Fertilizer subsidies in Malawi: An Exit Strategy Conundrum

During the 1990s, Malawian farmers experienced a rough transition from government policies that controlled and supported the agricultural sector, such as fertiliser subsidies and price stabilisation, to a more liberalised agricultural policy environment. In the wake of this change, prices for staple foods and inputs fluctuated widely, and the majority of smallholder farmers were unable to afford the fertiliser and seed that they desperately needed. This period of economic instability coincided with a Southern Africa-wide drought, resulting in extremely low yields. It was a recipe for disaster.

In response to the crisis, the Malawian government introduced a new subsidy for fertiliser, known as the Starter Pack (SP). The ‘universal’ SP programmes provide free packs containing fertiliser, maize seed and beans or groundnuts seeds to millions rural households. The subsidy has attracted world-wide attention, in part because it was enacted in the face of opposition from some important donors. Yet despite some of the drawbacks of the fertiliser subsidy — high fiscal cost, difficult targeting, and crowding out of commercial sales — it receives strong support from smallholder farmers and some policy makers. On the ground, the evidence collected shows that the fertiliser subsidy has had a strong, positive impact on food security, with maize output climbing steadily over the last several growing seasons.

Indeed, unless Malawi is prepared to risk another food crisis and the accompanying set-backs in education, health, and poverty reduction, the government should not abruptly abandon (or scale down) the input subsidies for fertiliser. Poverty is so extreme and widespread, and food security so precarious, that any shock would be enough to precipitate a crisis. Resources spent on social welfare and development are undermined by a food shortage. Farmers may build up assets, only to be hit by another food crisis that absorbs all their resources and puts them back where they started, or worse. The fertiliser subsidy should be viewed as an important part of a two-pronged strategy that will help farmers break out of this precarious situation:

• The fertiliser input subsidy has proven to be an efficient way of boosting food production in Malawi. The programme needs to be of sufficiently large scale (universal or near-universal) to achieve the impact on maize markets that is required to keep prices in check and ensure food security.

• On the other hand, there is a need to develop smallholder farmers’ livelihoods. This means increasing opportunities for piecework and other off-farm activities, promoting cash crops that smallholders can grow without displacing food crops (for example, inter-cropping), and boosting livestock ownership.

But while the fertiliser subsidy is best kept in place for the time being, it should not be permanent. Although fertiliser subsidies of the sort implemented by Malawi rarely have an 'expiration date' attached, the long-term sustainability of the subsidy is questionable. Subsidies cannot transform non-competitive producers into competitive producers. By subsidising smallholder farmers, the government is ultimately delaying a process restructuring at great cost to society in terms of alternative output. Moreover, when smallholder farmers come to rely on subsidies, the propensity to improve productivity is diminished. Other non-subsidised countries will increase productivity and lower production costs to the point where they will be competitive, in spite of Malawi’s attempts to protect its farmers.

Over the long term, therefore, the Malawian government needs to think about an exit strategy. There are some factors that should be applied as a test to assess the possibility of ‘exit’, and indicators to monitor their progress. These include:

• Increase smallholder purchasing power, such that more farmers can afford to buy the inputs they need to increase maize yields on poor soils.

• Improve the marketing and distribution of seeds and fertiliser. The availability of seeds at an affordable price has often been a serious problem. And although fertiliser may be available in most parts of Malawi, it is not always offered in the small quantities that most farmers can afford.

• Diversify food crops in maize-dependent districts. The parts of Malawi where farmers’ only food crop is maize suffer much worse food insecurity than the areas which have diversified food sources, like the cassava-growing areas of Nkhotakota and Nkhata-Bay.

Working toward these goals will help Malawian farmers transition away from the fertiliser subsidy, without causing the sorts of turmoil that they experienced in the 1990s. Politically, however, the subsidy will still be very hard to remove. Ultimate responsibility for the subsidy falls with Dr Bingu wa Mutharika, the current president of Malawi. This is both a strength and a source of concern. The subsidy has become an entrenched political tool which no political leader is seriously questioning.