Input Subsidy in Malawi

Input Subsidyin Malawi

Introduction:

Malawi, adopted World Bank/IMF economic reform measures from the mid-1980s, resulting in the liberalisation of agricultural sector, a process, which included removal of input subsidies and closure of some ADMARC markets. Fertilizer and maize seed subsidies were phased out completely in the 1994/95 season (Government of Malawi, 1999).

This immediately resulted in a serious drop of 43 percent of the usage of fertilizer in the year (93/94) preceding subsidy removal. Seed sales declined by 56 percent during the same period.

Liberalisation pushed ADMARC to closedown. Input supply to most of the remote rural areas became poor because of withdrawal of ADMARC. Local traders found it costly to move in because of infrastructure reasons including the road network which is in disrepair and own limited financial capacity. To date, input supply is one of the major constraints to crop productivity. The key issues relating to supply are: availability, distance to supply points, timeliness of supply, and affordability (Government of Malawi, Ibid).

In an attempt to deal with the problems of declining agricultural productivity and hunger the government has attempted to provide agricultural inputs, principally seeds and fertilizers using various mechanisms including free distribution, inputs for work programmes and “soft” agricultural input loans1 and the government inputs subsidy programme. This has met various stakeholders’ reactions, with IFIs strongly against government interventions.

Since 1994, the input interventions in Malawi can be roughly categorized into
three:
(a) Starter pack initiative (SPI)
(b) Targeted input programme (TIP)
(c) Targeted fertilizer subsidy programme.

The IMF and World Bank

“The government's strategy under IMF- and World Bank-supported programs in 1998 and 2000 was to end government interventions in the maize market while providing targeted food subsidies to the poor. Interventions through the Agricultural Development and Marketing Corporation (ADMARC) distorted prices and other market signals and impeded the development of the market. They were expensive, as the government bore the costs of these interventions by repeatedly bailing out ADMARC. In addition, they rarely were transparent and so raised governance issues.” (www.imf.org/external/country/mwi)

“These measures were supported by the World Bank's Third Fiscal Restructuring and Deregulation Program, approved by the Bank Board in December 2000.” (www.imf.org/external/country/mwi)

“The World Bank has served as the lead advisor on agricultural and food security policy reform. Given the impact of agriculture on the budget, however, certain elements of the reforms were supported under recent IMF arrangements as well. But while the government did make reference to the reduction in the maize stock and the restriction of the NFRA's role to disaster relief in its letter of intent to the IMF of December 2000, the letter did not include any conditionality related to food security policy.” (www.imf.org/external/country/mwi)

“Following reports from nongovernmental organizations that some regions were experiencing starvation, the government undertook field visits in February 2002, which revealed that the food shortages went beyond the usual seasonality. The government declared a food emergency in late February 2002. It turned out that two components of that carefully formulated food security policy had not been as effectively implemented as expected: …” (www.imf.org/external/country/mwi)

Objectives of the Input Subsidy programme in Malawi

Outlined in “Concept Document for the 2006/2007 Fertiliser Subsidy Programme (Ministry of Agriculture)

To contribute to long term economic growth and development, and … to guide the development of short and medium term objectives (related to poverty reduction and food security), and these in turn (will) guide decisions about the design and implementation of the programme and its interactions with other policies.

Specifically,
To increase agricultural productivity and hence improve food security at both the national and household level
To improve land and labour productivity and production of both food and cash crops by cash constrained smallholder farmers
To promote economic growth and reduce vulnerability to food insecurity, hunger and poverty
To promote development of the private sector agro dealer (input) network
(all these are consistent with the National Agricultural Policy Framework)


Production and Livelihood Outcomes

Bumper yield: 3.1 million tones, more than the 2005 yield of 2.7 million tones (Malawi needs 2 million tones)
Using regression and agronomic models:
Incremental production of about 700,000 tones
Incremental fertiliser application to maize as around 70,000 tones (total fertiliser subsidy was 150,000tones)
20% increase in area under hybrids
9% increase in area planted under OPV
Livelihood:
Lower fertiliser prices meant people did not need ganyu to buy fertiliser >> they concentrated on better crop husbandry
Lower maize prices led to reduced pressure on need for cash >>> lower inflation; tighter labour markets and raised real wages, all these generally benefiting the poor that the Malawi Growth and development Strategy targets.
Yes, increase in food stocks and reduced food prices benefited the normally food deficit producers, but reduced incomes of households that normally are surplus maize producers


Governance and Accountability

Parliament debated and increased allocation to the sector from ……… to …….

Financing of the 2006 / 2007 Subsidy programme
MK 8,955,700,000

Malawi Government
Donors
Malawi Government - 7,200,000,000
DFID/EU/Norway seeds 800,000,000

UNDP communications 35,000,000

DFID Finance Premium 378,000,000

DFID transport 405,000,000

DFID TA 137,700,000
Total Government MK7,200,000
Total 1,755,700,000

What needs to complement the subsidy

Social protection against shocks and assist the productive poor to access matching funds
Agriculture interventions that promote research and extension for maize and other crops, and access to finance
Infrastructure: Road construction and policies promoting growth of both non-farm economy and private sector
Human resources - Health and education investments to promote a flexible and productive population able to respond to and create new opportunities

Conclusions by various stakeholders

Government of Malawi (with support from DFID, USAID, Future Agricultures Consortium)
· ‘has potential to drive growth forward out of the poverty trap in which many Malawians and the Malawian Economy are currently caught’
· ‘Extra importation and distribution of fertilisers is generally considered to be cost effective than doing the same of food – but this is only achieved if weather is good enough’

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