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Malawi, fertilizer subsidies and the World Bank

Key Points on Subsidies

  • The World Bank strongly supports Malawi’s efforts to improve smallholder productivity. The national input subsidy has made an important contribution to this objective.
  • The World Bank’s advice to Malawi has consistently been to better target its subsidies to assure the highest possible impact.
  • A subsidy program should be part of a comprehensive strategy to improve agricultural productivity.
  • Stronger participation of the private sector can help leverage higher returns to any subsidy through the strengthening of input markets.
  • An exit strategy simply helps reduce the chances of the program becoming financially unmanageable and politically difficult to adjust.

Malawi Agriculture Facts

Agriculture is the foundation of Malawi’s economy. The sector contributes about 38% of GDP; 80% of export earnings; and employs 80% of the country’s workforce. Tobacco, sugar, coffee, and tea are important cash crops. Maize is the dominant food staple, and smallholders devote 85% of their land area to maize production. Total cultivated area in Malawi is 2.7 million hectares, and about 1.7-2 million hectares of that is cultivated by smallholders.

Malawi faces severe land pressures. The average size of smallholder farms is less than one hectare. Consequently, most smallholder land is continuously cropped, with little replenishment of the nutrients, resulting in soil mining and low productivity. Fertilizer, improved seed, and better crop management are essential for raising farm productivity in Malawi. Without fertilizer, yields will remain low, and farm households will remain food insecure and impoverished.

Key Questions on the Bank and the Subsidy Program in Malawi

  1. What is the history of the country’s fertilizer subsidy program?


Q1:  How does the Bank respond to assertions that Malawi only succeeded agriculturally when it defied the World Bank’s advice of no subsidy and free market prescriptions?

A key error in this assertion is that Malawi’s subsidy program was ‘against Bank advice’. In reality, the only thing the Bank advised against was a universal subsidy, which the Government of Malawi concurred with. The Government eventually implemented (and is still implementing) a targeted subsidy. In 2005 the Bank supported the subsidy program through an extra $30 million budget support and a reallocation of $12.5 million of Malawi Social Action Fund resources to public works programs which enabled poor farmers to purchase inputs. The Bank continues to provide budget support and agricultural assistance to the Government.

Q2:  What is the Bank’s position on subsidies?

The World Bank is not against subsidies per se. Instead, we argue these should be well targeted toward achieving the highest possible payoff. The Bank takes a pragmatic position, favoring "smart subsidies" in select circumstances. Smart input subsidies should be transparent, well targeted to the poor (for example through a voucher or coupon system), should help jumpstart agricultural input markets and should be part of a comprehensive strategy to improve agricultural productivity.

Subsidies should be used to leverage broader private investment – by farmers and by businesses – not replace this investment. For example, subsidies may well encourage farmers to try new technologies which they may continue to invest in on their own. Subsidies may encourage the expansion of investment in building commercially sustainable wholesale and retail input supply chains extending into outlying parts of the country.

Subsidies should also provide exit options. As Europe and the US have well found, once established, subsidies can be difficult to re-target or eliminate because they create politically significant constituencies which demand continuing payouts. The same problem occurs in India. Exit strategies can reduce this risk.

Q3:  What is the history of the country’s fertilizer subsidy program? 

During the 1970s, Malawi generally produced enough maize to meet its national requirements. However, the country has experienced grain deficits during most of the past twenty years due to rising land pressures, declining soils, low productivity, and periodic weather shocks.

One response to periodic flooding and drought was the establishment of input distribution programs designed to help farmers re-establish their farming operations after experiencing severe food supply shortfalls. These have generally involved the distribution of small quantities of seed and fertilizer through public channels. Due to the frequency of flooding or drought, these sorts of interventions have been common since 1992.

In 1998/1999 the Malawi Government introduced a free fertilizer distribution program aimed at increasing fertilizer use among smallholders. A free ‘starter pack’ program was initiated first as part of drought response efforts and later to stimulate uptake of hybrid maize and raise national output to reduce food imports. DfID was the major financier of the program.

In the wake of extreme drought and low agricultural productivity in early 2005, the Government reintroduced a broader agricultural input subsidy program during the 2005/06 cropping season. Approximately 130,000 t of fertilizer was distributed through a coupon based distribution program to more than 1.3 million farm households. The following year, approximately 1.5 million farmers received coupons for the purchase of 150,000 t of fertilizer and two million farmers received coupons for free maize seed. In 2007/08 more than 1.7 million farmers are expected to coupons for 170,000 t of fertilizer and almost 3 million farmers are expected to receive coupons redeemable for seed. Over 50% of the budget of the Ministry of Agriculture and Food Security is allocated to pay these costs. Donor funds are paying some administration costs and much of the costs of the seed subsidy.

In combination with favorable rains, this program has contributed to sharp increases in maize harvests in 2006 and 2007. During the most recent harvest, the country produced an estimated 3.4 million metric tons (a surplus of 1.2 million metric tons above national requirements). This has allowed Malawi to start exporting 400,000 t of grain to Zimbabwe and 80,000 t to Swaziland and Lesotho.

Q4: What has been the Bank’s position on this program?

The Bank’s position is that the program should be targeted to achieve as large a set of development gains as possible. In effect, these should be “smart subsidies”.

First, these should target farmers who cannot afford fertilizer purchases in order to avoid displacement of commercial fertilizer sales. Since most Malawian farmers are extremely poor, this commitment would still encompass large numbers of households.

Second, the subsidy should be linked with the best possible research and extension advice in order to be sure farmers are getting the highest possible gain from this investment. The fertilizers being provided need to be targeted to variable soil and rainfall conditions around the country. These should be linked with advice on cropping practices that will improve both fertilizer and water use efficiency such as timely application, good weed control and conservation farming practices.

Third, the subsidy should be managed in ways that encourage the expansion of commercial investment in wholesale and retail trade in agricultural inputs. This is a gain partly made by shifting from free input handouts to the use of vouchers redeemable at retail shops. But retail trade still needs to be expanded in many outlying areas.

Over time, commercializing farmers should no longer need subsidies to encourage the continuing adoption of improved technologies and farm profitably. There may be a continuing justification for input subsidies to improve the welfare of the poorest of the poor who would otherwise continue to depend on food aid. 

Smart subsidies are ultimately important given the difficult trade-offs underlying investments of national budgets and associated development assistance. Money allocated to an extra bag of fertilizer may be money taken away from the vaccination of chickens for Newcastle disease. Or this may reduce the funds available for developing a new, disease resistant, bean variety. Or the subsidies may reduce the resources necessary to build rural roads in order to lower the costs of future agricultural inputs.

Q5: In view of its concerns, what has the Bank done to improve the approach to fertilizer subsidies?

Following concerns raised by donors and the association of agro dealers, the World Bank, in collaboration with the Government of Malawi, sponsored a Fertilizer Workshop, bringing all stakeholders to the table to discuss good practices on fertilizer and to chart a way forward. The workshop revealed considerable mistrust between the government and private sector fertilizer suppliers, but made great headway in building trust. As a result, the government agreed to involve the private sector in its 2006/2007 input subsidy program. Ultimately, 28% of the subsidized fertilizer was sold through private sector outlets. According to the DfID evaluation of the program, the involvement of the private sector had a positive impact on the availability of fertilizer in the country.  

The World Bank is currently in discussions with the government about strategies for improving the targeting of fertilizer recommendations to variable soil and rainfall conditions, and promoting the adoption of more sustainable farming practices including conservation farming. In combination, these efforts aim to improve both fertilizer and water use efficiency, and correspondingly increase the profitability of each kilogram of input used. 

Q6:  What is the Bank doing to support Malawi’s agriculture sector?

The Bank is supporting an Irrigation and Rural Livelihoods Project (co-financed with IFAD) which has an input for public works program, called "Inputs for Assets" (IFA) to the tune of US$15 million over 5 years. The IFA program is well targeted to the poor. The poor farmers have to work to create community assets; e.g. water harvesting structures, soil conservation works. Payment for the work is in the form of a voucher which can be redeemed for fertilizer.

Apart from good targeting, the program has the additional attractive features that:  (i) community/local public goods/assets are built through the public works;  (ii) effective demand for inputs is created for input retailers in remote areas through the voucher scheme (which helps to strengthen the agro-dealer network); and (iii) it does not distort input markets since the voucher does not have a subsidy element (farmers are paid market wages in the form of voucher redeemable for fertilizer at the market cost).  The active project was approved in 2006 and has a closing date of June 30, 2012.

In its 4th Country Assistance Strategy (2007-2010), the Bank has planned 2 additional projects that will focus on improving total food output and productivity, and strengthen risk management systems. The Agriculture and Food Security Program (FY08) will be part of a multi-donor effort to fund the government’s performance based Agricultural Development Program (ADP). It will seek to strengthen agricultural planning systems, strengthen market based risk management systems and increase the payoffs to the national food security initiatives, including the fertilizer subsidy programme. The ADP will be further strengthened with sectoral development support to be initiated in 2010.

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