22 May 2013

Zambia: Subsidy Removal Debate Rages

THE decision to remove subsidies on fuel and maize has raised a debate in Zambia with some sections of society calling on the Government to rescind its decision.

Students from the Copperbelt University (CBU) and University of Zambia (UNZA) even staged protests against the removal of subsidies leading to the arrest of a number of UNZA students who were later released.

National Restoration Party (NAREP) secretariat said the removal of subsidies on fertiliser, fuel, and maize has created serious problems for many ordinary Zambians.

No one is seriously disputing the fact that these subsidies are a huge drain on national resources.

There is no doubt that the funds could be more effectively used to develop social and economic infrastructure that could bring about development that would better benefit everyone, including the most vulnerable in our society.

The problem is really not so much whether subsidies should be removed but how Government should go about doing it and how they will address the needs of ordinary Zambians with the resulting savings.

There should be explanations about why subsidies should be removed and what the Government is doing to alleviate the pain this will cause in the short and medium term.

However, while it is appreciated that society and individuals are entitled to their opinions and right to comment on governance matters, it is also critical that issues are looked at from a broader perspective.

In this case, it is important to understand the background to subsidies in the Zambian context.

According to the Investment Dictionary, a subsidy is a benefit given by Government to groups or individuals usually in the form of a cash payment or tax reduction.

The subsidy is usually given to remove some kind of burden and is often considered to be in the interest of the public.

More often politics plays an important role in subsidisation.

In general, the left is more in favour of having subsidised industries, while the right feels that industry should stand on its own without public funds.

There are many forms of subsidies given out by the Government, including welfare payments, housing loans, student loans, and farming subsidies.

For instance, if a domestic industry, like farming, is struggling to survive in a highly competitive international industry with low prices, a Government may give cash subsidies to farms so that they can sell at the low market price but still achieve financial gain.

In 2012, the Budget allocation for the Farmer Input Support Programme (FISP) was K500 billion against actual expenditure of K1.181 trillion, representing a Budget overrun of K681.2 billion, while during the year 2011, K485 billion was budgeted against actual expenditure of K1,354.70 trillion, representing a Budget over-run of K869.7 billion.

As in 2010, K100 billion was budgeted under the Food Reserve Agency (FRA) maize marketing programme against actual expenditure K2.6 trillion, representing a Budget overrun of K2.5 trillion; while in 2011, K150 billion was budgeted against actual expenditure of K3.2 trillion representing a Budget overrun of K3 trillion.

The Budget allocations to the ministry of Agriculture and Livestock for 2011 was K1.2 trillion while for 2012 was K1.6 trillion, which was far much less than the actual expenditure on the maize marketing and FISP programmes.

The overall, agricultural contribution to GDP, according to National Agriculture Policy, is between 18-20 per cent.

President Michael Sata in doing away with subsidies said they were a drain on the national resources and hamper development and Government had argued that it would make a saving of K300 billion (KR300 million ) monthly from subsidies.

The Government is taking bold steps to facilitate practical and equitable distribution of national resources among the general populace.

"Our people have to understand that maize subsidies have been a pillar for economic inequality in our society as they only benefit the already well to do middlemen and not the targeted vulnerable groups of our society," Mr Sata said.

President Sata said he was confident that the longterm benefits of these seemingly harsh decisions outweigh the shortterm expectations.

He said the savings that would be realised, by Government, through the higher contribution by farmers towards the cost of fertiliser, would be used to increase support towards the diversification of the agriculture sector including effective livestock disease control and the construction of grain storage facilities.

The FISP is one such case where a lot of resources have been spent without Government and poor farmers recording any tangible out-come.

The Government was spending more than US$300 million annualy to subsidise maize production and mealie-meal consumption.

The Government was buying a 50 kilogramme bag of maize at K65,000 and selling it to the millers at K60,000 and part of this maize and mealie-meal was consumed in the neighbouring countries.

To some extent, even the subsidised fertiliser ended up in the neighbouring countries meaning the country was subsidising maize production and consumption not only in Zambia but also in the neighbouring countries.

The removal of subsidies will therefore, allow the Government to divert the funds to critical developmental areas such as health, education, and social amenities among other things.

The KR2.5 million which was being spent on maize subsidies can for instance translate into paving of 5,000 kilometres of roads annually, provision of free education for 300,000 children in secondary schools and an additional 200,000 children that currently drop out of Grade seven each year.

On the other hand the K2.5 million which is equivalent to the 2010 health wage bill could simply double the entire health work force of 10,400 among them 7,000 nurses, 2,400 midwives, and 1,000 doctors.

However, the history of maize subsidies dates back to the Kenneth Kaunda era and all successive governments had maintained them until last week when President Sata removed them saying they were a drain on national resources.

The subsidies were introduced in 1973.

Oliver Saasa, an economist based in Lusaka and former Finance minister Situmbeko Musokotwane during Rupiah Banda regime agreed that the maize subsidies had been around since the Kaunda era.

Dr Musokotwane said the mealie-meal coupons were part of the subsidy arrangement and fuel was also indirectly subsidised.

He said it was wrong for former Finance minister N'gandu Magande under third Republican president of the Republic of Zambia Levy Mwanawasa to mislead the nation that subsidies were introduced in 2009 for political appeasement.

Dr Musokotwane is former Secretary to the Treasury, deputy Bank of Zambia governor, during the Frederick Chiluba and Mwanawasa regimes.

He was the economic affairs advisor to Dr Mwanawasa.

Dr Musokotwane urged Mr Magande not to mislead the nation and try to come out clean.

"The subsidies were there in the UNIP era, Chiluba, Mwanawasa and Rupiah Banda," said Dr Musokotwane.

He, however, refused to give his take on the removal of subsides.

But Professor Saasa said the revision of subsidies was long overdue because they were a drain on the economy and they were not properly and effectively administered.

He said the subsidies did not help the intended beneficiaries like orphans, people living with disabilities, widows, and elderly people in society.

Prof Saasa said subsidies were heavily abused when they could have worked well to reduce poverty if vulnerable people were targeted unlike benefiting the productive age groups.

"In short, the facility was abused, otherwise, the revision of the subsidy has been long overdue," Prof Saasa said.

The other problem which Prof Saasa cited was the decision to heavily subsidise maize only a move which he said was wrong despite maize being a staple crop.

He said subsidising various agriculture products like fish farming could have also contributed to reducing poverty.

Prof Saasa, however, said the impact of the removal of subsidies will affect the attainment of the 2013 budgetary objectives unless Government tries to review the Budget mid-year and do some realignment.

He said ending the year with single digit inflation and attaining more than seven per cent Gross Domestic Product (GDP) will be difficult.

Prof Saasa said the removal of subsidies should have been spread out within a period of 18 months to allow people adjust and adapt to the changing economic trends before seeing the benefits.

He said removing maize and fuel subsidies and plans to increase Zesco tariffs almost at the same time is wrong timing because the effects will be massive on the social, economic, and political situation in Zambia.

"There was need to follow a sequence so that people can moderately adjust to the changing trends as doing so may cause some political instability which is not good for the development of the country," Prof Saasa said.

CBU senior lecturer and Dean of the School of Business Sumbye Kapena said the positive aspect of the subsidy removal on maize and agriculture inputs far outweigh the negative part.

Dr Kapena said the fact that poverty in urban areas dropped from about 67 per cent to 37 per cent while the figure in rural areas rose up to 80 per cent was reason enough for Government to abandon the subsidy programme.

He said if subsidies on maize and agriculture inputs was serving its intended purpose, Zambia could have recorded an improvement in the welfare of people living in rural because that was where 80 per cent of the population practice farming.

"The rationale is that taking fertiliser subsidy to rural people, their welfare should have been improving, but then that is where poverty levels have been going up," he said.

Dr Kapena said it is only logical that Government tried other alternatives such as social protection packages, which when scaled-up would able to carter for real vulnerable people.

Although the removal of subsidies on maize come with a negative aspect of it in the increase of price of mealie-meal, Dr Kapena said the impact should be minimal especially that even before the removal of the subsidies, millers had already started hiking the price of the commodity out of the Government recommended price of K55,000 (KR55).

"We expect that with the removal of the subsidy the price of mealie-meal will go up by 20 per cent but because of the fact that millers had already hiked the price of Government's recommended price, the impact will not be seen much," Dr Kapena said.

He said it was not a secret that in rural areas, mainly the civil servants were buying mealie-meal while the rest depended on their own grown food.

He said the scrapped subsidy would work to the advantage of the natural promotion of other foods that had for a long time been suppressed by mealie-meal.

Notwithstanding that, Dr Kapena said, Government had failed to scale up the programme as seen from the low number of food security packs and that of the beneficiaries.

Private Sector Development chairperson Yusuf Dodia said subsidising maize production and consumption had proved not to be efficient and effective.

Mr Dodia said in the last five to 10 years Zambia had provided production subsidies for maize in the form of maize seed to Small and Medium Entrepreneurs and rural farmers, and fertiliser to ensure good harvests which had paid off in the form of bumper harvests.

"It is quite evident that Small and Medium Entrepreneurs and peasant farmers need the production subsidies for Zambia to be food secure and in the medium term with good maize prices then the farmers will develop capacity to produce without subsidies.

When the maize prices become low as has been the case, and then we undermine the growth and stability of maize production," Mr Dodia said.

The maize subsidy dilemma is made up of various linkages where farmers will only become independent of subsidies if their produce is bought out at the farm gate at profitable market prices.

Mr Dodia said millers would only buy enough maize from farmers to cover one or two months of production because buying more maize would be tying up good capital.

FRA is limited by the storage capacity and financial constraints and therefore, it cannot buy all the surplus maize.

Commodity brokers tend to take advantage of the gaps in the market and make their profits there from.

"Eventually we have farmers with maize that nobody buys immediately because buyers are waiting for prices to fall. This discourages maize farming and production decreases,"

Mr Dodia saidOfcourse, the issue of maize meal has been highly politicised, but it can also be depoliticised.

If part of the money spent on maize subsidies was diverted to other cash crops, the country could achieve a much higher level of food security than the current situation.

Moreover, the majority of the world population lives on rice and Zambia had all the conditions in almost every province of the needed for the production of rice and other food crops.

A political decision needs to be made for, to adopt more rational, sensible agricultural and food security policies.

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