While the Government of Malawi prepares to implement the ninth consecutive Farm Input Subsidy
Program (FISP), this paper takes stock of the literature and complements past evaluations by estimating
the general equilibrium effects of the program. The objective is to better understand the various positive
and negative spillover effects of the program, including direct and indirect production or income effects in
the agricultural sector and beyond, government financing implications, and the impacts on Malawi’s
foreign exchange position. We calibrate a computable general equilibrium (CGE) model with a recently
developed but backdated 2003/04 social accounting matrix (SAM) for Malawi—this represents a
“normal” year prior to the first introduction of FISP in 2005/06—to evaluate the program impacts, using
the broad design elements of the 2006/07 program as basis for the policy shock. Focusing on the maize
component of FISP, this entails providing around 150,000 metric tons (mt) of fertilizer at a heavily
subsidized rate (about 72 percent of the cost is subsidized) as well as modern maize seed varieties to just
over half of Malawian smallholders. The resulting intensification of the maize production system raises
maize production in our model by 14 percent and maize yields by more than 30 percent. We also find
crop diversification increases as some land formerly under maize cultivation is reallocated to other crops
following the increased production of maize. While returns to factor of production rise rapidly, the
program contributes little to growth and national poverty declines marginally (i.e., by less than three
percentage points) when overall program effects (including price and financing implications) are taken
into account.
While many analysts have remained positive about FISP despite its cost, the Malawian
government has in recent years faced a particular challenge of maintaining the program during what has
proven to be one of the most challenging economic periods in the past two decades. Shortly after the
fertilizer price shock in 2008/09, which caused program costs to skyrocket, a series of external shocks—
most notably a sharp decline in tobacco prices—placed tremendous pressure on the country’s balance of
payments position. Government was able to contain program costs by maintaining a fixed exchange rate,
but the dwindling foreign exchange reserves eventually meant that policy position became untenable by
early 2012. The sharp devaluation that followed will have a dramatic effect on program costs in the
2012/13 implementation period. Our analysis therefore also considers implications of external shocks
(fuel, fertilizer, and tobacco prices) and the exchange rate regime on FISP costs and effectiveness. The
substantial cost of the program has always meant the benefits of the program have been closely
monitored. Other socio-economic policies with similar objectives are also frequently offered as
alternatives; hence, a final contribution of the paper is to consider the effects of targeted and universal
social cash transfer programs. We find that while a cash transfer with a similar budget may be more
effective at reducing poverty, it does not promote value addition and food production in the way that FISP
does. Ideally, therefore, FISP and cash transfers should be been seen as complementary rather than
competing, with the former targeting cash-constrained poor farmers with the potential to significantly
increase staple food production and the latter to the poorest labour constrained households with little or no
land.
Keywords: Agricultural input subsidies; general equilibrium models; Malawi; social cash transfers