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AIP Reform vis-vis Climate Smart Agriculture

1.  CONTEXT OF SUBSIDIES IN MALAWI

Although the agriculture sector is dominant in the Malawian economy, it is bedevilled by low agricultural productivity, food and nutrition insecurity. To address this challenge, the Government of Malawi has been implementing a large agricultural inputs subsidy program since the 2004/2005 season to improve smallholder farmers’ access to seed and synthetic fertilizers primarily for maize production. The program was introduced partly in response to declining maize outputs and the hunger crisis of the 2000/2001 and 2001/2002 agricultural seasons. The program doubled household maize productivity, roughly from below 1 to 2 metric tons (MT) per hectare. On legumes and pulses, subsidies improved the total output (average over 10 years reported are 0.5 to 0.7 ton/ha for beans; 0.85 to 1.0 ton/ha and 0.79 to 1.02 ton/ha for Groundnuts and Soyabeans respectively). Legumes and pulses subsidies also resulted in better diets and more income over time. Other studies indicated that the program improved food security and child nutrition at the household level and national food self-sufficiency. These successes have led subsequent government administrations to maintain the program to date, albeit with varying designs and scales. In the 2020/21 agricultural season, the Government of Malawi introduced the Affordable Inputs Program (AIP) to replace the Farm Input Subsidy Program (FISP). The main goals of the AIP are to achieve security, improve nutrition, and reduce poverty by increasing farmers' access to improved inputs.

These subsidy successes notwithstanding, the Government and some stakeholders are wary of the cost of the program and its impacts on the ability of the Government to provide critical public goods for agricultural development. For instance, the subsidies have been allocated an average of 65% of the total “Other and Recurrent Transactions (ORT)” budget allocations to the MoA in the past 5 years. This means that the ministry had only 35% of its allocated budget to cover staff salaries and fund its operations. Additionally, the subsidy program drains foreign exchange reserves for the importation of fertilizers, worsened by the volatile and soaring international prices of fertilizers. For example, the letter by Fertilizer of Malawi to the MoA in June 2022 indicated that the chronic shortage of US Dollars, and the flow of fertilizer into Malawi has been severely restricted

2.  ACTION POINTS TAKEN TO INFLUENCE AIP REFORMS

2.1 DCAFS Thematic Priority and Reform Recommendations

AIP reform has been one of the DCAFS thematic priorities in the past years and WB is the lead agency. To ensure that AIP reform addresses critical issues, DCAFS's key message on AIP Reform was submitted to the MoA through WB and IFPRI in February 2023 to inform the 2023/2024 AIP implementation plan. In addition, AIP reform is one of the WB Development Policy Operation (DPO) triggers with specific indicators. The AIP reform recommendations followed the H.E.’s speech of 25 October 2022 in parliament in which he outlined his vision for an AIP 2.0: “a better and improved AIP, an innovative AIP for the 21st Century”. At Troika-PS meetings as well as at bilateral DP and Government engagements, follow-ups have been made on how the Government has taken into account and applied in practice the DPs’ recommendations on AIP reform.

The following have been key principles of the recommended AIP reform by the DPs:

  • Addressing fiscal sustainability (Reduction of AIP budget by 25% between 2021/22 and 2022/23, and more in coming years)
  • Reducing subsidy per household and increasing beneficiary contribution over time.
  • Improving beneficiary targeting - reduction of the number of beneficiaries in 2022/23 by moving the least productive into Social Protection programs; while more market-ready households into Agriculture Commercialization programs.
  • Improving effectiveness and efficiency in delivering agriculture support programs - addressing soil health issues; and improving farm management through extension services.
2.2 Fertilizer Donations

Following a deficit in fertilizer availability in the AIP program in 2022/2023, the Government asked DPs to consider donating fertilizer to the program. In response, the following donations were made:

NoDevelopment Partner/GovernmentAmount of the Donation (MT or US$)
1Morroco Government10,000MT Monoammonium Phosphate (MAP) which will be blended into about 52,000NPK.
2African Development Bank20,000MT NPK
3Russian mineral and potash fertilizer manufacturer - Uralchem20,000MT NPK
4Japanese EmbassyUS$5.0 million (in process for the 2023/2024)
2.3 Milestones in AIP Reform

Following the DPs’ recommendations, the Government opened up discussion on AIP reform. In May 2023, the PS communicated that the AIP reform Cabinet paper was developed and pending Cabinet review and approval. The AIP reform in the Cabinet paper included improved targeting (AIP for productive farmers by removing those that can afford inputs and the bottom poor farmers who can be reached by social protection programs); reduced number of beneficiaries (reduction to 1.5 million from 2.5 million in the preceding year); gradual phase-out AIP in the next 5 years (20% annual reduction) while linking farmers to commercialization programs.

In August 2023, the Minister of Agriculture made a Ministerial statement in Parliament in which among others indicated that AIP implementation shall start on 1st September 2023. However, the program failed to start and the Government response through the media was that logistical arrangements (especially fertilizer procurement) were still in progress.

On 17 October 2023, the Minister of Agriculture made a press release on the 2023/2024 implementation which among others announced various reforms. The reforms included a reduction in the number of beneficiaries and then integration of those that fell off into Social Cash Transfer programs; a reduction in seed voucher value; targeting productive farmers and a reduction in the overall budget (nominal value) compared to last year.

Section 3 below presents a tracking of influence on AIP reform following DCAFS recommendations. Then section 4 brings Rolling Talking Points from DCAFS to the Government on outstanding issues in the AIP reform for attention in 2023/2024 as well as next year and beyond.

3.  TRACKING INFLUENCE ON DP’S RECOMMENDATIONS TO AIP REFORM

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4.  ROLLING TALKING POINTS

  1. Applaud: The DCAFS would like to applaud the Government on the following:
    1. Milestones in AIP Reform: The reduction in the number of beneficiaries by 40% and targeting productive farmers is a demonstration of commitment to improve the efficiency of the program and value for money in ensuring increased production and productivity.
    2. Budget cut: The 5.21% (which is about 30% in nominal value) budget reduction for fertilizer and goats in 2023/2024 compared to 2022/2023 is a strategic direction in lessening the burden of the program on the government budget. We expect that this reduction will translate into the allocation of the savings into other sector areas that are catalytic to agriculture and economic growth such as extension, research and innovation.
    3. Starting time of implementation: The release of AIP implementation and modalities a month earlier compared to last year (17 October 2023 compared to 17 November 2022) deserves applause in view that it is commencing before the first planting rains. This is a shift from last year which denied farmers access to improved seeds.
  2. Concern: From the above observations, DCAFS would like to bring to the attention the following concerns:
    1. Voucher value: Farmer contribution to AIP fertilizer is still fixed while Government contribution is in practice flexible. The government contribution is capped by the budget, which is set early in the year most likely before the fertilizer price is known. Once the fertilizer prices change, which is inevitable and highly probable, the cost overrun would likely be a common occurrence year-in and year-out.
    2. Fertilizer volume availability: Malawi is experiencing a forex shortage which according to the Fertilizer Association of Malawi is already adversely affecting fertilizer imports. This raises a concern for the timely procurement and distribution of fertilizer especially to the estimated 31.5% fertilizer to be made available (102,000 MT is reported available against a target of 149.024 MT). The 2022/2023 season was seriously crippled by delayed fertilizer distribution which affected crop production resulting in the current food insecurity situation. It is from this background that any delayed input supply will adversely affect crop yield for a consecutive year.
    3. Beneficiary database: Much as the productive farmers are the primary beneficiaries, it is not yet clear how the targeting will be run to ensure that only productive poor farmers benefit from the program. Key issues on this include “How are the four mentioned databases (the Unified Beneficiary Register; last year’s AIP Beneficiary Register; National Agriculture Management Information System (NAMIS) and Farmer Organization Register) going to be synchronized?”
    4. Selection criteria: There is ambiguity about how beneficiaries will be identified. In one place, the AIP guidelines state that the “identification of AIP beneficiaries will be done centrally through random selection to avoid biases and will be based at GVH level.” On the next page, it says that “productive farmers will be selected from the validated farming household register based on the above-stipulated criteria. For the first time this season, beneficiaries will be identified based on constituency they below [sic].” These two statements are clearly at odds with each other.
    5. Linking with Social Protection program: The ministerial statement lists 1 million former AIP beneficiaries who will now be dropped from the program and who will be absorbed by other programs, including the Social Cash Transfer Program, the Climate Smart Public Works Program and AGCOM. However, it is not clear as to what process will be used to transfer dropped AIP beneficiaries to social protection programs. Much as these said programs have a window to expand, it is unclear whether these programs have sufficient budget for expansion to absorb all AIP dropped beneficiaries.
  3. Encourage: The DCAFS would like to encourage the Government to maintain the bold decision and steps in AIP reform both in the short (2023/24 Year) and medium to long term (next year and beyond).

2023/2024 Implementation Year

  1. Following AIP reforms, it would be strategic to see savings directed to support proven drivers of growth such as soil health management, research and innovation, irrigation development, high-value crops and market infrastructure development. There is evidence that much can be accomplished by the strategic investment in designated agricultural science. In addition, investing in soil health through sustainable practices would help to minimize environmental impacts and ensure the long-term viability of agricultural activities.
  2. There is a need for clarity on the selection criteria and methodology of the AIP productive farmers. Key areas that need clarity include from what database will beneficiaries be selected? Who exactly can access subsidized fertilizer? If more than 1.5 million farmers meet the criteria, who will be prioritized and what will be the methodology? “How are the four mentioned databases (the Unified Beneficiary Register; last year’s AIP Beneficiary Register; National Agriculture Management Information System (NAMIS) and Farmer Organization Register) going to be synchronized?”
  3. There is a need for clarity on the process that will be used to transfer AIP beneficiaries who have been dropped to Social Cash Transfer and the Climate Smart Public Works Programs. In addition, there is a need for a good analysis and clear plan to ensure that the said social protection programs can expand and absorb all AIP-dropped beneficiaries.
  4. It is important to have an effective monitoring and evaluation system for the program. This among others calls for a functional AIP multi-stakeholder task force including Farmers Union, Fertilizer Association, Anti-Corruption Bureau (ACB), Development Partners; Malawi Police, Seed Traders Association as well as other relevant ministries such as the Ministry of Finance, Ministry of Trade and Ministry of Local Government. This task force among others shall have a consistent schedule of bi-weekly meetings to allow sharing of information and jointly agree actions to resolve challenges. In addition, independent AIP monitoring and evaluations should be commissioned which shall inform the necessary swift implementation adjustments in the course of the season and annual lesson learning to inform subsequent seasons.

Next year and beyond

  1. The government should consider having farmer contributions flexible to allow for changes in fertilizer prices while fixing voucher value. AIP already allows for variable farmer contributions to seeds, so allowing varying farmer contributions to fertilizer is undoubtedly possible. The price of fertilizer is determined by international markets (over which the government has no control) at the time of purchase. The government contribution is capped by the budget, which is set early in the year before the fertilizer price is known, therefore, having a flexible voucher value risks AIP budget overrun.
  2. Continue rethinking the AIP to a smaller and smarter program with a gradual phasing out approach. Considering the status of the environment in Malawi and the effects of climate change, the program should strive to reduce farmers’ dependence on inorganic fertilizers and promote climate-smart agricultural techniques. We urge the Government to come up with a clear strategy for options for combining organic and inorganic fertilizers in AIP.
  3. Targeting productive farmers in AIP should be determined by fertilizer pricing modeling. The government should consider setting farmer contribution so that the demanded fertilizer quantity matches the available quantity; against the current attempt to do selection according to predefined criteria. In 2023/2024, a simple price mechanism modelling by IFPRI showed that setting farmer contribution at K15,000 per bag would consequently drive farmer demanded AIP fertilizer to 543,000MT; while raising farmer contribution to K40,000 would drop fertilizer demand to 156,000MT. This modeling entails that price determines the demand such that the most productive farmers will buy without the need for targeting.