In recent weeks, there has been much debate about the possible introduction of a universal fertilizer subsidy (UFS) in Malawi. However, several basic questions about the likely costs and distributional consequences of a move to a UFS remain unanswered. This op-ed aims to provide partial answers to these questions.
First, what is the likely cost of an untargeted UFS and how does this compare to FISP? Obviously, this question depends on the level of subsidy paid along with several other assumptions. By looking at the volume of commercial (i.e., non-FISP) fertilizer purchased in recent years, along with the additional commercial fertilizer that would be purchased if there were no FISP—among other assumptions—IFPRI has estimated the approximate cost of an untargeted UFS. Excluding administration costs and leakages, a 50% subsidy would cost between MWK 32.1 billion and MWK 46.8 billion for the 2019/20 Financial Year (FY). [1] This compares to a cost of MWK 26.8 billion for fertilizer costs alone under FISP in the 2017/18 FY and a total allocation cost (including seeds and administration cost) of MWK 38.5 billion. Alternatively, we can ask what a UFS of 75%─which is close to the level of fertilizer subsidy paid by FISP this year-would cost? This comes to MWK 48.1 to 81.3 billion per year, which exceeds the total annual agricultural development budget. And if the UFS resulted in fertilizer prices in Malawi that were significantly lower than in neighboring countries, the cost could be even higher than this due to unofficial fertilizer exports!
Despite the decline in the number of FISP beneficiaries in recent years (from 1.5 million households before 2016/18 to 900,000, and then back to 1 million this year), expenditure on the FISP still represents over a quarter of Malawi’s agricultural budget. Once recurrent expenditures (i.e. salaries and office expenses) plus maize purchases are accounted for, very little remains for other agricultural investments. So, an important additional question that needs to be asked is which types of agricultural investments will provide the biggest kick for your Kwacha (or, in the case of donors, ‘bang for your buck’)?
Second, what would be the distributional consequences of a UFS? IFPRI’s recent analysis of the Integrated Household Surveys (IHS) shows that beneficiaries of FISP are agricultural households in the middle of the expenditure distribution—with the poorest and richest fifth of households being less likely to benefit from FISP.[2] A move to a UFS would therefore be likely to concentrate fertilizer use among the richer, but also more productive, farmers who can afford to purchase fertilizer. So, an untargeted UFS would cut out many of the nearly 1 million farmers who currently receive FISP, while benefiting 1.1 million or so better-off smallholder farmers who can afford to purchase commercial fertilizer (along, potentially, with the large estates).
Experience from elsewhere in Africa shows that fertilizer subsidies are an expensive proposition.[3] A recent IFPRI study from Ghana, shows that replacing its UFS with an approach that targets poor farmers would reduce the cost of leakages by 72%, which far exceed the additional costs of targeting. [4] A similar approach, aimed at targeting FISP on more productive small farmers in Dowa and Rumphi, has been piloted with promising results.[5] However, in the Malawian context ─where we know that sharing of both in-kind and cash transfers is widespread─the costs of more precise targeting need to be set against established community sharing practices.
So, is a UFS in Malawi a good idea? As with all policy decisions, a move to a UFS involves trade-offs between competing policy objectives, so there is no simple answer. However, an untargeted UFS would be a very expensive budgetary proposition, involve significant opportunity costs in terms of foregone agricultural investments, and have benefits that would flow disproportionately to better-off farmers.
*This op-ed was written by Dr. Bob Baulch, Leader of the Malawi Country Strategy Support Program, IFPRI, Lilongwe─ a position he has held since March 2016. He holds a PhD in agricultural and development economics from Stanford University in the USA, and master’s degrees from the universities of Oxford and Sussex in the UK. He has worked in 22 developing countries in Africa, Asia and the Pacific.
Click here to download a Plug and Play Universal Fertilizer Subsidy Costs Calculation sheet
[1] This assumes that the demand for fertilizer is relatively responsive (elastic) to its price. Drawing on a recent IFPRI study, we have assumed an own price elasticity of demand for fertilizer of -0.92. See Komarek et al. (2017) Agricultural household effects of fertilizer price changes for smallholder farmers in central Malawi. Agricultural Systems, 154, 168–178. https://doi.org/10.1016/j.agsy.2017.03.016.
[3] See, for example, Jayne et al. (2018) Taking stock of Africa’s second-generation input subsidy programs. Food Policy 75:1-14. https://www.sciencedirect.com/science/article/pii/S0306919217308618?via%3Dihub.
[4] See Houssou et al. (2018) How can African governments reach poor farmers with fertilizer subsidies? Exploring a targeting approach in Ghana. Journal of Development Studies. https://www.tandfonline.com/doi/full/10.1080/00220388.2018.1528353.
[5] See CDM and FUM (2017) Two Studies on the 2017/18 Farm Input Subsidy Program, Policy Brief, Center for Development Management and Farmers Union of Malawi, Bunda and Lilongwe (downloadable from http://massp.ifpri.info/2018/01/22/dfid-policy-brief-on-2016-17-farm-input-subsidy-program/).
