An Action Plan for Developing Agricultural Input Markets in Zambia

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I. Introduction Zambia’s agricultural transformation from traditional subsistence farming to modern commercial farming has proven to be an immense challenge. Consequently, per capita cereal production is declining, and the natural resource base is degrading through nutrient depletion and chitemene (slash and burn). Agricultural productivity is low, especially in the smallholder sector where only 20%–30% of the farming households are estimated to use modern inputs including improved seed, mineral fertilizers, and crop protection products (CPPs). Without adequate, timely, and affordable supply and use of modern inputs, Zambia’s agricultural sector cannot confront the challenges of food security, agricultural growth, and environmental protection. II. An Assessment of Agricultural Input Markets in Zambia Although private sector participation increased in the aftermath of liberalization in the early 1990s, full liberalization was never achieved, and various interventions and distortions continued to create disincentives for the private sector to realize its full potential, especially in the fertilizer and seed markets. As a result, agricultural input markets (AIMs) remain underdeveloped and fragmented. Consistent with the GRZ policy statements, the overall objectives of achieving well-functioning AIMs in Zambia are to reduce the cost of input supply and increase the use of modern inputs by making them more profitable and easily accessible to small-scale farmers. Guided by these objectives, IFDC and MSU/FSRP, in collaboration with MOA/GRZ, conducted an assessment of AIMs and prepared an action plan for creating well-functioning input markets in Zambia. The assessment focused mainly on the following themes: • Functioning and performance of input markets—fertilizer, seed, and CPPs. • Constraints affecting the performance of AIMs, with a special focus on policy, human capital, finance, market information, and regulation. • Factors affecting input demand. • Potential of the private sector to supply inputs in a cost-effective manner. • Measures needed to strengthen the performance of AIMs. Constraints Affecting the Performance of AIMs Macropolicy Constraints The development of well-functioning input markets in rural areas is hampered by a depreciating exchange rate; high interest rates and stringent collateral requirements; and the poor state of rural infrastructure. Market Development Constraints Non-Conducive Policy Environment—In spite of liberalization, interventions by various entities, including the government, continue to distort the functioning of the input markets and discourage the effective participation of the private sector by creating uncertainty and inconsistency in the policy environment. This applies specifically to the Fertilizer Support Program (FSP), which involves: fertilizer distribution through a subsidy; GRZ procurement of fertilizers through tendering; and a 15% duty on insecticides. Inadequate Human Capital—Due to the scarcity of independent dealers in rural areas, farmers do not have easy access to inputs; they typically have to travel 20-30 km to purchase inputs. Where there are retailers, they lack technical knowledge about the products they are selling and business and marketing skills. Limited Access to Business Finance—Access to finance for input dealers is made difficult by high interest rates and stringent collateral requirements and compounded by the limited banking facilities in rural areas. The high rates of loan default and poor mechanisms to enforce contracts have also discouraged the development of the retail networks. Lack of Market Transparency—The lack of timely and accurate information about different market segments has hampered the development of input markets in Zambia. Although MACO has started collecting information about selected markets, dissemination of that information remains weak. Ineffective Enforcement of Regulatory Frameworks—Although the GRZ has enacted different rules and regulations about quality, standards, and measures, enforcement remains weak because the responsible agencies are understaffed and under-funded. Constraints Affecting Input Demand Agricultural inputs are not widely used by smallholder farmers; only 20% use fertilizers and 30% use improved seeds.1 A key reason for low input use is high input/output price ratios, which keep the profitability of fertilizer use low. Other factors constraining demand include lack of agricultural credit, lack of education and extension support, and adverse agro-ecological conditions, which constrain fertilizer response and thereby its profitability. The approximately 800,000 small-scale farm households in Zambia can be divided into three main groups: Group 1 consists of approximately 200,000 farmers who have a commercial demand for improved inputs and would benefit from market improvements; Group 2 consists of another 200,000 smallholder farmers for whom fertilizer use is profitable or potentially profitable, and who have limited commercial demand for inputs, and Group 3 consists of the remaining 400,000 smallholders who have limited effective demand for inputs due to limited purchasing power. Commercial demand from Groups 1 and 2 is met by commercial supply (private input dealer). Both commercial and non-commercial demand is met by non-commercial (at cost) supplies from NGOs and government programs. Technical Constraints The key technical constraints are outdated and uniform fertilizer recommendations, soil acidity, and inadequate research and extension support. For example, although aluminum (Al) toxicity is the principal constraint in the highly acidic soils in Zambia, lime recommendations continue to be based on soil pH. The growing misconception that the application of lime alone can improve crop yields without fertilizer use is also a constraint. III. Potential of the Private Sector Many governmental interventions are justified on the grounds that the private sector is not capable of supplying inputs. Therefore, the team paid special attention to assess the potential of the private sector to supply inputs. The team’s assessment indicates that the private sector has good potential to supply inputs to Zambian farmers in a cost-effective manner. However, because of the constraints identified earlier, this potential has not been realized and will not be realized in the short-to-medium term. A proactive approach is needed to modify distorted policies and create human and institutional capacity to provide greater incentive for private sector participation in market development. IV. An Action Plan for Developing AIMs in Zambia The Approach To realize the latent potential of the private sector and create effective and efficient input markets in Zambia, various policies and programs are recommended (Matrix B). These measures can broadly be divided into five groups: A. Policy options for the role of the government in input markets. B. Private sector capacity-building programs. C. Investment environment enhancement programs. D. Technology transfer programs. E. Infrastructure development programs. Programs or options under policy reform, private sector capacity building, and infrastructure development will primarily impact the supply-side of the market equation and, thereby, contribute to a shift in the supply curve to the right (and reduce the supply price), while those under technology transfer, investment enhancement, and infrastructure development will largely influence the demand-side by improving the efficiency of input use and output marketing. A. Policy Options for the Role of Government in Input Markets There is a need to create a market-friendly environment to promote the development of competitive markets. To this end, the government, donors, and NGOs should not intervene in the marketplace. The GRZ should clearly articulate and implement its fertilizer marketing policy. Since the FSP accounts for a large share of the market (over 40%), it is strongly recommended that the government should implement a program of phased withdrawal from the market. Where government support is considered necessary for humanitarian (natural disaster or vulnerable groups) purposes, such support should be implemented in a market-friendly manner by selecting appropriate instruments. In this context, three options are proposed based on the classification of smallholders and the supply and demand scenarios discussed in Section II. Option 1: Non-Commercial Supply Meeting Commercial Demand—The government can elect to service only those farmers who are already willing and able to pay the full cost for the inputs. In addition, resources saved from FSP can be channeled into the development of commercial demand among farmers from Group 2. However, in the long-term, the government should allow the private sector to satisfy commercial demand. Option 2: Commercial Supply Meeting Non-Commercial Demand—The government can also opt to continue to meet non-commercial demand among smallholders by supplying subsidized products but start the process of developing a functioning input market by allowing commercial suppliers to conduct input distribution without governement contracts. Option 3: Commercial Supply Meeting Commercial Demand—The government can phase out the FSP and facilitate market development without the assistance of government price subsidies and distribution programs. Traders will service those farmers who can pay the full cost. For some of those farmers who cannot use inputs profitably at the full cost, complementary investments in the agricultural sector should provide relief in the medium to long term. As part of Policy Options 1 and 3, it will also be necessary to indicate what (if any) alternative poverty-alleviating, non-market distortionary measures will be implemented that would affect those farmers without commercial demand. B. Private Sector Capacity-Building Programs 1. Development of Human Capital—To improve the availability of inputs in rural areas, an integrated input distribution network should be developed by establishing a large number of skilled and knowledgeable input dealers in rural areas and linking them with wholesalers, and wholesalers should be linked with importers. Human capital development efforts will also be needed in the public sector, especially in the area of market information and quality control enforcement explained below. To sustain the efforts in human capital development, an association of input dealers called Zambia Agri-Input Dealers Association (ZADA) should be established and ZADA staff members trained in administrative and technical matters. 2. Improved Access to Business Finance—To improve access to finance by importers and dealers, two risk management funds must be created. Unlike the funds that were operated primarily unsuccessfully in the past, these funds are geared to share risks among three key stakeholders, namely, the input dealer, the banker, and the society-at-large (represented by GRZ). The first fund, called the Agri-Input Business Development Fund (ABDF) will serve input dealers and the second fund, called the Agricultural Input Import Fund (AIIF), will serve input importers. These arrangements reduce the risk for the commercial banks by spreading the risk among all the stakeholders and provide importers, wholesalers and retailers with the business capital to invest in developing dealer networks in rural areas. 3. Promotion of Market Intelligence and Transparency—To improve the flow of information and transparency in the market, a market information system should be designed, established and operated regularly. MACO should be given the official mandate to maintain and operate this system. MACO should also work with ZADA to establish public-private partnership in this area. 4. Strengthening of Regulatory Capacity—It is essential to create adequate capacity to enforce regulations in the key regulatory institutions through training and technical assistance. The activities of these executing agencies should be carried out so that they facilitate rather than hinder the agri-input business. C. Investment Enhancement Programs 1. Improve Legal Enforcement—Improvements in the rule of law are crucial for further investment by the private sector in this industry. The Credit Act is a key instrument to improve the provision of inputs on credit to smallholder farmers. 2. Facilitate Cross-Border Trade by Open Trade Policy—An open trade policy is the key to expand traders’ market area beyond the small domestic input market and for input markets to gain from economies of size. Domestic trading policies across the region will need to be harmonized to enable market integration. Maize is the main commodity on which fertilizer is used, and the restrictions on maize exports keep the producer price in the main surplus zones depressed, eroding demand for inputs. An open trade policy is therefore essential for creating effective demand for agricultural inputs. 3. Promotion of Commercial Rural Credit—Some smallholders can use inputs profitably but may not necessarily have the cash flow for pre-season purchasing of inputs. One proposal for consideration is to promote the use of crop-fertilizer barter arrangements that would allow cash-constrained farmers to pay for fertilizer with crops rather than cash. D. Technology-Transfer Programs 1. Develop Better Fertilizer and Lime Recommendations—Better fertilizer and lime recommendations based on soil type, crop and cropping system, and agro-ecology need to be developed. New fertilizer trials should be conducted in representative areas. Lime requirements of soils should be re-evaluated based on their exchangeable aluminum contents, and studies should be undertaken to correlate this criterion with field-based indicators and crop response. Educational campaigns should be launched to inform farmers about the new fertilizer, lime requirements, and alternative methods of applying lime. 2. Strengthen Research and Extension Capacity—Research capacity for the production of better seed varieties and fertilizer and lime recommendations should be strengthened. The enactment and implementation of the Plant Variety Protection Legislation are critical in attracting the private sector investment in research and variety development. Extension needs to educate farmers on the correct input use and to promote integrated pest management (IPM) for crop protection. 3. Promote Crop Diversification Through Legume-Cereal Rotations—To improve crop yields while minimizing the cost of fertilizers for smallholders, MACO should consider encouraging crop diversification through legume-cereal rotations and other crops. The promotion of higher analysis fertilizer products can further reduce fertilizer cost. E. Infrastructure Development Programs 1. Linking Chipata to Mchinji—The Nacala railway line should be extended to link Chipata to the Nacala Port. Such a link could facilitate the importation of fertilizers for the Eastern Province from Nacala and help reduce the cost of fertilizers. Since Chipata serves the border areas of Zambia, Malawi, and Mozambique, it can become a source of input supply in all three countries, and gains from scale economies would reduce input prices significantly. 2. Enlarging Market Size through Integration of Regional Markets—Integration of markets in the Malawi, Zambia, and Mozambique (MZM) triangle and the Tanzania, Zambia, and Malawi (TZM) border areas by harmonizing the policies and regulations would allow economies of scale in procurement and distribution of inputs and, thereby, reduce prices for all farmers. The country should develop infrastructure and institutions to harness benefits from such integration of inter-country markets in border areas. 3. Improving Roads in Rural Areas—The GRZ should develop rural infrastructure by allocating resources for these activities under the Road Sector Investment Program (ROADSIP) II in the development budget. This would facilitate private sector investment and enable farmers to benefit from new technologies and markets. V. Institutional Arrangements Holistic Approach These measures to strengthen the functioning of input markets in Zambia must be implemented in a holistic manner, and an optimum sequencing and phasing scheme should be developed so that the synergy resulting from the various, interrelated measures can be realized. Public-Private Partnership Both the public and private sectors have a role in creating well-functioning input markets and should work jointly in removing market development-related constraints. Government Commitment and Donor Support A strong commitment will be needed from the government for the implementation of the action plan. Above all, the government has to work with donors to raise the necessary resources to implement the action plan.
Agricultural Inputs, Private sector