Since Malawi started implementing agricultural input subsidy programmes in the 1990s, the core objective has always been to ease access to agricultural inputs, especially fertilisers and modern varieties of maize seeds.

While the target is small farmers to improve their household food security, the country’s comprehensive fertilizer and seed subsidy programme—which the late leader Bingu wa Mutharila called the Farm Input Subsidy Programme (Fisp) and current President Lazarus Chakwera has dubbed the Affordable Inputs Programme (AIP), has been instrumental in boosting the country’s agricultural production, enhancing national food security and plays a key role in macroeconomic stability given the larger-than-life role food plays in the consumer price index from where the inflation rate is computed.

Agricultural subsidies have also had a large bearing on the broader Malawi economy because higher crop output has tended to have a massive impact on the country’s total economic output.

Agriculture is Malawi’s economic mainstay, accounting for roughly a third of the country’s gross domestic product (GDP), wiring in 80 percent of national export earnings and employing more than 60 percent of the workforce.

Furthermore, roughly 90 percent of the country’s crops are cultivated by smallholder farmers who rely on fertiliser to boost yields, which explains why government targets them.

Yet, the agricultural input subsidies have exerted a heavy burden on the national budget largely because of the numbers of beneficiaries it supports and the increasing price of fertilisers on the international market where Malawi ships in the bulk of the product.

Last year alone, at least 3.7 million farming households benefitted from the programme, up from the 1.5 million people that Fisp was targeting. The subsidy budget has quadrupled along with the increasing numbers of farmers.

Since early last year, fertiliser prices have more than doubled. More importantly, historically, government has not tied the subsidy rate to the changes in the global fertiliser prices, leaving Treasury to run helter-skelter every time there is a price spike.

That is why the current fertiliser price movements have sent the national budget into disarray and leaving Capitol Hill with tough choices to make: should government increase the fertiliser subsidy rate in the coming agricultural season or should it simply cut the number of beneficiaries as it wanted to do last year to 2.7 million only for President Chakwera to keep the one million farmers back on the AIP list?

The budget certainly does not have the money to maintain the same number of beneficiaries at the same redemption price of K7 500 per bag.

The total subsidy budget is K109 billion, of which K97 billion is for fertiliser and the remainder, K12 billion, is for seeds.

Based on the current prices, the market value of AIP is roughly K420 billion. If government sticks to its budgeted subsidy, that leaves K343 billion to be shouldered by farmers, which is way out of the affordability bracket and clearly also out of the capacity of the current national budget.

It is a catch-22.

My view is that government will have to do both: reduce the number of beneficiaries and raise the redemption rate, both of which are necessary evils.

There have been studies that have examined the impact of price increase of subsidized fertilisers on poor farmers, which have found that the price hike of subsidized fertilizers causes a reduction in the use of fertilisers largely owing to high poverty levels.

Lower fertiliser use among the poor farmers due to the price increase was found to have jeopardized the positive effects of subsidy programmes, meaning that there is a real danger here that most poor farming households won’t even grow maize, the staple grain either because they have been left out of the subsidy list or they cannot afford an increased redemption price.

Meanwhile, there is also the transport and logistics component of AIP, which is likely to also face cost escalations following the fuel price increases and the devaluation of the Malawi kwacha. That too will put pressure on Treasury to meet the additional costs.

I have noted that government is going out to look for resources to supplement what it has allocated in the budget and help minimize the immediate pain both on Treasury and the farmer the subsidies aim to protect.

It has thus secured US$20.2 million from the African Development Fund, the concessional window of the African Development Bank Group, under the African Emergency Food Production Facility. The facility Malawi has secured will provide half a million farm households with 2 500 tonnes of climate-smart certified cereal and legume seeds, and 70 000 tons of fertilizer.

While this will help, government must urgently decide and communicate policy direction on AIP both in terms of number of beneficiaries and the redemption price. It is roughly just three months to the rainy season and people need to plan, but they cannot do so without clear information.

The post Government’s subsidised fertiliser dilemma appeared first on The Nation Online.