By: Jan Duchoslav and Joachim De Weerdt
Malawi’s national budget for the upcoming fiscal year allocates K117 billion to the Affordable Inputs Programme (AIP), of which K110 billion is earmarked for fertilizer subsidies. The Ministry of Agriculture also announced that it aims to provide 1.75 million beneficiaries with 2 bags of subsidized fertilizer each under next year’s AIP. How can it be done?
The math is simple. Take the available budget of K110 billion, plus the K5 billion or so donation pledged by Japan, and divide by the number of beneficiaries. The program will be able to support each beneficiary with K66,000, which is K33,000 per bag of fertilizer. To contribute more within the allocated budget, the program would require further donations. Most of the fertilizer donated to this year’s AIP has been distributed, and no other donations seem to be in the offing. It would be wise, therefore, to plan the AIP assuming no further contributions.
No one knows what the fertilizer price will be later in the year, but at the current price of K70,000 per bag, a government contribution of K33,000 per bag implies a farmer contribution of K37,000. This year, those farmers who managed to access AIP fertilizer paid just K15,000 per bag. So it will require brave and honest political messaging to explain that high fertilizer prices and competing budget needs necessitate a leaner program of 1.75 million beneficiaries with a known government contribution of K33,000 per bag and an estimated K37,000 farmer contribution.
This jump in the farmer contribution would, however, solve a problem the government has with the AIP: deciding who should benefit from the program. Research by IFPRI shows that with a farmer contribution of K15,000, over 3 million smallholders would want AIP fertilizer, so 73% of interested farmers would have to be selected out of the program. With a farmer contribution around K37,000, just around 1.75 million farmers would be interested, obviating the need to target the program.
Perhaps more important, the farmers interested in accessing fertilizer at a higher price would be the most efficient ones — those who can turn the input into more maize than others. For those who are less efficient in turning fertilizer into maize, the investment would no longer be worth the return.
The most productive Malawian farmers currently produce about 7 times as much additional maize by applying a bag of fertilizer than the least productive ones. In a situation where Malawi can afford only limited amounts of fertilizer, the government should direct it toward the most productive farmers to maximize production in the country and thus ensure its food sovereignty.
No mechanism can identify productive farmers better than input prices. Survey data show that farm size, household size, and membership in farmer clubs are poor predictors of productivity. Characteristics such as soil health, farming skills, and adoption of progressive farming technologies may be relevant, but their observation at scale across the whole country every year is impracticable. And letting communities decide on program inclusion often leads to elite capture.
Fortunately, farmers themselves know very well just how good they are at turning fertilizer into maize. If the price a farmer has to pay for fertilizer is lower than the value of the additional maize she can expect to grow with it, she will likely buy the fertilizer. If the price is higher than the value of the additional maize, she will not buy the fertilizer. Allowing individual smallholders to decide for themselves whether the investment is worth it is therefore the surest way to ensure that subsidized fertilizer goes to the most productive farmers.
Soon many farming households will sell this year’s harvest and will decide what to spend now and what to keep for inputs for the next growing season. Farmers can make the right choices only if they are informed now of the knowns and unknowns of next year’s AIP. We know that with a budget of K110 billion and 1.75 million beneficiaries the government can contribute K37,000 per bag. We do not know how much farmers will need to contribute, as that will depend on the future price of fertilizer and on any future donations. Presenting tentative hopes of future fertilizer donations or lower future fertilizer prices as certainties will misinform and disempower farmers. It will require strong politicians to relay this message, but it will be good politics to do so.
What must be avoided is starting to implement next year’s AIP with unrealistic assumptions about the international price of fertilizer or the size and timing of fertilizer donations. Hoping for the best and planning for the worst will prevent the AIP from running out of funds mid-implementation.
If prices remain at today’s level, the AIP will require a total of K238 billion to procure the fertilizer needed to supply 1.75 million beneficiaries, of which K123 billion will be recuperated in the form of farmer contributions. The tricky part is that the whole K238 billion in fertilizer will need to be procured and pre-positioned ahead of the growing season so that farmers can access their inputs on time. In other words, this requires a line of short-term credit, which the government or its heavily indebted parastatals may be hard-pressed to access, but which is business-as-usual for the private sector. An urgent and important task ahead of a government wanting to make next year’s AIP a success for Malawi’s farmers is to make and communicate, as soon as possible, credible commitments to pre-approved private suppliers that a total of 3.4 million bags of fertilizer will attract a government contribution of K33,000 each. Equipped with this information, if it is provided in a credible manner, the private sector can start procuring and pre-positioning sufficient fertilizer.
Efficient distribution of fertilizer requires a competitive environment. A monopoly granted to any player, be it a private sector company or a parastatal, will lead to substantial inefficiencies at the expense of Malawian smallholders. The government itself does not need to procure and distribute fertilizer. Instead, it can create a competitive environment in which private sector players compete for business. That means first establishing clear rules of the game and credibly ruling out discretionary and last-minute interventions. Market predictability will attract interest from the private sector, which in turn will boost competition. The government can work through its Competition and Fair Trading Commission (CFTC) to identify and stop any cartel formation or other anticompetitive behavior (which should also be done based on clear and known rules, not through discretionary decisions).
Regardless of who supplies the fertilizer, less of it can be subsidized with the new budget than in the past few years. Fortunately, this does not have to undermine Malawi’s food sovereignty. A brief look at the history of subsidies in Malawi (summarized in Figure 1) tells us why. The introduction of large-scale input subsidies in the mid-2000s was widely acclaimed as a success leading to a decade of abundant maize yields. However, the experience during years when the subsidy was cut back drastically is also important to consider. There is no trend toward lower national production after the program was cut by two-thirds in 2017. A well-targeted, smaller subsidy program need not lead to lower production levels. Quite the contrary, it could open budgetary space for high-return investments in the agriculture sector, such as investments in soil health improvement, irrigation, or extension services, which are currently crowded out by the AIP.
Figure 1: History of agricultural input subsidies in Malawi
On the other hand, history also shows us that input subsidies do not ensure that each household grows enough food for itself. If they did, millions of Malawians would not require assistance every lean season. So what about these farmers, many of whom will not be able to afford fertilizer at a higher price? Poor Malawians need and deserve assistance, but fertilizer subsidies are not the best way of providing it. Many poor beneficiaries end up re-selling AIP fertilizer for much less than what the government spent on it. Some do so because they know that they could not use the fertilizer profitably even at the subsidized cost, others because they have more pressing needs. Regardless of the reason, all these farmers would be better off if the government simply gave them cash instead of a subsidy. In other words, the government should not use the AIP as a social safety net. It should focus on subsidizing fertilizer for the most productive farmers who can grow the maize the country needs and use social protection programs that are fit for purpose to enable the rest to buy the maize they cannot grow.
