The urea import requirements for the Rabi season will cost the government Rs 42 billion in subsidies as despite higher prices in the world market the imported commodity is being sold at lower price in the domestic market.

So far, following the directives of the Economic Coordination Committee, the state run grain trader - Trading Corporation of Pakistan - has finalised deals for the import of 722,085 tons of urea for Rabi season, while another deal of 200,000 tons is in process.

Currently, urea prices are on the higher side in the world market and to ensure cheap availability of the commodity in the domestic market, the federal government is paying huge subsidy on imported urea. The urea is being imported at $538 to $540.75 per ton (average Rs 48,533 per ton), while it is being provided to National Fertilizer Corporation at a price of 10,760 per ton following the decision of the ECC.

Since the natural gas shortfall will not be resolved in the short-term, the Sate Bank of Pakistan has predicted in its annual report that the government will have to import urea in the new fiscal year. The government had already planned to import about one million tons of urea for Rabi season because the local urea producers are unable to cater the local demand due to inconstant gas supply. The government will also have to subsidise imported urea because the international price of the commodity is higher than the current domestic price.

According to the State Bank if the gas load management schedule is followed, it is believed that urea import requirements for the Rabi season will be 1.2 million tons, which will cost the country around $620-640 million in foreign exchange and another Rs 42 billion in subsidies.

However, the State Bank has criticised the subsidy mechanism and according to its annual report the amount of subsidy granted by the government is more than the international-domestic price per bag, because of a consequence of the subsidy transmission mechanism.

According to the report urea is being imported by the TCP at or slightly above the international market price and sold to the National Fertilizer Corporation (NFC) at a price of Rs528 per bag, fixed by the Economic Coordination Committee of the Cabinet.

NFC then distributes the fertiliser through its marketing arm, National Fertilizer Marketing Limited (NFML), across the country. Unfortunately, this creates ample opportunity for various creative methods of corruption, the report said and added that the subsidy is, therefore, untargeted.

Reports regarding an FIA investigation into a "urea scam" at NFC/NFML are strong indications that the mechanism for the distribution of imports is defective. The SBP report has also reiterated that the problems in the fertiliser sector are solely a consequence of the ad-hoc policies deployed to manage the natural gas shortage. Apart from reassessing the role of NFC and NFML in importing and distributing urea, the government needs to set proper gas allocation to manage market expectations and halt speculative activity.

The SBP estimates indicate that urea production for the Rabi season in FY12 will be 2.1 million tons, leading to a deficit of 1.2 million tons, as there will be a demand of 3.3 million tons urea in the Rabi season.

The report said that inconsistent policies will always provide incentives for significant hoarding of urea and further unofficial price increases. Since the government is still reliant on imports of urea to fulfil domestic demand, there will always be a question mark regarding the timely availability of urea in the market.

"If the government fails to time its import of the commodity precisely, and ensure that stocks are distributed systematically throughout the country, dealers will want to hold on to their stocks in anticipation of future price increases and apprehensions of future availability," the SBP pointed out. Buffer stocks will dwindle and the market will create self-fulfilling expectations of a shortage, the report added.