GIDC settlement - It’s about time!

July 10, 2019 (MLN): In a bid to protect the local farming community, the recently held Federal Cabinet meeting declared that that any unjustified increase in fertilizer prices would not to be tolerated by the Government.

Elaborating on the same in much more detail, Abdul Razak Dawood said that the production cost of fertilizer had gone up due to a recent hike in gas prices. However, he claimed that there was a smooth supply of fertilizer in line with demand and the government was making efforts to prevent undue hike in fertilizer prices.

While this might be a constructive move on government’s part, there’s still a lot of fretfulness as to how this goal will be achieved. With IMF having indirectly assumed the decision-making power, any additional subsidy on urea to slacken upward pressure in fertilizer prices is plainly out of question.

Likewise, any further reduction in sales tax would be impractical as it is already at its nethermost level.  In short, the current fiscal position of the economy does not allow for any increase in outflow or decrease in inflow of funds from national exchequer.

Keeping the above mentioned shortcomings in sight, it seems that GIDC settlement is the only possible way to dispel apprehensions on agricultural growth.

According to a research report by AKD Securities, GIDC settlement proposal suggests a 50% reduction in prospective GIDC application for those who clear 50% of GIDC over dues. The outcome of this proposal is likely to be sufficient to cancel out the gas price hike and keep urea prices at June-19 levels.

It would be apt to note that Agritech and Fatima Fertilizers currently rely on subsidized gas to dissuade pressure on urea prices. A continuation of this trend for another six months would denote an outflow of around Rs. 13 to 14 billion from the national kitty, thus making GIDC settlement a preferred solution.

The report further points out that GIDC settlement would largely benefit non-concessionary players of the sector, such as Fauji Fertilizer Bin Qasim (FFBL) and Fauji fertilizer Company (FFC).

“While FFC is expected to book a higher one-off gain due to higher GIDC payable out-standing, FFBL is expected to be the prime beneficiary on a recurring basis” the report stated.

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