Executive Summary:
[pic][pic]Economists often proceed with impact studies of fertilizer subsidy without first making an examination of the structure and dynamics of subsidy. This may lead to misleading focus and to seeking solutions generally in adjustment of administered prices. Substantial gains in efficiency can be realized by looking into structural questions of subsidy. The case of Bangladesh provides an example of how a proper procedure of accounting can shift the onus of correcting numerous distortions that arise from current practices, from farmers to industries. The case study also shows that farmers receive less subsidy than usually claimed and the hidden subsidy to industries is passed on to farmers. The Bangladesh case may represent developing countries in a general manner.
Introduction:
In the early 1970s, Bangladesh pursued a highly restrictive trade and exchange rate policy characterized by import regulations, high import tariffs, export taxes, pervasive quantitative restrictions, and an overvalued exchange rate, similar to policies of the 1960s when it was part of united Pakistan. The policy regime in the 1970s was especially restrictive for the agricultural sector.. Major reforms in markets for fertilizer and irrigation equipment markets were begun during the late 1970s (Appendix Table A8). Under the New Marketing System established in 1978, private trade in fertilizer was liberalized, leading to a large expansion in the number of wholesalers and retailers operating in the fertilizer market. The government had a monopoly on import of most agricultural commodities and placed major restrictions on exports of raw jute, the major agricultural export. As a result of these distortions, agricultural price incentives were substantially reduced throughout the period (Rahman 1994). Disenchanted by the outcome of the policy as reflected in slow economic growth and continued balance of payments problems, and under pressure from donors, the country began initial reforms in its trade and exchange rate policies in the early 1980s. The major trade and exchange rate policy liberalization did nt take place until the early 1990s, however, when it involved broad liberalization of trade and exchange rate policies as well as of agricultural trade and pricing reforms. By the mid-1990s, agricultural output price distortions had been virtually eliminated on rice and wheat, and total distortions were minimal. Bangladesh sharply raised Import tariffs on rice in response to subsidized exports by India in 2001, but domestic rates of Assistance calculated relative to international market prices indicate only small overall agricultural price distortions in Bangladesh in the present decade.
* Until June 2002, the Bangladesh Sugar and Food Industries Corporation (BSFIC), a public enterprise, and Trading
Corporation of Bangladesh (TCB) shared a monopoly on sugar imports (Pursell 2005, p. 17).
* Another parastatal, the Bangladesh Water Development Board (BWDB) was also established in the early 1960s to implement large-scale surface water irrigation as well as flood control and drainage projects, following suggestions by a Master Plan prepared in the aftermath of disastrous floods of the mid-1950s.
*In spite of privatization of the distribution of fertilizers, most urea production stayed in the public sector.
Fertilizer was removed and the deregulation in fertilizer marketing was completed. Between December 1994 and March 1995, however, a serious shortage in the supply of urea led to a crisis in the fertilizer market, resulting in a partial reversal of the reform process by imposing controls on wholesale markets, regulating pricing at factory gates and imposing some restrictions on domestic traders selling outside their districts of registration (Ahmed 2001). Subsidies on nitrogenous fertilizer, which is produced domestically, have been the major distortion to agricultural input prices in Bangladesh. Fertilizer prices at the farm level were deregulated throughout the country by 1983, eliminating direct subsidies to farmers for urea. Subsidies on imports of other fertilizers (Triple Super Phosphate and Muriate of Potash), designed to improve the balance of chemical nutrients, continued through 1991, however. Subsidies on imported fertilizers such as TSP and MP were not reintroduced until January 2005, at the rate of 35 percent.
In spite of the liberalization in marketing, government controls and the volumes of imports and exports of urea have kept domestic wholesale prices of urea consistently below import parity border prices, though generally above export parity prices.27 Domestic prices for urea averaged about 37 and 50 percent below import parity in the 1970s and 1980s, and 50 percent in the 1990s and 2000s.28 However, domestic prices of TSP have averaged only 18 percent below import parity since 1990 compared to 47 percent below import parity in the 1970s and 1980s (Appendix Table A9). Given that costs of fertilizer have averaged only 5 percent of total cost of paddy (and less for most other crops), the fertilizer subsidy has not had a major effect on overall NRA to agriculture in recent years, adding only 1 to 2 percent in most years. That also applies to the main non tradable food, potatoes that would otherwise have an NRA of zero.
Political intervention and lack of co-ordination:
There has been a progressive shift in agricultural policies in Bangladesh towards privatization, deregulation, and a reduction of input subsidies, which began in the mid- 1970s and continued in stages up to the early 1990s. There are still government controls on fertilizer and sugar production and on wholesale trade, but these are of relatively minor economic significance. The successive Bangladesh governments that formulated and implemented these policies, like all governments, balanced a variety of objectives against a range of constraints. In the policy process, pressures and counter-pressures are exerted on the government from various interest groups, and government responses are usually conditioned by the mutuality of interest of the pressure groups and the ruling elites. Sometimes there are situations where effective pressure groups do not exist or can be successfully set off against one another, and the state can pursue its own agenda – which could be purely predatory, altruistic or a blend of the two (Grindle 1991).
Even if the reform proposals are sound on economic considerations, they need to have a minimum level of social and political acceptability for their implementation to be successful and sustainable. When this is not the case, the government may be forced to backtrack and adopt policies that are less satisfactory on economic grounds.29
In the Bangladesh context, several factors have been particularly important in determining the influence of various interest groups on agricultural policies and reforms since independence: the relative political strengths of farmers versus urban groups; academic and political views on socialism and capitalism; internal debates within government across ministries; and influences of donors.
One of the most important facets of the political economy in Bangladesh is the relative weakness of farmers and the rural poor as pressure groups. Although they include a large number of households, their geographical dispersion, internal differentiation, ideological orientation, and poor resource base all contribute to making them largely ineffective politically. In contrast, the working class in the urban formal sector, the bureaucracy as a pressure group within the state apparatus, and private entrepreneurs constitute organized and powerful interest groups whom few governments can afford to antagonize.30
The weak political clout of the peasantry in Bangladesh explains why conflicts of interest between agriculture and industry have consistently been resolved in favor of industry.
Policies and reform process:
There has been a progressive shift in agricultural policies in Bangladesh towards privatization, deregulation, and a reduction of input subsidies, which began in the mid- 1970s and continued in stages up to the early 1990s. There are still government controls on fertilizer and sugar production and on wholesale trade, but these are of relatively minor economic significance. The successive Bangladesh governments that formulated and implemented these policies, like all governments, balanced a variety of objectives against a range of constraints. In the policy process, pressures and counter-pressures are exerted on the government from various interest groups, and government responses are usually conditioned by the mutuality of interest of the pressure groups and the ruling elites. Sometimes there are situations where effective pressure groups do not exist or can be successfully set off against one another, and the state can pursue its own agenda – which could be purely predatory, altruistic or a blend of the two (Grindle 1991).
Even if the reform proposals are sound on economic considerations, they need to have a minimum level of social and political acceptability for their implementation to be successful and sustainable. When this is not the case, the government may be forced to backtrack and adopt policies that are less satisfactory on economic grounds.29
In the Bangladesh context, several factors have been particularly important in determining the influence of various interest groups on agricultural policies and reforms since independence: the relative political strengths of farmers versus urban groups; academic and political views on socialism and capitalism; internal debates within government across ministries; and influences of donors.
One of the most important facets of the political economy in Bangladesh is the relative weakness of farmers and the rural poor as pressure groups. Although they include a large number of households, their geographical dispersion, internal differentiation, ideological orientation, and poor resource base all contribute to making them largely ineffective politically. In contrast, the working class in the urban formal sector, the bureaucracy as a pressure group within the state apparatus, and private entrepreneurs constitute organized and powerful interest groups whom few governments can afford to antagonize.30
The weak political clout of the peasantry in Bangladesh explains why conflicts of interest between agriculture and industry have consistently been resolved in favor of industry.
Important factors:
Urea is heavily subsidized, while 15% subsidy on imported TSP, DAP and MoP is given through a engthy bureaucratic system. Fertilizer demand is usually calculated by the Department of Agricultural Extension on the basis of nutrients needs and crop production projections. There is huge gap between productions (1.7 million tons) and demands (4.45 million tons). Timely supply of locally produced and imported fertilizers at the farm gates are handicapped by various constraints that result in crisis and dashes farmers’ hope. Prices of urea and other imported fertilizers should be fixed at per with those in the neighboring countries to check their smuggling out of the country. Fertilizers should be marketed like other essential commodities like rice grain, common salt, edible oil, kerosene, etc in the open market. The farmers should be provided subsidies not only for buying fertilizers, but also for other agro input such as seeds, pesticides, etc. Two more urea fertilizer factories (each 0.5 million capacity) - one in the northern and another in southern-western districts should be established to minimize the shortfall of urea. Full functioning of the DAP plants should be started as soon as possible to reduce its import.
Government initiative:
In the revised budget of the current fiscal year an additional allocation of Tk. 600 crore has been made for providing subsidy to the power sector. An allocation of Tk. 1,500 crore has been provided in the revised budget for the recapitalization of Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and Karmasangsthan Bank in order to revamp the rural economy by increasing credit access, thereby supporting self-employment. Tk. 1,500 crore has been allocated to enhance subsidies for agricultural inputs and irrigation. Bangladesh Bank has allocated Tk. 1,183 crore for refinancing agricultural credit.
It may be recalled that Tk. 4,285 crore was allocated in the budget of 2008-09 as subsidy for fertilizer and other agricultural inputs to help the farmers. Due to abnormal price hike of urea and non-urea fertilizer in the international market around that time, the amount of subsidy was raised by Tk. 1,500 crore to Tk. 5,785 crore for keeping the market price at an affordable level for the farmers. Recently, the price level has come down to one-third of that level in the international market. Against this backdrop, I propose to allocate Tk. 3,600 crore as subsidy in this sector for the next fiscal year.
Fertilizer Subsidy:
Government is providing subsidy in different rate: λ Subsidy for Urea @ tk. 30.00/kg costs the government about tk 4,200 corers per year. λ Subsidy for non-urea fertilizers @ 15% costs the government about tk. 600 corers per year.
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λ But with the decreases of prices of non-urea fertilizers, subsidy rose to 55% costing the government about tk 2,756 corers per year.
With the new reduction of prices, government has to incur an additional amount of subsidy for tk.
500 cr. The total subsidy of fertilizers has been calculated to be tk. 3,000 cr. for the year 2009-10.
For 2010-11
In the budget for FY2009-10, an allocation of Tk. 3,600 crore was made for granting subsidy on fertilizers and other agricultural programs to reduce the cost of production in agricultural sector. Later, we increased the amount of this subsidy to Tk. 4,950 crore. I propose an allocation of Tk. 4,000 crore for subsidy in agricultural sector in the budget for
FY2010-11.
71. Another major input of agriculture is seed. Under the program of
Table 1. Ranking of different fertilizer use by farmers in Bangladesh (2001-02 to 2005-06).
Year Fertilizer
2001-02 2002-03 2003-04 2004-05 2005-06
Urea 1 1 1 1 1
TSP 2 2 2 2 2
DAP 5 6 6 5 4
SSP 4 4 4 4 7
MP 3 3 3 3 3
Gypsum 6 5 5 6 6
Zinc 9 9 9 8 9
Mixed fertilizer 8 7 7 7 5
Am. sulphate 7 8 8 9 8
Note: "1" indicates the highest use and "9" indicates the lowest use. Source: Ali and Ali (2006)
Table 2. Fertilizer production and import (‘000 t) during 2000-01 to 2005-06
Urea TSP SSP Year
Production Import Production Import Production
2000-01 1883 302 68 363 119
2001-02 1545 522 66 341 136
2002-03 2057 286 65 328 135
2003-04 1986 235 67 369 141
2004-05 1878 567 54 451 163
2005-06 1730 770 56 374 135
Source: MOA (2007)
Outlook for fertilizer consumption 15
Bruce (1987) reported that the fertilizer consumption per hectare in Bangladesh is considerably lower than in many developed countries, but it is higher than the average level in many of developing countries. Fig. 8 observes that on total crop area basis near about 198 kg nutrients were used for crop production, which was higher than in India, Pakistan, Sri Lanka, Thailand and even Philippines (BARC 2005).
Fig. 9 shows the overall consumption of major fertilizers (as N, P and K) with an exponential growth rate of 7.8 per annum.
Twelve years interval (since1968-69 to 2003-04) growth rate of fertilizer decreased over times in case of all 3 major fertilizer nutrients (Table 3) because of increased fertilizer selling price. It does not mean that the total amount of fertilizer used by farmers in crop production decreases. The growth rate decrease here measures the magnitude of fertilizer quantity use in crop production as compared to previous 12 years' fertilizer consumption.
During 1992-93 to 2003-04, the growth rate of P use was 