Removing subsidies in Zambia - the way to go?

The Zambian government has removed subsidies for farmers and millers because the expenditure is perceived as draining the country’s resources. Fuel subsidies have also been removed, and the combined loss of assistance is pushing up the price of maize meal, a staple foodstuff in the Zambian diet.

Removal of the subsidy is just one in a series of similar moves by Zambian President Michael Sata, who is known for taking a tough stance on issues ranging from Chinese investors, whom he has threatened to deport, to fuel subsidies, which have been removed on the ground that their US$200 million annual cost would be better spent on health and education.

The loss of subsidies for farmers has angered the Zambian National Farmers’ Union (ZNFU), which said the move was “ill-timed”. Inadequate rains, an attack of army worms that forced many farmers to replant, and the late delivery of subsidized fertilizers have already affected the 2011/12 harvest. ZNFU warned that any reduction in support for beleaguered Zambian farmers could threaten maize production and national food security.

“Government has reduced the Farmer Input Support Programme (FISP) subsidy,” the media officer for ZNFU, Kakoma C Kaleyi, said in an email to IRIN. “Previously, government would pay 75 percent while the farmer would pay 25 percent for 50kg bag of fertilizer, but now the cost-sharing is 50%-50% for government and farmers respectively. A bag of fertilizer costs ZMW200 [about US$37], [with] farmers paying ZMW100 [almost $19] and government covering the remaining ZMW100, though farmers are still receiving a 10kg bag of seed for free.”

About 900,000 small-scale farmers covered by FISP have been affected. Kaleyi noted that in the past some of them had failed to raise enough money to cover even their 25 percent share of the fertilizer cost, so it remained to be seen how they would cope now.

Enormous costs

The FISP accounted for roughly 39 percent of the more than $231 million allocated to the agriculture sector in Zambia’s 2011 budget, yet rural poverty rates remain stubbornly high. A study by agricultural experts Thom Jayne and Auckland Kuteya, of the Indaba Agricultural Policy Research Institute, in Zambia, found that the support programme was benefiting wealthier land owners more than poorer ones, and that around 80 percent of rural people were still categorized as poor, despite many years of inputs and consumer subsidies.

"The question one has to ask, is: were the funds spent instead on research, extension, better rural roads, and perhaps - because it's difficult - some intervention to kick-start rural financial services, would this do more to increase production than subsidizing inputs?"

“Unbalanced agriculture policies have caused an over-production of maize and hampered the development of other segments of the agriculture sector,” the International Monetary Fund (IMF) noted in its 2012 country report on Zambia.

The government has said that in 2013 it will continue to buy maize for the Food Reserve Agency (FRA), paying a set higher price to farmers, but will not sell it at a subsidized rate to millers, as was usually done in the past. 

Zambia’s Agriculture and Livestock Minister, Bob Sichinga, told a media briefing in May 2013 that the FRA had been buying maize at the current rate of ZMW 65 (roughly US$12.27) per 50kg bag, and selling it to millers at ZMW60 ($11.43), amounting to a loss of ZMW100 ($19) per tonne. 

In 2011, for instance, the FRA bought maize from farmers at $270 per metric tonne and sold it to millers at $180 per metric tonne, resulting in a “50 percent loss” to the government, the Famine Early Warning Systems Network (FEWS-NET) noted. 

The programme - which spent US$258 million on maize purchases alone in 2012 - was meant to help farmers, while keeping food prices low for consumers, but Jayne and Kuteya found that virtually none of the subsidy to maize millers was passed on to consumers.

Consumers pay more

The removal of subsidies to millers has already begun to impact consumers. Kaleyi told IRIN the price of a 25kg bag of maize meal has jumped from ZMW55 ($10.38) to ZMW65 ($12.27) since the beginning of 2013. According to the Jesuit Centre for Theological Reflection (JCTR), a faith-based NGO that calculates the monthly cost of a basket of essentials for a household, prices have been rising since the removal of the subsidies.

Daniel Mutale, the social conditions programme manager at JCTR, said the price of maize meal had already reached ZMW 59.28 ($11.19) in June 2013. “The effects of removal of subsidies on basic food items are deepening,’’ he noted in a statement, and called for an urgent response to address rising food costs.

“[In] the absence of alternative programmes for small-scale farmers to access finance,” ZNFU said, they expected to “see many more [rural] households slide into the social security safety net category… [which will] ultimately increase expenditures on [the government’s] social welfare schemes.”

FEWS-NET reported that maize prices have begun to rise because private traders, who now hold most of the stocks of maize, are paying more for it. "Maize prices across the country are generally higher than the same period last season, and the five-year average," the organization noted.

A higher demand for maize in southern Africa - combined with the poor harvests reported in parts of Zambia and the region, such as in neighbouring Zimbabwe - is also pushing up prices.

FEWS-NET noted that farm-level information on the impact of the reduced FISP has been limited, but expects less access to inputs, which could affect timely planting and yields. “We’ll need to reassess early next year, once the quality of the 2014 harvest becomes apparent… it’s a victory for a more sustainable policy environment, one that is likely to attract increased private investment and competition into food value chains as long as this environment continues,” Jayne said.

Should other countries follow suit?

Zambia’s experience may contain a broader message about agricultural subsidies, especially for neighbouring Malawi, which has been spending enormous amounts of its donor-funded budget on subsidizing inputs. It spent more than a $100 million in 2009/10, and more than $250 million in 2008/09.

Jayne has been drafting a review of the arguments for and against agricultural subsidies, based on evidence from southern Africa, said Steve Wiggins, an agricultural policy expert with the Overseas Development Institute, a UK-based think-tank.

“There is lingering doubt about the effectiveness of fertilizer applied to soils low in soil carbon, low in nutrients, and with poor structure. The agronomic argument for such soils is that fertilizer will only boost yields to the potential of the nutrients when the soils have been improved… None of the experts are opposed to supporting farmers, but they insist the circumstances must be right.”

Wiggins told IRIN in an email that subsidized inputs work where there are few local agricultural supplies dealers, who stock small quantities, so seeds, fertilizers etc, are therefore more expensive, or when the farmer does not have enough cash at the beginning of a new crop season and lacks access to credit to buy inputs.

“These issues become acute in countries such as Malawi, where maize yields are lower than they could be, and farmers are seemingly trapped into producing low yields by their poverty and the various failures of rural markets for inputs and credit.”

Subsidies are expensive to maintain, and are not very sustainable in the long run, especially for poor countries. “The question one has to ask, is: were the funds spent instead on research, extension, better rural roads, and perhaps - because it's difficult - some intervention to kick-start rural financial services, would this do more to increase production than subsidizing inputs?” Wiggins asks.

Kuteya says the timing was right for the removal of subsidies in Zambia, as elections are only expected in 2016.