An Action Plan for Developing Sustainable Agricultural Input Supply Systems in Malawi

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I. Introduction Malawi is a landlocked rural economy dominated by agriculture; but the productivity of the agricultural sector is so low that nearly one-half of the population suffers from chronic food insecurity even in normal years. Approximately 70%-80% of the population is estimated to earn less than US $0.50/day. Under such conditions of poverty, food security at both the household and national levels can be ensured only through a two-pronged approach of market-based measures and well-targeted safety net improvements. In both approaches, the major focus should be on enhancing the productivity of land and labor through the application of science and technology embodied in improved seeds, mineral fertilizers, crop protection products (CPPs), and other appropriate agronomic and soil fertility-improving practices. In addition to ensuring food security, Malawi has to protect and sustain its most important natural resource, namely, the soils that feed the nation. Currently, harvested crops remove about 160,000 mt of nutrients per year while 70,000 mt of nutrients per year are replaced in the form of mineral fertilizers. Organic sources may supply another 15,000-20,000 mt of nutrients per year. Thus, there is a net loss of nutrients from the soils. This mining of nutrients must be reversed, so that the soils can be preserved for future generations. In fulfilling both socioeconomic goals, improved seeds, fertilizers, and CPPs have a critical role to play and should be supplied in a costeffective and timely manner in rural areas. II. An Assessment of Agricultural Input Supply Systems Malawi has made considerable progress towards deregulation and liberalization of the agricultural input supply systems, and the private sector has played a dominant role in supplying various inputs in recent years. Nevertheless, agricultural input markets (AIMs) are not operating efficiently and farmers do not have easy access to inputs and at affordable prices. Several factors continue to constrain the development of efficient AIMs. These factors can be divided into three broad groups, namely, macropolicy issues, market development-related issues, and technical issues. In the macropolicy group, devaluation of the Malawian Kwacha (MK), limited availability of foreign exchange, high interest rate, poor rural roads, and physical insecurity in rural areas constrain the development of input markets. The devaluation of the domestic currency not only increases the prices of imported seeds, fertilizers, and CPPs, but it also discourages investments in business development due to associated risks. Limited availability of foreign exchange constrains the import of inputs. Poor infrastructure in rural areas makes the transportation of goods and services difficult and costly and limits the supply of much-needed inputs. Physical insecurity compounds the problems associated with devaluation, high interest rate, and poor rural roads. All these factors have contributed to the concentration of suppliers in urban and peri-urban areas and are forcing farmers to travel 10- 50 km to purchase inputs. The market development-related issues consist of policy uncertainty, inadequate human capital and market information, lack of affordable finance, and poor implementation of regulatory frameworks. Policy uncertainty results from well-intentioned donor-financed and government-supported programs for supplying inputs. These programs include Agricultural Productivity Investment Program (APIP), Starter Pack Scheme (SPS), input grants under Kennedy Round II (KR-II), and the Smallholder Farmer Fertilizer Revolving Fund of Malawi (SFFRFM). By creating uncertainty in the marketplace, these programs tend to discourage private sector investment in input business. Inadequate human capital (marketing and business skills) and market information restrict the supply of products in the marketplace and result in high prices. There is generally a lack of input dealers in the rural areas. The seed and fertilizer markets are largely concentrated in towns and cities and are served by a limited number of enterprises. High interest rates and stringent collateral requirements coupled with near absence of financial service providers in rural areas make the availability of finance for business development nearly impossible. Although the country has laws on seed and fertilizers, the implementation of these laws has been far from satisfactory. The regulatory agencies are also constrained by the lack of human and financial resources needed for implementing laws and regulations. III. An Action Plan for Developing Sustainable Input Supply Systems In developing the Action Plan, the team assessed various options available for supplying agricultural inputs and concluded that the free market systems should be used to supply inputs to the farmers because these are relatively more efficient and sustainable and do not strain the fiscal resources of the country. Nevertheless, the team recognized the fact that although AIMs have been liberalized in Malawi, they are not operating efficiently. To develop sustainable supply systems, the liberalized markets must be strengthened by undertaking activities in the areas of policy reform, human capital formation, improved financial services, market information systems (MIS), and regulatory frameworks (laws related to “truth-in-labeling”). The team recommends that these activities should be undertaken in a holistic manner so that the synergies of various activities could be captured. The team also assessed the potential of the private sector in undertaking marketing activities in a competitive market environment. The team found that the private sector has latent potential to shoulder the responsibility of marketing of agricultural inputs in an efficient and sustainable manner. However, for this potential to be realized, constraints affecting their activities need to be removed. In developing the Action Plan, special attention was paid to the alleviation of these constraints. The main activities proposed in the Action Plan are are briefly summarized below. Policy Reform Overall, the macro policy environment should be conducive to the market development process. Macroeconomic stability and sufficient supply of foreign exchange are essential. It is estimated that Malawi will need approximately US $65-$80 million/year to import the necessary inputs during the 2001-2005 period. The Government of Malawi (GOM) and donors should ensure through the balance-of-payment support that these amounts are available in the market. As explained earlier, various well-intentioned donor-financed programs and government-supported activities contribute to creating uncertainty for the private sector involvement in input marketing. Both APIP and SPS are good programs because they create additional purchasing power with resource-poor farmers. However, their implementation mechanisms need improvement. Both programs should be implemented through voucher-based market mechanisms replacing donors and the government international tendering. The GOM should also use vouchers to distribute seeds for safety net purposes. Agricultural inputs received under the Japanese KR-II program should be integrated with commercial imports through transparent auctioning in the country. Counterpart funds received from such auctions should be used to establish a credit guarantee fund (explained below) for input dealers. The Agricultural Development and Marketing Corporation (ADMARC) had traditionally been a primary supplier of inputs in the country. However, after liberalization, its market share decreased substantially. In 1999, ADMARC accounted for less than 12% of the fertilizer and 1% of the hybrid maize seed markets. Nevertheless, ADMARC continues to enjoy certain advantages (e.g., free storage and transportation fleet) in the marketplace. To provide equal opportunity to all market participants, ADMARC should sell inputs at full cost and remove all implicit subsidies. SFFRFM has managed fertilizer buffer stocks in the past. Currently, there are no buffer stocks in the country. The team carefully assessed the needs for maintaining buffer stocks and concluded that there is no need to maintain such stocks. The private sector can import the necessary inputs on short notice provided they have access to finance and market information. Not only will the buffer stocks block scarce resources but also they will introduce uncertainty in the private sector planning of input supply. Because there is no need to maintain the buffer stocks, SFFRFM should be privatized. Human Capital Formation Skills, knowledge, and information needed to make input markets efficient are inadequate at all levels of the marketing chain. Importers do not have adequate knowledge about the conditions prevailing in the global input markets; wholesalers and retailers lack the necessary skills for enterprise management; and most importantly, there are few independent dealers involved in marketing inputs in rural areas. Even the bankers are not fully equipped to effectively play their role in financing the import and marketing of inputs. The Ministry of Agriculture and Irrigation (MOAI) and the Malawi Bureau of Standards (MBS) do not have adequate skilled manpower to implement the enacted laws and regulations and to monitor the quality and quantity of products for “truth-inlabeling.” Developing the human capital necessary for making input markets perform efficiently constitutes the core of the activities recommended in this Action Plan. This will be accomplished by performing the following activities: 1. Training programs for dealers (wholesalers and retailers), importers, and bankers. 2. Technical assistance in enterprise development to newly trained dealers. 3. Study tours for dealers, importers, and bankers. 4. Policy workshop and study tours for policymakers. To make dealers a dynamic force in the economy, various associations of input traders will be encouraged. Training and technical assistance for associations will be essential. In addition to developing human resources for competitive markets, training and technical assistance will be needed for building technical capacity in the seed sector—training for seed growers, capacity for inspection and quality control, and enterprise development. Improved Financial Services Finance is the lifeblood of any business activity. Without adequate access and availability of affordable finance, competitive markets cannot function efficiently. Currently, difficulties in obtaining adequate foreign exchange to cover procurements from overseas estimated at about US $65 million/year (and likely to increase to US $80 million/year by 2005) are constraining major and new entrant importers alike. If export earnings and balance-of-payment support continue at levels sufficient to ensure the availability of foreign exchange for use in procuring annual requirements, further liberalization of the market would generate significant benefits to the economy. Within the importation and internal market, vertical integration of sales and services by the principal importers and stringent security/collateral requirements imposed on all borrowers have prevented the establishment of an intermediate cadre of local dealers and traders in seeds, fertilizers, and CPPs. To foster greater competition among importers and assist with foreign exchange financing, the team recommends that an Agricultural Inputs Import Fund (AIIF) be established to supplement available foreign exchange used in raising Letters of Credit (LC) with foreign banks. The Fund will provide guaranteed foreign exchange support up to a maximum of US $1.0 million per importer per year. In addition, the team recommends that an MK 100 million Agricultural Inputs Business Development Fund (AIBDF) be established as a loan guarantee fund to cover commercial banks lending to local agricultural inputs dealers/traders. The provision of specialist training for the senior credit officers of participating banks and targeted importers and dealers would be a prerequisite for the use of both funds. Market Information Systems Information is crucial for the functioning of the market. Dealers and importers need information about local, regional, and global markets. Because every stakeholder will need the information about prices, stocks, and availability of inputs in various markets, an MIS should be created and operated by the MOAI or by the Agricultural Policy Research Unit (APRU) under a contract from the MOAI. Adequate collection and analysis of appropriate market data and information, and their dissemination through media and appropriate publications should be done regularly. Implementation of the Regulatory Frameworks Malawi has an enacted fertilizer, seed, and pesticide law, and there is a draft bill awaiting enactment to strengthen the pesticide component of this law. But the implementation of the law currently in effect and its supporting regulations remain weak due to shortage of manpower and resources. To safeguard the interests of farmers and to protect the environment and human health, proper implementation of these laws is essential. Training and technical assistance activities will be needed to strengthen the implementation of laws and to ensure “truth-in-labeling.” Technology Transfer Activities Although farmers in Malawi are aware of modern inputs such as improved seeds and fertilizers, they lack sound knowledge of appropriate technologies. Because “seeing is believing” works better than any other mechanism, large-scale demonstrations on farmers’ fields for various crops are planned in the Action Plan. These demonstrations will teach farmers about proper and environmentally sound use of fertilizers, seed, CPPs, and soil-fertility enhancing practices. These demonstrations could also be used to promote high-analysis fertilizers. To aid farmers in estimating fertilizer requirements properly, soil-testing facilities should be developed. This activity could be implemented in close collaboration with Sasakawa-Global 2000 (SG 2000) and other nongovernmental organizations (NGOs). Other Input-Specific Issues Seed—Specific efforts are required to encourage entry of new small and medium seed enterprises (SMEs) to import and/or process seeds from domestic production, with particular attention to secondary field crops such as pulses, rice, potatoes, cotton, beans, oilseeds, and others. For many of these crops, seeds are non-hybrid, so that marketing margins are going to be small and most commercial seed may be sold at 2-2.5 times the grain price. Local SMEs with low overheads could be competitive in producing and marketing such seeds. Over the last decade, government and donors have supported local seed production through small farmers and estates, but seed from these projects have not been sold by retail outlets. Instead, government projects and NGOs have bought and distributed most of this seed outside commercial channels. Hence, despite many good efforts, seed production is not linked to markets and is therefore not sustainable. Efforts should be made to help potential entrepreneurs (scientists, seed farmers, seed growers’ association, and others) to establish viable seed enterprises—buying seed from farmers, packaging it with a brand name, and distributing or selling it to retail outlets for farmers to buy. Currently, the United States Agency for International Development (USAID), with Iowa State University and Purdue University, is preparing a project to assist the small seed growers. There is room for several projects, just as there is room for dozens of new seed companies in the Malawi (and regional) seed market. Fertilizers—Some researchers have concluded that farmers do not need to apply phosphate fertilizers because the soils in Malawi are rich in phosphorus (P). However, limited soil tests have indicated that P levels are generally low in the soils. Hence, if farmers apply a small quantity of phosphate fertilizers, it is possible that the P is absorbed by the soil. MOAI should fund research on this crucial aspect of P dynamics, so that the soils of Malawi do not get completely depleted of P. Malawi has abundant phosphate rock (PR) resources. Because these PRs are of low reactivity, they cannot be used for direct application. However, PR can be compacted with single superphosphate (SSP) or triple superphosphate (TSP) for use in farmers’ fields. Research on the agronomic response of crops to compacted PR should receive priority in future work. Malawi’s heavy dependence on tobacco for export earning is nonstrategic. To promote diversification in export crops, GOM should consider promoting the use of diammonium phosphate (DAP) for basal dose and urea for topdressing for maize cultivation followed by groundnuts or pulses (both of these commodities seem to have good export potential). These crops can use residual P from basal application of DAP and fix their nitrogen requirements from the atmosphere. The country can benefit from additional export earnings at no additional nitrogen cost. In sulfur-deficit areas, supplementing the supply of sulfur should be encouraged. Crop Protection Products—With the uncontrolled status of the Malawi CPP market, it has been estimated that the country has over 30,633 L and 2.478 million kg of outdated pesticides in stock. Furthermore, several unapproved compounds, such as Dieldrin, are sold in the market and other products are inappropriately used on food crops or in various cases of suicides. Consequently, a safe and environmentally sound disposal of the obsolete stock of pesticides and enforcement of laws and regulations should receive top priority for Malawi. Similarly, proper monitoring and education are essential to avoid harm to human health and the environment. Additionally, efforts should be made to (1) promote the use of less toxic CPPs; (2) intensify research and extension on bio-control and integrated pest management (IPM); (3) develop easier, cheaper, and low-risk regulations for biopesticides; and (4) improve residue testing on food products. IV. Regional Integration While it is essential that market development activities be promoted in Malawi, input market development activities should be considered for the subregion consisting of the M-Z-M Triangle (Malawi-Zambia-Mozambique) and Zimbabwe to derive larger benefits from economies of scale and harmonization of policies. For example, one pre-shipment inspection of imported inputs, e.g., fertilizers, at the port of entry should be sufficient for input movements in these countries. Such a rule can save considerable costs incurred in pre-shipment inspection for each country and preshipment inspection of inputs involved in intraregional intercountry trade. Likewise, harmonization of policies for seeds and CPPs can contribute to efficiency in input marketing. It is recommended that a comprehensive study of policies and rules and regulations prevailing in these countries be undertaken to develop an Action Plan for promoting regional input markets. V. Potential Benefits of the Action Plan The implementation of the Action Plan will generate several socioeconomic benefits for Malawi. It will promote food security and environmental protection by lowering the prices of inputs, making inputs easily accessible to farmers in rural areas, and improving access to new production technologies. The contribution of the Action Plan to foreign exchange earnings will also be significant through crop diversification and increased food production. VI. Implementation Arrangements In implementing the Action Plan, care must be taken to preserve the holistic nature of the proposed measures. It is recommended that core activities dealing with policy reform, dealer development, and financial services should be implemented as a project. Other activities could be implemented as subproject activities. To facilitate the implementation of the Action Plan, a Task Force (TF) consisting of stakeholders from the private sector, donor community and the government should be created. The TF should have direct access to the MOAI and the donor committees on agriculture and food security. The Malawi Agricultural Sector Investment Programme (MASIP) should coordinate TF’s activities and assist in making necessary arrangements for stakeholders’ meetings.
Agricultural Inputs, Information systems