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PR Short Notes


Photo Source: Dawn

Pakistan Reader# 283, 29 January 2022

Pakistan’s Urea Crisis: Three contributing factors



Commodity crises like wheat and sugar in past have helped the government in earning higher revenues

Ankit Singh

Agriculture contributes 24 per cent of Pakistan’s GDP; it employs roughly half of the employed labour force and also is a major source of foreign exchange earnings. Pakistan external trade is largely furbished by raw materials and semi-finished goods.  Within this, chemicals (including fertilizers) have contributed around 11 per cent to the export basket. 

Pakistan has been self-sufficient with Urea manufacturing. The government provides subsidies and tax incentives for farmers to retain profit margins. Despite the importance of urea to Pakistan’s export basket, and the government’s support for manufacturing, currently, there is a crisis. What has caused the current crisis over urea, and what are the implications?

The current urea crisis is a result of Pakistan’s structural problems and not due to constraints in its industrial capacity. Three major factors seem to have resulted in the current shortage of urea. 

Subsidy and price disparity 
In keeping with the welfare policies, Pakistan provides subsidies to fertilizer producers for accessing cheaper LNG to be used as a feed. Besides, there is a subsidy on imported urea and; in Punjab, the provincial government also gives a cash subsidy. Since there is self-reliance in urea production, the subsidy and tax incentives on fertiliser production create a price disparity with other countries like Iran and Afghanistan, which are crippling under economic sanctions. 

There has been a global surge in the price of commodities; however, Pakistan is not intricately linked to supply change disruptions. While the end-user is supposed to be the farmer in Pakistan, the end user in such artificial crisis tends to be countries like Afghanistan and Iran. 

The urge for higher profits and immediate revenues dictates illegal smuggling and hoarding of urea at the expense of struggle and disdain for a farmer in the alluvial plains of Pakistan. 

 

Urea and its connection with the natural gas
As per the Haber-Bosch process, the urea is produced using hydrogen from natural gas and naturally occurring nitrogen. It is one of the most efficient and clean ways of manufacturing urea. 

Pandemic induced supply chain disruptions and lack of certainty have propelled the prices of natural gas to surge as well. Even coal is peaking at its highest price level in the recent decade. Though Pakistan has indigenous capacity and natural gas reserves, the excuse of natural gas shortage is just a convenient way out for justifying the shortage of urea. There are many major fertilizer producers in the country like Fauji Fertilizers, Engro Fertilizer Company, Dawood Hercules Fertilizer and Fatima Fertilizers; these companies make Pakistan the eighth largest nitrogen fertilizer producing country in the world. They have been given incentives to import the latest technology so that urea production is of preferred global standards. Other than incentives, there are partisan trade agreements with various countries.  At a time when it could book LNG cargoes at USD 7-8 per metric million British thermal unit (mmbtu) Pakistan resorted to booking LNG at USD 30 mmbtu. The deliberate importing of expensive LNG over indigenous gas is an effort to keep friends like Qatar, Australia and USA happy. The hunt for potential markets in the region and the world for urea exports/smuggling supplements larger national security objectives at the expense of Pakistan’s own national food security. 

Similar artificial food crises in the recent years
Wheat and sugar crises in the last years created similar havoc among the lower middle class in Pakistan. An investigation into the matter revealed that despite a ban of export of wheat imposed in July 2019, the government allowed the export of 48,000 tons of wheat which fueled a price hike. Similar was the case with sugar as it got exported and the price shot up to PKR 71.44 per kg from PKR 55 per kg. 

An FIA investigation found out that the export of sugar brought two-way profit for the sugar barons, first, by gaining subsidy and second by taking huge profits by creating a shortage and hence demands increased the price of the sugar. Previous governments have also led investigations into such artificial crises but never named the culprits publicly.

References 
Ikram Sehgal, “Wheat and sugar crisis,” The News International, 10 April 2020
Fazal Sher, “Closure of two LNG-based urea-making plants: MNFS&R asked to conduct investigation,” Business Recorder, 31 December 2021
Ongoing urea crisis,” Dawn, 14 January 2022
Ahmad Fraz Khan, “Urea: a preventable crisis that is worsening,” Dawn, 10 January 2022
Mushtaq Ghumman, “Crisis of urea fertilizer in the offing,” Business Recorder, 24 January 2020
Rizwan Shehzad, “PML-N demands probe into ‘the most expensive LNG purchase’,” The Express Tribune, 31 July 2021

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