Impact Of Agricultural Market Reforms On Smallholder Farmers In ...

In 1986, Malawi’s economy deteriorated due to falling tobacco and tea export prices, severe
droughts, and the cut-off of transport routes through Mozambique. A new series of World Bank
programs and loans were initiated in 1987. In the agricultural sector, this meant freeing
smallholder output markets for all crops except for cotton and tobacco. However, although private
trading was allowed, producer prices for commodities such as maize were still fixed by the
government. In 1990, smallholder farmers were allowed to grow burley tobacco under a quota
system. Cotton production and marketing were liberalized in 1991. In May 1993, a policy was
announced to open up both importation and distribution of smallholder fertilizers to the private
sector. Fertilizer subsidies were gradually reduced from an 11 percent subsidy level in 1994 to 5
percent in 1994/95. Production and marketing of hybrid maize seed was liberalized in 1994/95
while complete elimination of fertilizer subsidies was effected in 1995/96. Tobacco marketing was
freed up in 1994 to allow the access of smallholder farmers to the country’s tobacco auction floors.
The smallholder tobacco production quota system was repealed in 1997/98.
Before the reforms, the main access of small farmers to agricultural credit was through the
Smallholder Agricultural Credit Administration (SACA). The SACA was established in 1988 to
provide inputs on credit (fertilizers and seeds) to smallholders through farmers clubs or
associations. The loan repayment rates were among the highest in the third world (about 90
percent), mainly because the government did not extend a new loan to any group which did not pay
back in full the previous year. However, loan recovery rates dropped drastically during the 1991-
92 to 1993-94 period because of political instability. The introduction of the multi-party system in
1993 caused uncertainty and confusion among farmers causing massive loan default (N’gon’gola,
1997). The SACA collapsed soon there-after and was replaced in 1994 by the Malawi Rural
Financial Corporation (MRFC). However, unlike SACA which subsidized loan interest rates to
small farmers, the MRFC operates like a commercial bank and charges market interest rates which
were above 50 percent in the period 1995/96. To insure loan recovery, the MRFC extends loans
mainly to tobacco farmers clubs and cash crop growers.
Until 1999, a maize price band was still in effect, whereby ADMARC established a maize floor
price for smallholders and a ceiling price for consumers. Private traders were allowed to trade
freely within the price band and ADMARC acted as buyer of last resort for staple food crops as
well as manager of strategic reserves. Since the liberalization, ADMARC has been implementing a
divestiture program and has been closing uneconomic market locations. It nevertheless is still a
major player in agricultural marketing. The irony in ADMARC’s restructuring program has been
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