Over the last few decades, a successful economic development model for developing countries has hinged on promoting exports by leveraging their unique competitive advantage. After Japan’s economic miracle, China, Vietnam and now Bangladesh have made impressive strides in global export markets to benefit from continuous technological upgradation, upskilling of manpower and foreign direct investments in the country.
Historically, Pakistan has failed to achieve sustainable growth due to weak tax collections, low investment in the economy and sluggish exports. Latest figures of the Ministry of Commerce show that the country’s trade deficit widened by 32.9 percent, or $ 7.6 billion, in the outgoing fiscal year (FY21) due to lower export proceeds and wheat and sugar imports.
The burgeoning deficit is expected to pose significant challenges for the government in managing the foreign exchange reserves and external liabilities.Nonetheless, the government’s Vision 2025 seeks to elevate Pakistan’s position from a lower middle income to an upper-middle income country by pursuing an ambitious, export-led growth strategy.
The Vision aims for an increase in exports from the current $ 25 billion to $ 150 billion by 2025 through diversification of both the products and export destinations. There is a need to recognize that locally manufactured urea has the potential to become one of the top exports of Pakistan without any additional investments by the industry.
The evolution of fertilizer manufacturing in Pakistan
Over the years, the fertilizer manufacturing industry has evolved in Pakistan and played a key role to support the development of country’s agricultural sector. In particular, the Fertilizer Policy 2001 has proven to be the most effective policy to attract investments in the fertilizer sector and ensure food security for Pakistan through self-sufficiency, higher crop productivity and improved returns for the farmers.
Prior to 1980-81, Pakistan imported more than 50 percent of its annual fertilizer requirements to meet the domestic demand. Following the expansion of local industry in the 1980s, the situation improved to a certain extent.
However, the imports continued to surge between 1989-2001 on the back of persistent increase in demand and, therefore, an urgent need was felt to encourage further investment by existing and new players in fertilizer production.
In this backdrop, the Fertilizer Policy 2001 was formulated to incentivize manufacturers and encourage new plant investments by provisioning “a gas price that enables them to compete in the domestic market with fertilizer exporters of the Middle East so that indigenous production is able to support the agricultural sector’s requirement by fulfilling fertilizer demand.”
The Fertilizer Policy 2001 has been a resounding success to attract significant investment of around Rs 162 billion in new plants and capacity expansions by Engro and Fatima Fertilizers. With increased domestic production of around 1.9 million tons, Pakistan has been able to attain self-sufficiency in urea and saved around Rs 665 billion in import substitution from 2011 till 2020.
The case for urea exports
Till 2012, Pakistan was a net importer of urea as the limited capacity of manufacturers was insufficient to meet the agrarian economy’s high urea demand. Due to new investments and capacity expansions, the local industry can now produce over 7 million tons of urea per annum, which is higher than the average national demand of around 6.1 million tons in recent years.
Pakistan has now not only become self-sufficient in urea production, but also has untapped production capacity to export around 0.9 million tons to earn valuable foreign exchange.
Unlike most other industries that will need three to five years to develop their export capabilities, urea exports can be attained without making any additional investment as the idle production capacity is already available.
If granted permission by the government, the industry can start making exports within 30 days, which will create additional jobs and result in foreign exchange inflows. Urea exports could alleviate the burden of the economy as the excess capacity may be used to generate exports worth ~$230 million and potential tax revenues of Rs 300 million for the government.
The export potential can reach as high as ~$436 million based on 5-year maximum urea price of $485/ton (FOB urea spot rate 2021). In 2017 and 2018, the local fertilizer industry exported surplus urea to the tune of 0.7 million tons, cumulatively.
This opportunity of exports of urea can be materialized either by exporting urea produced through RLNG even without any subsidy or gas priced at Petroleum Policy (PP) 2012, whereby low BTU, non-pipeline quality gas can be used to bring valuable foreign currency in the country. This opportunity is feasible in the medium term as crude oil and the linked RLNG prices are expected to remain within a viable range.
In addition to the foreign exchange inflows and value creation as mentioned above, urea exports can generate employment mainly due to continuous operations of RLNG-based plants. Further, the government will also not be required to pay any subsidy for operations of the RLNG-based fertilizer plants.
Last year, the total subsidy to these fertilizer plants was calculated to be around Rs 2 billion, in addition to Rs 6.7 billion spent on the import of RLNG that significantly widened the country’s trade deficit. In 2021, a subsidy of around Rs 13.6 billion was approved for these RLNG-based plants.
Managing local demand along with urea exports
Fertilizer plants producing urea volumes from non-Fertilizer Policy gases only shall be allowed to export. The concessionary Fertilizer Policy gas is meant to produce affordable urea for local farmers and, hence, exports should only be considered from urea produced through imported RLNG or low BTU non-pipeline quality gas priced at PP 2012.
While RLNG-based production would generate 2 times foreign exchange inflows benefit on a spot basis, exports based on low BTU non-pipeline quality gas priced at PP 2012 would generate significant foreign exchange inflows without any outflows.
The remaining requirements may be kept in line with the Imports and Exports (Control) Act, 1950. Urea exports must be considered only after ensuring adequate supply in domestic market. Hence, parameters must be developed to ensure that exports can only be done on excess quantity.