Fertilizer price and subsidy policies in Bangladesh

Fertilizer price and subsidy policies in Bangladesh

World Development, Vol. 20. No. 3, pp. 437-455. Printed in Great Britain. Fertilizer 0305-750)(/92 $5 .oo + 0.00 Pergamon Press plc 1992. Price an...

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World Development, Vol. 20. No. 3, pp. 437-455. Printed in Great Britain.

Fertilizer

0305-750)(/92 $5 .oo + 0.00 Pergamon Press plc

1992.

Price and Subsidy Policies in Bangladesh RAYMOND Z. H. RENFRO* US Agency for International Development,

Islamahad

Summary. - Fertilizer marketing and price policies in Bangladesh are becoming increasingly liberal. Reforms that began in 1983 with the New Marketing System. and continue into the present with direct procurement of urea and gypsum fertilizers from factories. have led to an expanded role for the private sector and to important price and supply availability benefits to farmers. Despite the virtual elimination of urea subsidies in 1986, prices and consumption have improved due to growth in competition and other nonprice factors. Large subsidies continue to exist on phosphate and potash fertilizers. These subsidies and import restrictions in general on the private sector are problematic to competitive procurement of fertilizers. Policy options are recommended to overcome these problems. and benefits to farmers from complete price and market deregulation are estimated.

nominal farm level prices did not rise, as expected, and real prices consistently declined despite the reduction in budgetary subsidy.

1. INTRODUCTION

Bangladesh is one of the world’s poorest and most densely populated countries. Agriculture is the dominant sector in the economy, accounting for approximately 45% of GDP and employing over 70% of the workforce. Food grain production (predominantly rice) has been increasing at a compound growth rate of 1.9% per year since 1970. below the estimated annual population growth rate of 2.4% over the same period.’ Chemical fertilizer has been a major factor in the growth of domestic food production, and growth rates in fertilizer use have been more dramatic than those of complementary inputs such as irrigation and high yielding varieties (HYV). The fertilizer use area is substantially greater than the irrigated area and HYV use area. Since 1970, fertilizer sales and use have increased at a rate of 10% per year. Numbers of irrigation equipment in operation and distribution of HYV seeds by the Bangladesh Agricultural Development Corporation (BADC) have increased at rates of 15% and 9% per year, respectively. Table 1 presents the basic data from which these growth rates are calculated. Subsidies have traditionally played an important part in the pricing of fertilizer in Bangladesh, but are gradually being reduced to ease government budgetary support requirements and annual budget deficits. As domestic fertilizer prices were being deregulated and subsidies reduced (notable on urea fertilizer) from 1982-83 onward, an apparent paradox began to emerge:

2. OBJECTIVES

AND METHODOLOGY

The purpose of this paper is to: (a) estimate the prevailing and historical rates of subsidy on fertilizer; (b) trace the sources of subsidy and the high costs of fertilizers; and (c) recommend alternative policy options. Policy options will concentrate on price and market availability benefits from continued deregulation, reduction of the large subsidy in effect for triple superphosphate (TSP), and exfactory pricing at par with border prices. Statements to the effect that the fertilizer subsidy has been eliminated and that there is a production tax on fertilizer consumers will be shown to be incorrect and misleading (see, for example, UNDP, 1989, pp. 16, 75-78). Estimates and comparisons of subsidy levels, marketing margins, and the impacts of price and market deregulation over time from available price and cost data are made. Border prices are compared with nominal prices and are used to estimate economic subsidies. Real prices and marketing margins are derived after deflating by

*Special thanks to Surjit Sidhu, IFDC and two anonymous referees for valuable comments.

437

11,885 11,077 9,887 10,021 11.830 11,224 12,776 11,822 13,108 13,232 13,349 14,737 14,372 15,069 15,471 15,832 15,829 16,254 16,532 16,566 18,987

Total foodgrain production (000 MT) 25,783 24,805 23,289 24,093 24,714 24,408 25,896 24,813 25.245 25,645 26,175 26.935 27,067 27,442 27,364 26.934 27,031 27,661 26,984 26.384 27,663

Foodgrain cultivated area (000 MT) n/a n/a n/a nla 1,839 2,529 1,590 495 1,743 955 2,188 891 1,838 1,825 2,012 2,589 1,224 1,767 2.920 2,138 1,533

Food grain imports (000 MT) 282 309 248 390 386 284 465 521 731 745 852 875 829 968 1,129 1,260 1.156 1,321 1,514 1,719 2,043

Total fertilizer sales (000 MT)

1. Trends in food grain production

7,602 8,117 7,548 10,210 11,370 9,767 12,165 10,319 11,441 12,233 13.301 14,393 14,790 15,789 16,515 17,743 16.862 n/a n/a n/a n/a

Fertilizer use area (000 AC) 19 25 25 34 37 40 42 37 50 53 58 82 109 147 175 204 194 211 238 287 335

Total irrigation equipment (000) t 2,619 2,884 2,714 2,994 3,211 3,561 3,475 3.009 3,600 3,694 3,877 4,050 4,264 4,566 4,744 5,121 5,183 5,434 5,930 6,778 n/a

Irrigated area (000 AC)

and impours, input use and area, 1971FW

6 2 15 22 14 10 11 5 7 10 20 19 21 19 21 25 17 16 23 32 n/a

Total HYV distribution (000 MT)S

g 2

3,975 5,951 6,833 7,022

2

6

F

3,450 4,052 3,364

7,729 7,752 8,482 8,386 9.183 9,716 11,182 14,059

: 3,649

13 863 1,351 2,684 3,869

HYV area (000 AC)

Source: Bangladesh Bureau of Statistics (various years); BADC, “Management information system report” (various reports); BADC, “Monthly fertilizer newsletters” (various issues); IFDC and USAID estimates from Ministry of Agriculture data. Figures for irrigated area for FY 1988-89 are from World Bank (1990). *MT = metric tons; AC = acres. tIrrigation Equipment data in operation from FY 1981 onwards includes private sector sales. *Quantities sold by BADC.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Bangladesh Fiscal Year

Table

FERTILIZER

PRICE

available price indices, and comparisons are made with major grain to fertilizer price ratios.

3. FERTILIZER

MARKET STRUCTURE BANGLADESH

IN

Fertilizer sales began in earnest in the early 1960s with the introduction of high yielding varieties and modern irrigation equipment. Largely because agricultural input marketing channels were virtually nonexistent, the government established the East Pakistan Agricultural Development Corporation in 1961 to procure and distribute key agricultural inputs to farmers throughout the country. After the birth of Bangladesh in 1971, its name was changed to the Bangladesh Agricultural Development Corporation (BADC). A system was established to sell fertilizer to small retailers at fixed prices. This system comprised approximately 460 wholesale dealerships at the localized level, consisting of Thana Sales Centres (TSCs) and Thana Central Cooperative Associations (TCCAs). TSC and TCCA wholesalers were licensed by BADC to sell fertilizer. Approximately 43,000 retail dealers were also licensed and were not permitted to sell beyond their respective local government or union boundaries (an average area of 12 square miles). Retail prices to farmers and retail dealer margins were also fixed based on product and distance from the TSC or TCCA. Bangladesh’s heavy reliance on imported fertilizer began to be supplemented by domestic production of urea in 1970 with the establishment of the Fenchuganj factory using large deposits of natrual gas as the primary energy source. Bangladesh is now virtually self-sufficient in the production of nitrogen fertilizer through five urea factories. Small amounts of urea were exported in 198488, but 61,000 tons had to be imported in 1990 due to production shortfalls. The country’s only triple superphosphate (TSP) factory in Chittagong is totally dependent upon imported raw materials and accounts for only 30% of domestic consumption. Farmers generally prefer, even at higher prices, imported granular TSP to domestically produced powdered and granular TSP because of higher quality and granular consistency. Table 2 highlights domestic production, imports and exports by year, factory and type of fertilizer. The proportion of imports to domestic production and total fertilizer supply has been decreasing over time, although the total volume of imports has remained high in recent years. Annual sales by type of fertilizer are presented in Table 3. During 1962278 BADC had a total monopoly

AND

SUBSIDIES

439

on the procurement and distribution of fertilizer to the thana (now upada or subdistrict) level. Prices were fixed at all levels and largely subsidized. Concerns began emerging within the government, however, over the high levels of budget subsidies required under this system, poor management of imports and supply movement, and erratic annual sales and domestic production (Infanger, Samad and Hooker, 1988). Reduction of subsidy was, of course, always a stated Bangladesh government objective, and this policy became increasingly augmented by US Development for International Agency (USAID) and World Bank policies in Bangladesh. Agreement was eventually reached with the government and BADC to implement a revised marketing system, that came to be known as the New Marketing System.

4. THE NEW MARKETING

SYSTEM

In December 1978 the market was partially deregulated in the Chittagong Division (one of four divisions in Bangladesh) on an experimental basis, although the politically sensitive Chittagong Hill Tracts were not included. TSCs and TCCAs were slowly replaced by 104 Primary Distribution Points (PDPs) and retailers were allowed to sell fertilizer wherever they pleased. Small wholesalers were encouraged to procure fertilizer from the PDPs and were permitted to sell fertilizer anywhere in the Chittagong Division (except the Hill Tracts). This process of expanding the roles of private traders and phasing out TSCs and TCCAs took seven years, through 1985. There are currently 46 wholesale PDPs throughout the country and 26 TSCs in the Chittagong Hill Tracts under BADC control. Price deregulation was not initiated until April 1982. Again the Chittagong Division was selected as the test site for partial price decontrols. Under this new marketing and pricing system, BADC distributed fertilizer from the factories and ports to PDPs for sale to licensed private sector wholesalers at fixed prices. Regulations were enacted on the minimum quantity that could be procured from a PDP on a single occasion (10 tons), and this had to be procured in one day. From the 20 PDPs in operation in the Chittagong Division, wholesalers were free to market fertilizer whereever and at whatever price they wished. Marketing networks were quickly established by the larger wholesalers, consisting of smaller wholesalers and retailers. Mudahar (1984) examined prices during and after this prolonged deregulation process. Prices in the deregulated areas remained close to

BCIC

issues);

24 40 44 38 60 59 74 59 67 75 60 91 137 113 143 146

TSP

7 13 26 26 41 46 51 142

Gypsum 16 151 3 118 97 48 223 21 115 103 173 194 147 135 124 408 351 93 191 379 232

115 107 109 126 0 142 72 I1 260 348 287 64 254 43 94 171 196 0 0 0 61 newsletters

TSP

Urea

(various

55 2 0 0 41 7 78 9 17 77 60 42 26 44 60 75 87 47 83 148 76

MP

Fertilizer

issues);

84 42 36 37 72 76 0 0 0 0 0 0

DAP

imports

Bureau

14 0 0 0 I1 36 2 0 0 11 11 20 0 9 3 13 1 12 2 8 5 Bangladesh

200 260 112 244 149 233 375 41 392 623 573 356 464 303 357 667 635 152 276 535 374

Other

IY7WZ)

Total imports

imports und exports by type of ferfilizer,

fertilizer

98 88 57 190 274 108 325 318 268 339 368 432 479 500 728 792 896 1,025 1,443 1,638 1,760

Total production

“Monthly

production

BADC,

Fertilizer

2. Domestic ferrilizer production,

(various

98 88 57 190 274 84 285 274 230 279 309 358 420 426 640 706 779 847 1.284 1,444 1,472

1970 1971 1972 1973 lY74 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Source:

Urea

Bangladesh FY

Table

of Statistics

40 0 72 52 26 21 40 223 394 143

TOtal

issues).

298 348 160 434 423 341 700 359 660 962 941 748 943 731 1,028 1,433 1,510 1,127 1.490 1.779 1.991

fertilizer supply

(various

5 0 0 10 6 0 0

Fertilizer exports Urea TSP

(in thousurzd.s of metric rons)

33 25 34 44 65 32 46 89 41 35 39 55 51 62 67 54 59 87 84 92 88

supply (X,)

Ratio: production

to

FERTILIZER

Bangladesh FY

Urea

TSP

MP

1970 1971 1972 1973 1974 197.5 1976 1977 197X 1979 1080 19X1 1982 1983 19x4 1985 1986 1987 1988 1989 1990

200 216 173 281 272 177 317 359 488 476 542 560 519 629 708 X32 795 915 1,029 1,145 1,369

67 76 61 90 9.5 76 112 12x 1’)s 177 209 215 208 206 261 346 297 336 390 416 4x0

15 17 14 19 19 1X 22 23 42 45 47 4s 45 50 63 6Y 60 66 86 Y4 110

BBS,

BADC

and

441

SUBSIDIES

DAP

-

Gypsum

Zinc

-

-

-

3X 43 42 49 73 94 0 0 0 0 0 0

-

1 1 3 3 6 61 6X

1 1 1 1 1 1 2 3 5

Other 13 14 11 6 9 11 13 8 9 1 10 0 0 1 0 2

Total 2X2 309 24X 300 3X6 2x4 465 521 731 74s 852 875 830 96X 1.129 1.259 1.156 1,321 1.514 1.719 2,043

IFDC.

prices and to prices in the other three regulated regions of the country. The percentage differences between deregulated prices in the Chittagong Region and official prices for the three major types of fertilizer were close to zero, even after official prices were increased in July 1982 by 12% for urea and 22% for both TSP and muriate of potash (MP). The official price increases in July 1982 were the result of the government’s policy to gradually reduce fertilizer subsidies, and are discussed in more detail below. Mudahar’s (1984) interpretation of these data is that price variations in regulated and deregulated market areas showed no consistent pattern. and that fertilizer supply variability and distributional efficiency of the marketing system accounted for most of the variation. But Quasem (1987), who analyzed fertilizer prices over the same period, has alluded to the overriding significance of price deregulation: “All in all, it appears that deregulation enabled traders to raise prices, but they remained close to official prices except at times of national supply scarcity” (p. 395). Government fears that deregulation might lead to price increases by unscrupulous private traders appear to have been assuaged during the trial deregulation period, and total retail price deregulation was enacted in April 1983. During the official

AND

3. Trends in fertilizer use by type of fertilizer I970-YO (it1 thousands of metric tons)

Table

Source:

PRICE

first four months of nationwide retail price deregulation, as reported by Mudahar. prices increased slightly and were almost identical between regions. Bangladesh continues to be characterized by low spatial variability in prices. Analysis of International Fertilizer Development Centre (IFDC) monthly survey data of fertilizer prices and availability between remote and nonremote areas (based on an average survey of 900 farmers nationwide for September 1986June 1990). reveals only a 1% difference in retail prices for all fertilizers. Even during periods of high demand and scarcity spatial price differences are minor. Remote areas are defined here as less accessible by water and road infrastructure and more distant from fertilizer sales outlets. Prices are slightly higher in remote areas because of higher transportation costs. but there is little evidence that farmers in remote areas are adversely affected by policies of deregulation and an increased marketing role for private dealers; in fact, the opposite appears to have occurred. Infanger, Samad and Hooker (198X) also found no evidence of substantial price and availability differences between remote and nonremote areas. The rapid increase in numbers of fertilizer retailers and wholesalers has surprised many in Bangladesh. BADC reported an estimated

442

WORLD

DEVELOPMENT

43,000 registered retailers in 1978 and IFDC has estimated over 50,000 private retailers and over 8,000 wholesalers in 1988 - a 35% increase in sales outlets to farmers in a lo-year period. USAID and IFDC estimate that farmers have access to an average of nine retail fertilizer dealers in their villages, and regularly buy from 2-3 dealers. Although retail price deregulation did not lead to price increases, destabilization or fluctuations, fertilizer prices have been increasing over time, due primarily to inflation and reduction in subsidies. Retail price deregulation signaled the true beginning of the New Marketing System, as well as the reduction of major price subsidies beyond the PDP level (with the exception of TSP and MP, as we shall see below). Instead, from mid-1983 on, subsidies were provided largely to the government producers and distributors of fertilizer - the Bangladesh Chemical Industries Corporation (BCIC) and BADC.

5. RECENT

MARKETING

(a) Transportation

REFORMS

discount points

In January 1988 a new system of Transportation Discount Points (TDPs) was introduced along with the PDP system. This cofunded BADC and USAID initiative is an attempt to encourage further competition in fertilizer wholesale marketing with the added involvement of the private sector, and to help solve major fertilizer movement and cost problems faced by BADC. There are currently six TDPs operated by BADC, three strategically located transit warehouse TDPs, two at ocean ports and one at the TSP factory. The TDP concept is based on the supposition that if fertilizer is sold by BADC from fewer wholesale outlets (i.e., six TDPs versus 46 PDPs), there will be lower BADC movement, handling and overhead costs. These cost savings are passed on to private wholesalers procuring large lots from TDPs in the form of a discounted price from the existing ex-PDP price. Other potential benefits of TDPs include more timely supplies of fertilizer at lower prices to farmers through lower marketing margins, more aggressive and customer-oriented private sector marketing and enhanced price competition. Private wholesalers purchasing from TDPs tend to be larger than wholesalers procuring from PDPs with more extensive marketing networks of smaller wholesalers and retailers, and their market territory encompasses a much larger area. The market area served by a TDP averages 6,000 square miles, over six times greater than the

average area served by a PDP. IFDC has estimated that the average TDP market area would be even larger with higher price discounts that more accurately reflect movement cost savings to BADC. These cost savings average about 4,000 taka per month from supplying less fertilizer to PDPs and more to TDPs. TDPs captured over 20% of total BADC sales from November 1988 to March 1989, despite considerable opposition from many BADC and union staff, and could have sold at least 50% of the total if they had been adequately stocked to meet demand (IFDC, TDP Monitoring Reports, 198889).

(b) Direct factory sales to private dealers Price declines continued to 1989-90 due to the discount program and, more important, to a new program of direct factory sales of urea to private wholesalers at the same price charged to BADC, which began in March 1989. This innovative program permits direct competition between private dealers and BADC in urea marketing for the first time. The Direct Factory Lifting program was instrumental in overcoming the temporary phenomena in early 1989 of fertilizer supply bottlenecks and rapidly escalating prices that threatened the record 1985) boro rice crop. As illustrated in Figure 1, at the start of the Direct Factory Lifting_ program in March 1989 the private sector market share of urea was about 10% and BADC’s share was 90%. But in May 1989 the private sector share exceeded BADC’s and by February 1990 was 90% of total sales. The retail or farm-level urea price declined 10% from March 1989 (Table 4) due to this increased market competition and_ decreasing marketing margins in the private sector. As we shall examine in more detail below. the contrast between private sector and BADC marketing margins is becoming more apparent. Given the decline in prices and the increase in urea fertilizer use, the national savings to farmers in the last two years was approximately 704 million taka (the difference between 1988 and 1989-90 average prices, shown in Table 5, and sales in 1989-90). Savings to the government and BADC were also significant due to less urea movement and storage costs in the public sector. BADC would have spent over 880 million taka in 1989-90 if it had distributed the 1,152,OOO tons of urea sold in these two years by the private sector. Urea prices rose and private sector market share dclined temporarily in March and April 1990 due to nationwide shortages of urea and BADC selling off stockpiled urea in the market

FERTILIZER

PRICE

AND

SUBSIDIES

443

-

Sap

Jut Aug

NW

Jan DOC

Od

Mar Fob

JUI

May

Sop

JUn

APT

Au9

NW Ott

JQll DOC

Mar Fmb

4600

MCY APT

JUn

Month

-.-

Figure

Private

sector

-+-

Urea price

I. Private sector market share and urea prices,

IY8%90.

Table 4. BADC and private sector market shares and urea prices by momh, July 1988 to June IWO

Month and year

Private sales (000 MT)

July 1988 August September October November December January 1989 February March April May June July August September October November December January 1990 February March April May June Source:

IFDC

1 1 2 1 0 0 1 3 12 18 18 54 35 70 102 49 10s 109 104 155 136 28 64 84 (1990).

Private sector share (%) 3 1 2 1 0 0 1 2 6 29 53 61 51 64 57 80 85 92 90 78 73 64 83 X6

BADC sales (000 MT)

Total urea sales (000 MT)

Urea retail price (Tk./MT)

36 90 105 77 90 57 97 190 187 45 16 34 26 39 77 12 18 9 11 44 51 16 13 14

37 91 107 78 90 57 98 193 199 63 34 88 61 10’) 179 61 123 118 115 199 187 44 77 98

4,952 4,942 4,972 4,922 4,895 4,941 4,905 4,909 5,083 s ,083 4,974 4.865 4,850 4,773 4,747 4,701 4.642 4.618 4,534 4,549 4,664 4,601 4,571 4,551

SOil

5Oll

Sot)

762

762

962

1.734

1.734

1.734

1.X83

2.076

2.S.38

3.094

3.428

3.3X6

3.586

3,444

4.025

4.025

4.025

lY72

1Y73

lY74

lY75

lY76

lY77

lY7X

197')

lY8(1

19x1

I')82

19X3

19x4

IYXS

IYXh

IYN7

IYXX

IYXY

IYYU

I,Y37

544

4')')

3.675

5,339

3.4Y5

3.605

4.001

4.216

3.418

3.633

3.974 4.525 4.575 4.575 4,575

3.577 4.26X 4,527

5.2X0 -

5,341

5.444

4x5

4.3YiI

3,746 3,454

3,691

3.673 3.6fX)

3,691

3,318 3.327

4.340

6.024

5,l!N

4.136

3,755

3,787

3.x14

3.5X1 2.7lY

1.7M 2.175

3,439

3.66X

3.023

6,619 6.611) 6.619

4.Y3l 4.Y24 4.63') 6.619

6.619

4.9')s

4.648

4.222

5.757

6.436

5.X%

4.961

4.x15

4,283

4SHl7 5.735

4,242

5.735

3.943 5.735

3.754

4.676

3.64K,

4.74')

3.504

2.463

4,350 4.350

1.9%)

4.350

2.YY4

I.916

4.350

3.134

2.X26

2.585

4.3so

2.702

2.032

2.450

1.905

1.633

1.633

I.442

2.663

2.574

I.513

2.663

2.314

I.361

1.241

4.285

Xl7 I.361

772 I.301

2.953

3.923

x04

276

241 696

243 332

Border*

276

Ex-factory

276

Retail

241

241

3.494

814 -

s75

430

363

Wholesale

BADC

2,736

1.963

74')

677

34Y

277

Export

BCLC

TSP

7.450

7.11'

5.')(X)

4.4Yl

5.027

5.221

4,x30

4.192

4.X41

S.OM)

4.387

3.072

2,874

2.0X6

3.008

3.4YX

1.472

YYI

331

331

464

Importi

BADC

~

-

S.SlY

4.5X5

-

3.hYX

Export

BCI(‘

4.725

4.725

4.725

4.725

4.72.i

4.725

3.685

3,477

3,477

2,175

I.764

I.356

l.lX7

1.1x7

YhY

I.U2Y

484

350

241

241

241

Wholcsalc

BADC

S.011

S.14X

5.1X6

5.nxx

4.955

4.819

3.788

3.740

3.532

2,450

l.Yll5

1.497

1.307

1.307

I.OXY

I ,0x’)

544

3YS

276

276

276

R&ail

4,721

4.365

3.673

3.329

3.475

3,072

2.90')

2.745

2.705

2.5X6

2,110

1.623

I.341

1.284

I.666

I.OYI

737

454

533

2XX

200

Border'

MP

5,865

1.396

3.395

2.978

3.628

3,628

3.532

3.607

3.257

3.2')s

3.361

l.XIX

7.4xX

1.845

2.409

I.172

780

267

263

Import:

BADC

(taka per merric ton)

BADC

3.725

3.725

3.725

3.725

3,725

3.192

2.965

2,673

2.673

1.764

I.356

IS)84

YhY

YhY

hY7

757

363

227

13x

I38

I38

Wholesale

of

4.313

4.391

4.3Y5

4.323

3.715 4.111

3.197 3,0x0

1.497 I.905 2.726

1.089 1.225

817 1.089

817 408

272

I73

173

173

Retail

BADC; IFDC; Green Markefs (various issues); World Bank (1987-88); World Bank (Nov. 1988); IMF (1990); and Ahmed (1987). *Border prices for urea reflect world c.i.f. (import parity) prices for 197G30. and world f.o.b. (export parity) prices for lY81-90 because BCIC began exports urea in 1981. i_BADC import prices are weighted average invoice prices for donor-financed procurement.

Source:

SUU

I')711

lY7l

Importt

Border'

FY

EK-lactory

BADC

Urea

5. Average annual fertilizer prices at differem distrihurion and marketing levels. 1970-90

Bangladc\h

Table

$

2

6

s

;

E;

5

FERTILIZER

PRICE

(to empty full warehouses). Production shortfalls at BCIC factories preceeding the peak demand season (January to April) necessitated imports of 61,000 tons of urea in 1990, and prices began declining again in April as the imports arrived. It should also be mentioned that the private sector market share of gypsum fertilizer (a byproduct of TSP) is virtually 100X, made possible by direct BCIC sales to private distributors from the TSP factory in Chittagong.

(c) Direct port sales to private dealers BADC began direct sales of imported fertilizers to private distributors from ocean ports in 1990, in lieu of transporting supplies to inland sales points. BADC sold over 127,000 tons in this way in 1990 for a savings of 97 million taka (at an average distribution cost of 764 taka per ton). Timely supply of imported fertilizers through the private sector to farmers also improved as a result.

6. PRICES

AND MARKET

COSTS

Nominal fertilizer prices have been increasing over time at all levels of the marketing system. although real prices have been declining. Even nominal retail prices for urea fell in 1988-90 due to increased market competition. Table 5 provides price data on major fertilizers at the border, ex-factory, export, ex-PDP wholesale and retail levels. Border prices are based on published c.i.f. and f.o.b. international prices. The distinction between f.o.b. and c.i.f. prices has particular relevance for urea, since Bangladesh began exports of urea in 1981 and has continued exporting small amounts to the present (see Table 2). Consequently, whereas importparity (c.i.f.) prices are relevant for all imported fertilizer, including urea, before 1981, exportparity (f.o.b.) prices for urea are appropriate for border price comparisons from 1981 onward, particularly for calculation of subsidies. By contrast, published BADC import prices are based on donor-assisted implicit prices that often overstate internationally competitive prices to the benefit of donor country procedures and suppliers of fertilizer. Urea, TSP and MP prices are increasing at both the wholesale and retail levels, with TSP prices growing the fastest since 1981. BADC’s wholesale prices for urea were consistently below border prices through 1985, evidence of subsidy. After 1985, the government raised the prices

AND

SUBSIDIES

445

charged by both BADC and BCIC and the farmlevel price subsidy was eliminated. The fact that domestic factories are run by a public sector monopoly and prices are fixed precludes competitive procurement of urea and TSP. TSP and MP continue to be highly subsidized. TSP ex-factory prices are substantially higher than border prices from 1977 onward, reflecting inefficient and costly domestic production. Also, wholesale and retail prices are consistently below ex-factory and border prices, implying subsidies, an issue analyzed in more detail below. Recent MP prices exhibit a similar pattern to that of TSP. Interestingly, fertilizer prices have been rising faster than rice and wheat prices, and faster than the consumer price index but below the wholesale price index (see Table 6). Figure 2 compares indices of weighted average fertilizer price changes to rice and wheat price escalations at the retail level, and with the consumer price index. Similarly, Figure 3 compares indices of wholesale prices of fertilizer, rice and wheat to the wholesale price index. Output to fertilizer price ratios have been fairly constant in recent years at both wholesale and retail levels, as shown in Table 6 with respect to rice-fertilizer and wheat-fertilizer price ratios. Despite these adverse relative price effects, fertilizer sales have been growing at an annual rate of over 10% since 1970, and 1990 sales were 20% greater than 1989. Part of this growth is explained by the consistently high marginal return of fertilizer to crop production and to the relative low fertilizer price elasticity of demand. Results from farmer surveys (Hossain, 1987; Diamond, 1988; and unpublished results of a 1987-88 rabilboro season survey by USAID/ IFDC) indicate an average paddy response to fertilizer of about five (i.e., one unit of fertilizer nutrient use results in five units of rice production), and results from earlier years are even higher (Sidhu, Baanante and Ahsan, 1982 and 1984). The fertilizer price elasticity of demand is -0.5 to -0.6 (Infanger, Samad and about Hooker, 1988), with a range of -0.3 to -1 (1Si8Jhp. Baanante and Ahsan, 1984; Hossain, The major factors contributing to rising nominal fertilizer prices include escalating BCIC production costs of domestic urea and TSP, increasing international prices for imported fertilizer, and consistent cost overruns of BADC for marketing and distribution. As we shall see, factory production costs and government pricing policies are the major reasons for subsidies and price escalations, but also the consistently high costs of BADC fertilizer distribution should be of great concern.

236 235 235 451 681 1,189 1,147 1,407 1,380 1,617 2.019 2,524 3,323 3,584 3,645 4.417 4,535 4,536 4.565 4,565 4,565

Fertilizer wholesale*

271 270 270 496 730 1.249 1:267 1,527 1.514 1,758 2,251 2.792 3,535 3,854 3,895 4.711 4,939 4,941 4,962 4.753 4,716

Fertilizer retail

and

da I.279 2,017 2,692 5.614 3:306 3,031 3,716 4.080 5.397 4,513 5,906 6,420 7.185 8.008 6.422 8,540 9,190 9,360 9,134

n/a

Rice wholesale

6. Fertilizer

537 497 686 1,138 1,731 3.238 1,955 1,741 2,192 2,542 3,273 2.690 3,440 4.020 4,344 4,805 3,853 5,335 6,154 5,950 5,760

n/a n/a n/a 917 2.179 3.914 2,097 2.279 2,477 2.477 3,176 3.110 3.735 4.410 4.167 4,636 4.x50 5,290 5.470 5.700 5,884

indices,

n/a

n/a 5.44 4.47 3.95 4.72 2.X8 2.15 2.60 2.52 2.67 1.79 1.78 1.79 1.97 1.81 1.42 1.88 2.01 2.05 2.00

da n/a x74 2,113 3,866 I .571 2.183 2,233 2,205 2.576 3,012 3.702 4,083 3.977 4.227 4,625 5,252 5.x31 5.676 5,423

(taka

da n/a n/a 2.03 3.20 3.29 1.83 1.62 1.79 1.53 1.57 1.23 1.12 1.23 1.14 I .os I .07 I.17 I .20 1.25 1.21)

1990)

tia n/a 1.76 2.X9 3.10 1.24 1.43 1.47 1.25 1.14 1.08 I .05 1.06 1.02 0.90 0.94 1.06 1.1X 1.19 1.15

n/a

Price rallos: Wheat to Fertdizer Wholesale Retail

1970-90

198X. and

I.12 1.02 0.7x 1.08 1.24 1.25 1.22

1.04

1.98 I.84 2.54 2.29 2.37 2.59 1.54 1.14 1.45 1.45 1.45 0.96 0.97

Price ratios: Rice 10 Fertilizer Wholesale Retail

and price

n/a

farm gate

wholesale

farm gate

relationships,

Wheat

price

Wheat

crop

Rice

major

Source: BBS, BADC and IFDC. For price indices data: The World Bank (1981. March *Wholesale fertilizer prices are charged by BADC to private wholesalers and retailers. KBI, Dhaka represents the consumer price index for middle-income families in Dhaka. $The Wholesale price index is an average of agricultural and industrial products.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 19X4 1985 1986 19x7 19X8 1989 1990

Bangladesh FY

Table metric

I91 227 255 297 326 357 397 436 481 536 579 637

41 43 49 73 loo 167 I53 I57 177

CPI Dhakat

per

5 I5 47 3X 67 8 2 13 8 19 13 I6 IO 10 11 IO 10 I1 8 10

-

% Change

ton)

42 n/a n/a 67 IO0 200 200 267 267 300 367 467 668 7x4 755 911 1,008 I ,060 1.123 1,211 1,332

Wholesale Indexl:

L! ? 8 6 x 10

s 17 5

s

S

E

? 0 13 10 I2 8 13 6 16

27 49 -26 7

n/a n/a n/a

% Change

FERTILIZER

1970 71

72

73

74

75

76

PRICE AND

77

76

79

SO

Bangladesh

Figure 2. Comparison

qOveral1

61

62

63

447

84

65

66

07

66

69

90

fiscal year

of retail price indices

difference between the controlled ex-PDP wholesale price and the retail price, has grown an average of 5% per year in nominal terms since 1982. This margin was approximately 400 taka per ton of fertilizer in 198688, but fell below 200 taka in 1989-90 due to direct factory and port lifting by the private sector. Active competition at the private wholesale and retail levels is

Private sector wholesaler and retailer marketing average costs or margins in money terms have grown modestly since 1983 (when the New Marketing System was in effect), and have therefore not been a major factor in overall fertilizer price increases. Results in Table 7 show, that the combined private sector wholesale and retail marketing margin, as reflected in the

1.3

SUBSIDIES

WPI

I.2 I.1 I.0 s 7 q s; &?I

q s

xs 0 ,z E-” 0) .o t

0.9 0.6 0.7

+_+-+-+-+-

0.6 0.5 0.4
I,

0.2 01 0 1970

71

72

73

74

75

76

77

78

79

Bangladesh

Figure 3. Comparison

60

61

fiscal

62

83

64

85

year

of wholesale price indices

86

87

66

89

SO

44x

Bangladesh FY I Y70 lY71 1972 1973 1974 lY7S lY76 lY77 1978 197’) 1980 19X1 19x2 19x3 1983 1YXS 19X6 19x7 1988 19x9 1990

WORLD

Movement cost* (Mill.Tk) 6 7 7 20 44 4x 7s x7 126 144 172 198 lY6 33’) 346 133 564 421 47s 763 371

Incidental costt (Mill.Tk) 32 43 so 76 SY 68 194 173 20’) 193 2Y2 344 453 SY2 SY7 512 700 605 6X1 40s 571

DEVELOPMENT

Total distribution cost (Mill.Tk) 38 so 57 96 103 116 269 260 33s 336 464 542 64’) 931 943 Y4S 1.265 I .026 1,156 1.168 942

BADC quantity distribution (000 MT) 2X2 309 248 390 3X6 284 465 521 731 73s 852 875 830 Y6X 1,129 I .2S9 1.1.56 1,321 1,514 1.54x 974

BADC margin or average cost (‘I-k/MT)

Private sector margini (TkIMT)

135 162 231 245 267 40X 578 4YX -1% 451 54s 620 7x2 Y61 x.15 751 1.OY4 777 764 754 Y67

35 3.5 3s 45 4Y 60 120 120 134 141 232 26X 212 270 2SO 294 404 40s 397 IXX IS1

Real private sector margins (TklMT) X3 lll~

n/a 6X 49 30 60 45 so 47 63 57 32 34 33 32 40 3x 35 16 II

Source: *BADC tBADC

BADC and IFDC records. movement costs include transportation and handling of fertilizer from factories and ports to salts outlets. incidental costs include salaries. operational expenses, interest. working capital. depreciation. godown rent and maintenance and misc. SPrivate sector margins are the difference between weighted average retail and wholesale prices. by the wholesale price index. EjRcal private sector margins are in lY73 prices, as deflated

apparently keeping annual increases in marketing costs and margins below inflationary trends in the economy and real margins have declined. Assuming a 10% rate of inflation. the real IY8YYO margins in lY74 prices were 13.5 taka per ton compared to 36.5 taka per ton for 1987-X8 (i.e., a real decline of about 170%). BADC has been experiencing escalating costs of marketing and distribution. Total reported distribution costs of BADC from Table 7 include transportation and handling fees, as well as salaries, storage costs and other overhead costs of the Fertilizer (Supply) Wing, consisting of about 2,280 employees. The distribution margin based on these reported cost figures is estimated at 967 taka per ton in lYYO%higher than the official (but largely arbitrary) margin of S50 taka established by the Ministry of Agriculture and over double the average private sector wholesale margin. BADC’s buffer stock management does add to total costs and somewhat distorts comparisons with private sector dealers.

The contrast between public and private sector marketing margins is even more remarkable in view of (a) the greater distances that the private sector moves fertilizer, from factories and BADC sales outlets to highly diffuse markets; and (b) recent evidence, as a result of the Direct Factory Lifting Program. that private dealers can move urea fertilizer from factories to retail markets at considerably less cost than BADC.

7. SUBSIDIES There are three basic types of fertilizer subsidy in Bangladesh: a direct price subsidy when border prices exceed BADC sales prices. an indirect production subsidy to BCIC when exfactory prices exceed border prices and an indirect distribution subsidy to BADC when its distribution costs are in excess of private sector costs. This distinction is more relevant for discussion of nominal subsidies, since an econo-

FERTILIZER

PRICE

mic subsidy does not make a distinction between price and other types of subsidy. The indirect nominal subsidy to BADC may be thought of as an efficiency loss to Bangladesh for distribution costs in excess of break-even levels. Direct fertilizer price subsidies reflect conscious government policies to encourage increased fertilizer use and to favor domestic fertilizer production over imported fertilizer. These policies may have been justified in the early and mid-1970s when fertilizer use was very low relative to other neighboring and developing countries and when domestic fertilizer production of urea and TSP was initiated. There are, however, many longer term problems with prolonged direct price subsidies, including (a) misallocation of resources, as farmers substitute artificially cheap fertilizer for other fertilizers and inputs; (b) inefficient fertilizer production (particularly if they constitute economic subsidies, whereby domestic production costs and exfactory prices exceed border prices); (c) inefficient fertilizer distribution and production through exclusion of private sector competition with government parastatals on equal terms; and (d) financial and budgetary burden on the nation to pay for subsidies to the exclusion of other possible social goods and services. In addition, fertilizer subsidies may have made sense when there were other major subsidies in effect on, for example, irrigation equipment, HYV seeds and rice prices. Except for seeds, however, subsidies are rapidly being eliminated in the agricultural sector. Subsidies were in effect for urea through 1985 when the border price was above the BADC price. There has been no nominal price subsidy in effect for urea from 1986 onward. Direct price supports have always been in effect for TSP, primarily to encourage farmer use of TSP over other fertilizers and to subsidize the domestic production facility at Chittagong. From 1977, this also constituted an economic subsidy when the border price was below the ex-factory price. Bangladeshi private fertilizer dealers and farmers paid approximately 30% below the border price for TSP in 1990. Despite this large subsidy, the average use of TSP is far below recommended agronomic dosages and much lower than urea use. For example, the Bangladesh Agricultural Research Council (BARC) recommended dosage for HYV bore (irrigated) rice and wheat is 80 kilos of urea per hectare, 60 of TSP and 40 of MP, a recommendation of onethird more urea than TSP. An unpublished USAID sample of farms in four regions of the country for 1987-88 r&i (dry season) rice and

AND

SUBSIDIES

449

wheat (see Infanger, Samad and Hooker, 1988) found an average use of 66 kilos of urea per hectare, 27 of TSP and 17 of MP. Farmers are using over 2.5 times as much urea as TSP per hectare, which is consistent with nationwide data for all seasons, and the growth rate for phosphate is similar to that of nitrogen. Although BCIC is indirectly subsidized for TSP production, the direct TSP subsidy appears in BADC’s accounts. Presumably, BADC is subsidized because the majority of its TSP procurements have historically been from imports. A way to make TSP subsidies more visible and accountable would be to directly subsidize BCIC for both domestic production and imports. This step would have the added benefit of allowing competition from the private sector in the marketing of TSP. In order to totally eliminate the direct price subsidy, BCIC would have to either stop producing TSP or bring the ex-factory price in line with a moving average of international prices, as is the case with urea. There is also a direct price subsidy for MP, a result of a BADC price below the border price. A consistent problem for BADC has been that its ex-PDP prices for the major fertilizers have been artificially pegged at the same levels since 1986 and do not accurately reflect escalating BADC distribution costs Table 8 provides estimates of the annual nominal and economic subsidies in terms of total taka subsidy, unit or average subsidy per metric ton and the percentage rate of subsidy. Subsidy estimates by major type of fertilizer are presented in Table 9. Total subsidy is defined as the difference between BADC’s costs of procurement and distribution and the gross revenue from fertilizer sales, and is represented by a positive number. Conversely, total subsidy can be thought of as the amount of net loss incurred by BADC in fertilizer sales. Nominal subsidies are calculated using a weighted average of domestic ex-factory prices and implicit border prices from donor-funded imports. Economic subsidies are estimated using border prices. Total subsidy has been steadily increasing and was an estimated 2.17 billion taka in 1990 in nominal terms. Disaggregating the total subsidy, we find that approximately 956 million taka, or 44% of the total, was a direct price subsidy to farmers (i.e., the difference between border and BADC port prices of TSP and MP for the quantities sold by BADC). Another 126 million taka, or 6% of the total, constituted an indirect TSP production subsidy to BCIC, as defined by the difference in the ex-factory and the border price. The balance of 1,088 million taka. or 50%, was an indirect subsidy to BADC for distribution

2,986 3,645

4,788

5.386 4,986 5,312 6,910 7,540 5.692

1982 1983

1984

1985 1986 lY87 1988 198’) I990

5,041 4,556 5,043 7,025 7,249 4,722

4,532

3,095 3,650

2,088 2,934 3,079

75 106 167 2Yl 732 738 1.321 1,130 1,714

Import (border) costt (Mill.Tk)

945 1,265 1,026 1,156 1.168 942

943

649 931

336 464 542

38 50 57 96 103 116 269 260 335

Total BADC distribution cost (Mill.Tk)

5,568 5,241 6,000 6,909 7,070 4,464

4,123

2,763 3,478

1,209 1,728 2,221

66 73 58 176 263 333 531 728 1,009

Total sales revenuet (MilLTk)

763 1,010 338 1,158 I.638 2.170

1,608

812 1,097

1.269 1,479 1,094

92 107 118 190 202 501 678 697 1,163

Total nominal subsidy§ (Mill.Tk)

606 874 256 765 1,059 2.228

1,424

1,050 1,134

1,704 1,736 1,251

326 346 476 486 523 1,762 1,457 1,338 I.590

Nominal unit subsidy! (TWMT)

x

8. Nominal and economic fertilizer subsidies.

BADC records. procurement cost = purchase price x quantity procured. import cost = border price X quantity procured. sales revenue = BADC sales prices x quantity sold. nominal subsidy = BADC procurement cost + distribution cost - sales revenue. economic subsidy = import cost + distribution cost - sales revenue. l/Unit subsidy = total subsidy + total quantity sold. *“Rate of Subsidy = total subsidy + (total procurement or import cost + distribution cost)

2,142 2,744 2,773

1979 1980 1981

Source: ‘BADC -i-Total #Total aTotal j\Total

120 129 119 270 362 718 940 1,166 1.837

1070 1971 1972 lY73 1974 1975 1976 1977 1978

Bangladesh FY

BADC nominal procurement cost* (MiLTk)

Table

100

12 16 5 14 19 33

28

24 24

51 46 33

58 ho 67 52 43 60 56 49 54

Rate of nominal subsidy* * (o/o)

1970-90

418 580 69 1,272 1,347 I.200

1,352

981 1,102

1.215 1,670 1,401

46 83 166 211 572 521 1,058 661 1,040

Total economic subsidy// (Mill.Tk)

332 502 52 840 871 1,233

1,197

1,182 1,139

1,632 1.960 1,601

164 26X 670 541 1,482 1,835 2.276 1,270 1,423

Economic unit subsidy1 (TWMT)

7 10 1 16 16 21

25

26 24

50 49 39

41 53 74 55 69 61 67 48 51

Rate of economic subsidy** (%)

3

g

‘,

5

:

6

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Bangladesh FY

64 83 93 104 70 281 307 271 582 651 605 135 313 359 565 217 421 -279 220 209 228

Urea Nominal

64 58 115 139 396 326 726 467 751 814 1,104 830 633 481 659 279 161 -302 416 184 -1

Total Urea Economic

9. Nominal

24 19 20 80 119 182 295 375 490 467 660 712 437 451 606 454 512 608 860 1,288 1,565

9 19 42 63 163 158 273 157 246 276 400 419 220 356 374 86 352 340 755 488 288

4 5 5 5 13 15 50 32 83 53 120 97 61 95 88 82 60 2 37 134 370 3 5 9 9 12 13 34 19 35 45 61 65 37 52 49 44 51 25 61 10 67

57 61 69 43 25 55 44 33 44 44 34 8 15 13 18 6 10 -7 4 4 12

Urea Nominal 41 53 73 50 65 59 65 46 51 49 48 35 27 17 20 7 4 -8 8 4 0

Urea Economic

subsidies by type of fertilizer,

MP Economic

and economic

subsidy (millions of taka) MP TSP TSP Nominal Economic Nominal

Table

60 51 57 72 72 70 73 71 68 66 64 60 38 39 39 22 27 28 32 40 41

36 51 74 67 78 67 72 51 52 53 52 47 23 33 28 5 20 18 29 34 30

Rate of subsidy (%) TSP TSP Nominal Economic

1970-90

65 68 72 56 65 52 77 59 67 52 65 55 34 41 32 27 21 1 IO 28 45

MP Nominal

59 69 82 68 64 50 69 46 46 48 49 45 23 28 21 16 18 9 16 27 35

MP Economic

452

WORLD

DEVELOPMENT

and storage costs greater than the break-even point. The distinction between nominal and economic subsidy is not clear-cut: one may be the higher in one year but the lower in another (see Table 8). This variation is largely explained by the difference between the nominal and border price of urea. When the nominal procurement price of urea is greater than the border price, the nominal subsidy exceeds the economic subsidy, and vice versa. Consequently, the nominal subsidy has been greater than the economic subsidy in recent years, except in 1988 when the border price exceeded the ex-factory price. The only exception to this rule is 1977-79 when the nominal subsidy was greater than the economic subsidy, despite border prices for urea being greater than nominal prices. In these years, the TSP price effect, whereby nominal TSP prices were greatly in excess of border prices, outweighed the urea price effect. For reasons described above, subsidies (particularly nominal subsidies) on urea and MP are considerably lower than for TSP. Table 9 reveals that subsidies on urea have been declining since 1980, but have remained consistently high for TSP. Both nominal and economic subsidies for TSP have been increasing in recent years. MP subsidies were declining in the early 198Os, but increased sharply in 1989-90. There were small cross-subsidies of urea for TSP and MP in 1987 and 1990, where a net gain from urea sales helped pay for deficits from TSP and MP sales. How is BADC able to continue commercial fertilizer distribution and sales with such large deficits? There are four major ways: direct subsidy payments from the government’s Annual Development Plan (ADP), nonpayment of liabilities due BCIC for fertilizer procured from factories, outstanding debt from bank loans and retention of the “counterpart fund.” The counterpart fund consists of several BADCmaintained bank balances where theoretically all the proceeds of BADC’s sales of imported fertilizer to Bangladesh by different donor countries and multilateral agencies are kept. BADC is allowed to deduct its distribution costs from sales revenue of granted and soft loan fertilizer, and the balance of revenue is to be turned over to the Ministry of Finance. BADC reportedly retains and spends all counterpart funds, however, to help offset its net losses from fertilizer operations. Available data on subsidy payments from the ADP, outstanding liabilities due BCIC and bank debt are provided in Table 10. Data on the_ counterpart fund are unavailable. BADC has claimed major subsidies over the last decade. but

has usually been awarded less than requested from the ADP. No subsidies were paid out from the ADP in the last four years. The total liability due BCIC, for fertilizer received and sold but not paid for, has been growing since 1985. This outstanding liability was reported by BCIC to be over 1.2 billion taka at the end of 1990. The total reported outstanding bank debt of BADC is also 1.2 billion taka, including principal and interest. To summarize, the high levels of fertilizer subsidy are the direct result of price policies that keep wholesale and retail prices below ex-factory and border prices (this is currently the case only with respect to TSP and MP), inefficient domestic TSP production and inefficient BADC marketing operations. We are now in a position to consider policy options that would decrease subsidy levels, lead to more efficient operations and result in lower prices to the farmer.

8. ALTERNATIVE

POLICY

OPTIONS

(a) Increased marketing and import competition

It is apparent from this analysis that if the true costs of BCIC’s production of TSP and BADC’s commercial fertilizer distribution operations were reflected in public sector sales, prices to farmers would be considerably higher. There are at least two options available to the government to lower real prices: continue and expand artificial price supports and subsidies or encourage a more competitive production and marketing atmosphere. The former option can only be implemented at great cost to Bangladesh, and runs the danger of misallocation and inefficiency of resource use. In a competitive market scenario, a more efficient and streamlined BADC could help stabilize prices and private fertilizer dealers would compete to maintain wholesale prices below BADC prices. The current official marketing margin for BADC is 550 taka per metric ton, an amount that theoretically should pay for all movement and overhead costs between the factories and ports and the government sales outlets. We have seen that BADC cannot break even unless the margin is increased substantially. Under a totally competitive environment, we have observed that private wholesalers can market urea fertilizer between factories, ports and wholesale outlets at significantly lower margins. In 1989-90, farmers saved approximately 704 million taka through a 10% decline in the urea price, largely the result of policies enabling open market competition. Because BADC distributed much less urea in 1989-90, the government

FERTILIZER Table

Total nominal subsidy

Total subsidy claimed by BADC

92 107 118 190 202 501 678 697 1,163 1,269 1,479 1,094 872 1,097 1,608 736 1,010 338 1,158 1,638 2.170

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

*Total

AND SUBSIDIES

10. Estimated direct and indirect fertilizer subsidies to RADC.

Bangladesh FY

Source:

PRICE

BADC liability

and BCIC records. due BCIC is for fertilizer

89 1,126 1,124 1,205 1,017 1,149 1,335 1,318 687 354 574 413 1,498 1,981

Total subsidy provided by ADP

667 1.1x0 1.179 989 1.041 983 872 857 143 0 0 0 0

453 1970-90 (in millions of tuku)

Total liability due BCIC*

120 100 1,776 1,248 X29

Total outstanding bank debt

51

I ,050

1,200

1,237

1,200

procured by BADC but not paid for.

saved over 880 million taka in movement and storage costs. The government also saved 97 million taka in 1990 from direct BADC sales of imported fertilizers at ocean ports. Transferring and privatizing BADC fertilizer storage assets represent another way to reduce government costs. BADC may continue to play a very limited emergency buffer stock role for critical imported fertilizers and thereby also help to stabilize markets.

(b) Subsidy elimination There would be a cost to farmers, however, under a totally competitive market scenario where subsidies are reduced or eliminated, in the form of higher TSP and MP prices. The demand for TSP and MP, however, may decline only marginally or not at all due to increases in other factors which have historically outweighed fertilizer price factors in Bangladesh. The massive TSP subsidy could be eliminated by placing domestic prices at parity with border prices. Under a competitive marketing arrangement, and assuming that an average private sector

marketing margin from ocean port to the farm level of 600 taka per ton applies, the retail price would rise from 5,011 to 6,357 (border price of 5,757 plus 600) to eliminate the TSP subsidy, a 27% increase. Similarly, the retail price of MP would rise from 4,313 to 5,324, a 23% increase. One alternative is to retain current TSP and MP price supports and directly subsidize BCIC for TSP production, as well as allow private sector equal access to imports which are typically provided by several major donors (notably the Asian Development Bar&, the Netherlands, Canada, Japan, Germany and Norway) to Bangladesh on a grant or soft loan basis. This step would enable competition in the marketing of TSP and MP to occur with both BADC and private wholesalers procuring from the TSP factory and ports on the same terms and conditions. Then wholesale and retail prices could be gradually escalated to decrease and eliminate the subsidy to BCIC, and farmers would not have to face dramatic price shocks. Another alternative is to permit the private sector to import other sources of phosphate, such as diammonium phosphate (DAP), or other blends of nutrients. In any event, it is imperative for BCIC to discontinue the production of

454

WORLD

DEVELOPMENT

uneconomic and inferior quality TSP. Using the existing TSP plant facilities at Chittagong for blending of compound fertilizers appears to be a viable and economic alternative (see IFDC, 1989).

9. CONCLUSIONS Government of Bangladesh policy has progressively moved toward a competitive marketing and production system in fertilizer through seve-

ral important actions, including the New Marketing System, the Transportation Discount Point system, direct urea and gypsum factory procurement by private wholesalers, direct port procurement of imported fertilizers by the private sector for BADC, and ex-factory urea pricing at parity with world prices. Substantial benefits can be realized by farmers and the nation at large if this process petitive subsidy

of price and market deregulation, imports and factory procurement, elimination is continued.

comand

NOTES 1. Time-series data from 1970 are generally representative of trends in Bangladesh after independence. The

government of Bangladesh July 1 to June 30.

fiscal and financial

year is

REFERENCES

Ahmed, R., “Structure, dynamics, and related policy issues of fertilizer subsidy in Bangladesh,” in Fertilizer Pricing Policy in Bangladesh (Washington, DC: IFPRI and BIDS, November 1987). Bangladesh Agricultural Development Corporation (BADC). Ministry of Agriculture, “Management information system report” (Dhaka: Government of Bangladesh. various monthly reports, 1972-91). Bangladesh Agricultural Development Corporation (BADC), Ministry of Agriculture, “Monthly Fertilizer Newsletters” (Dhaka: Government of Bangladesh, various monthly issues, 1972-91). Bangladesh Bureau of Statistics, Stafistical Yearbook

(Dhaka: Government of Bangladesh. various years, 1972-91). Bangladesh Chemical Industries Corporation (BCIC), Ministry of Industries, “Monthly newsletter” (Dhaka: Government of Bangladesh. various issues, 1972-91). Diamond. R., “Agro-economic response to fertilizers in Bangladesh,” in “Management information system for the Bangladesh fertilizer sector, final report,” submitted to USAID/Dhaka (Muscle Report Scdoals, AL: IFDC and Management Systems International, March 1988). Green Markets: Fertilizer Market Intelligence Weekly (New York: McGraw-Hill, various issues). Hossain, M., “Fertilizer consumption, pricing, and foodgrain production in Bangladesh,” -in F&lizer Pricing Policy in Bangladesh (Washington, DC: IFPRfand BIDS, November 1987). Infanger, C. L., A. Samad and R. W. Hooker, “Final evaluation: Bangladesh fertilizer distribution improvement project-I,” Report submitted to USAID/Dhaka (Dhaka, Bangladesh: USAID, July lY88). International Fertilizer Development Center. “Policy options for the Government of Bangladesh, TSP

complex,” Report submitted to USAID/Dhaka (Muscle Shoals, AL: IFDC, April 1989). IFDC, “Annual monitoring report on fertilizer distribution in Bangladesh, 1989-90” (Dhaka, Bangladesh: IFDC, August 1990). IFDC, “Transportation discount point monitoring reports” (Dhaka: International Fertilizer Development Center, various monthly issues, 1988-89). International Monetary Fund, lnternafional Financial StaGstics (Washington, DC: IMF, January 1990). Mudahar, M. S., “Fertilizer price deregulation and public policy: The case of Bangladesh,” Mimeo (Muscle Schoals, AL: IFDC, August 1984). Quasem, M. A., “Supply and distribution of fertilizers in Bangladesh, ” in Fertilizer Pricing Policy in Bangladesh (Washington, DC: IFPRI and BIDS, November 1987). Sidhu, S. S., C. Baanante and E. Ahsan, “Agricultural production, fertilizer use and equity considerations: Results and analysis of farm survey data, 1980/82, Bangladesh,” Report submitted to USAID/Dhaka (Mu&e Shoals, kL: IFDC, February 1984). Sidhu. S. S., C. Baanante and E. Ahsan. “Agricultural production, fertilizer use and equity con&lerations: Results and analysis of farm survey data, 1979&O, Report submitted to USAID/Dhaka Bangladesh,” (Muscle Shoals, AL: IFDC, April 1982). United Nations Development Program, “Bangladesh agriculture sector review, main report, Bangladesh agriculture: Performance and policies” (Dhaka, Bangladesh: UNDP, February 1989). The World Bank, Bangladesh: Managing the Adjustment Process -An Appraisal (Washington, DC: The World Bank, March 16. 1990). The World Bank, Price Prospects for Mujor Primary Cornmodifies (Washington, DC: The World Bank, November 1988). The World Bank, Bangludesh Adjuslmenr in the Eighf-

FERTILIZER

PRICE

ies and Short-Term Prospects (Washington, DC: The World Bank, March 10, 1988). The World Bank, Commodity Trade and Price Trends (Washington, DC: The World Bank, 1987-88).

AND

SUBSIDIES

455

The World Bank, Bangladesh: Current Economic Situation - Review of the Second Plan (Washington, DC: The World Bank, February 23, 1981).