Fighting poverty through subsidies and loans

The defiance is nothing but the re-introduction of fertilizer subsidy, which Malawi phased out in 1996 on the advice of the IMF.

Malawi’s Finance Minister Goodall Gondwe, who served as IMF Africa region director when the subsidies were scrapped, says he is optimistic that their re-introduction will restore Malawi’s glory of being the land of the plenty.

“We believe the subsidies would boost food production and counter perennial hunger. The subsidy is expected to take up about US$272 million of the government's US$9.5 billion Malawi’s budget of this year.

Gondwe says that 50,000 metric tonnes of fertiliser would be distributed to a targeted 2 million poor
households.

"The fertilizers will only be given to very poor people who cannot afford to buy fertilisers. These are
the people who are living below the poverty line and they run out of food most of the time,” he said.

Gondwe said that the subsidies on fertilizers is not defiance to IMF and World Bank advice, but an attempt to find solution to the problem of food insecurity in Malawi.

The International Monetary Fund and World Bank advised Malawi to phase out subisidies as they were wasteful and destructive to poor economies.

Gondwe argues that the subsidies were a spendthrift because they were not precisely targeted. Gondwe says the distribution of the fertilizers to the rural poor is an experiment, which if in the longrun
proves effective would be adopted as Malawi’s agricultural policy.

“The truth of the matter is that the outcome of this subsidy programme would give lessons to both donors and government. We will learn why the subsidies that were scrapped as a result of our adopting IMF structural adjustment programmes were a flop.

Malawi’s finance minister says the major donors are implementing the scheme with approval of the IMF and World Bank, who has given the country the benefit of doubt.

The IMF and World Bank forced some African countries in the 1980s to fizzle out fertilizer subsidies
because poor countries had no financial muscle to sustain them. The other side of the story is that the
elimination of subsidies was also one of the conditions for aid.

Malawi now insists on food subsidies because of its perennial food shortage problems. The country’s
agriculture minister Chakufwa Chihana says 1.3 million Malawians desperately need food. Malawi is not the only country hit by hunger, its neighbours Zimbabwe, Swaziland, Lesotho, Angola and Mozambique face similar problems.

While some donors are sceptic about food subsidies, others have welcomed it describing it as the feasible to tackle the problem of food insecurity.

Malawi, which needs 2.2 million tonnes of grain to feed its population of 12 million has been harvesting low yields due to poor soil nutrients.

In Malawi, currently harvested crops remove about 160,000 tonnes of nutrients per year while 70,000
metric tonnes of nutrients in the soil are taken up by crops.

Although government has introduced inputs subsidies in a bid to end hunger, the fertilizer intensity of 43 kilograms per hectare for Malawi remains much lower than the world average of 100kg/ha. China, for instance, use 600kg/ha, which explains why the country is able to feed its huge population.

The Malawi scenario implies that while harvested crops are using up the nutrients from the soil, these
nutrients are not being fully replenished. Malawi soils are therefore suffering from a continuous mining of nutrients.

Now it remains to be seen if the new subsidies will enable farmers to produce the required 2.2 million
tonnes of grain required to feed the population of 12 million in a country where the economy is mainly based on rain-fed agriculture, making it susceptible to erratic climatic conditions.

But is Malawi relying only on fertilisers subsidies to fight poverty?

Not at all. The country's newly elected president Bingu wa Mutharika last month told Parliament sitting
in Malawi capital Lilongwe that there was need to implement a "tough programme" to resuscitate Malawi's ailing economy.

"To fight poverty successfully, we need an annual growth rate of at least 6 per cent," he said,
observing that last year's growth rate of 4.4 per cent was "not good enough," he said.

Mutharika said the decision by donor countries and institutions to withhold over US$75 million in aid,
coupled with a high domestic debt was holding down the economy.

The International Monetary Fund (IMF), the World Bank, the European and some donor countries (notably Britain and Denmark) suspended budgetary assistance to Malawi, citing concerns about the way the previous government of Bakili Muluzi spend public funds.

"The priority of my government is to resume economic cooperation with the IMF and access the resources needed to revamp the growth process," Mutharika told MPs.

Malawi's domestic debt stands at US$600 million and the external debt at US$2.9 billion.

Mutharika added: "I am a strong believer in restoring micro-economic stability for the resumption of growth. We plan to lower interest rates, find a stable foreign exchange regime and reduce inflation to a single digit."

The new government is battling with interest rates hovering at around 40 per cent, an inflation rate of
14 per cent and foreign exchange import cover of only 2.6 months.

The local currency, the Malawi Kwacha has depreciated by over 25 per cent from about 70 units to the dollar in 2002 to about 106 units to the green back now.

The government has also announced that it has set aside US$8 million for loan scheme for the poor.