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Towards sustaining Malawi's farm input subsidy program

The Malawi Farm Input Subsidy Program (FISP) has been successful in raising maize yields and improving food security. Maize production almost tripled in the first two years of the program. Maize yield increased from an average of 1.06 ton/ha in 2000-05 to 2.27 ton/ha in 2009/10. Key messages: 

• The sustainability of the program in terms of meeting the fiscal and foreign exchange resources requirements is uncertain as Malawi is faced with large budget and current account deficits. Thus, there is a need for a feasible plan to sustain the farm input subsidy program.

• This brief underlines the importance of focusing on exports to satisfy the foreign exchange requirement of the subsidy program. A simple counterfactual analysis of sustaining exports at the 2007/08 level, i.e., 12%, in 2009/10, shows that more than 87% of the foreign exchange requirement of the program could have been covered through maize export. A conservative estimate falls to around 65%.

• Commodity market instruments, coupled with careful stock management, present a viable alternative way of managing exports without compromising domestic food security. Commodity put options and repo agreement can be used to reduce the risks associated with exports and cope up with unexpected conditions such as drought and other climatic shocks.

• In terms of the institutional arrangement, the proposed stock management via the use of commodity market instruments can be coordinated by the Malawi Agricultural Commodity Exchange (MACE). Donors’ financial and technical support is, however, critical to put the option market alternative into practice.

  • Conclusion

The Government of Malawi introduced Farm Input Subsidy Program (FISP) in 2005 to achieve food security and raise smallholder’s income through increased maize and legume production. FISP is a large-scale subsidy program aimed at lowering the cost of fertilizer and modern maize seed varieties to resource- poor farmers. The program has been successful in terms of increasing registering surplus maize output to the tune of more than 1 million ton per annum since the implementation of the program. Maize yield has doubled from 1.06 ton/ha in 2000-05 to 2.27 in 2009/10. While the demonstrated productivity gains of the program are significant, the rising cost of fertilizer import and the resultant foreign exchange constraints have cast shadow on the sustainability of the program.

Most importantly, because of the depleted foreign exchange reserves following the rising oil and fertilizer prices, and uncertain donor financial flows, the continuity of the program hinges on the country’s ability to raise foreign exchange.

This brief underscores the importance of focusing on maize export as a major pillar of the fertilizer input subsidy program in order to sustain the program in the short to medium term by providing the required foreign exchange. At the current international market price of USD 311/ton, maintaining maize exports at the 2007 level (12% of total output) could cover 65 to 87 percent of the program’s foreign exchange requirement. The role of export to raise foreign exchange is straightforward. Rather, what is most important is how to coordinate smallholders’ surplus maize output for export market amidst recurrent drought, food insecurity and the risk of price escalation. This brief put forward a commodity market alternative as a way of managing exports without compromising domestic food security.

Commodity put options and repo agreement can be carefully used to reduce the risks associated with exports and cope up with unexpected conditions such as drought and other climatic shocks. In terms of the institutional arrangement, the proposed stock management via the use of commodity market instruments can be coordinated by the Malawi Agricultural Commodity Exchange (MACE). Donors’ financial and technical support is, however, critical to put the option market alternative into practice.

  • Key messages and conclusion to:  Towards sustaining Malawi's farm input subsidy program.  Readers can access the 8 page report , dated April 2012, here.
Date: 
4 May 2012
Author: 
Daniel Zerfu Gurara, Adeleke O. Salami
Source:
AfDB
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