures, Pakistan can also earn well over 200 million US Dollars.