It is easy enough to calculate how much the Government of Malawi spends on subsidizing chemical fertilizer. Last year, for example, this was MWK 120 billion (about US$ 150 million) taking up over 50% of the agricultural budget. It is much harder, however, to calculate the benefits that these subsidies bring about and how they stack up against the costs. In this policy note, we combine multiple methods and sources of data to narrow down the range of possible benefit estimates, compare it to the cost of subsidies, and propose changes to current policies to make fertilizer subsidies more efficient and affordable.
We first look at recent agronomic data on yield responses to determine how much additional Kwacha output each farmer produces per Kwacha of subsidized input under ideal conditions. Second, we use nationally representative farming household survey data with detailed information on both fertilizer use and yield to calculate likely benefits under normal conditions. We find that for every Kwacha spent on fertilizer, less than 8 Tambala worth of maize is produced on average. It costs MWK 3,236 to turn fertilizer into a kilogram of maize, while that same kilogram of maize can be imported 5 times more cheaply at a total cost of MWK 600. Rising prices of fertilizer and decreasing yield response rates will make the situation even worse.
Fortunately, not all farmers are unproductive. While some cannot turn fertilizer into maize productively, others can, and they typically know it about themselves. If given the choice between receiving a fertilizer subsidy or a cash transfer, productive farmers will choose the former while the unproductive ones will choose the latter. By giving farmers this choice and ensuring that contracts to import the resulting shortfall of maize are in place, the government would spend less money on ensuring the country’s food security than by subsidizing inputs for everyone. In a situation where foreign exchange reserves are low, this would be a prudent course of action.
Authors: Joachim De Weerdt and Jan Duchoslav
Read and download the policy note here (PDF 168 KB)
