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A Factsheet - July 2002

Malawi—The Food Crises, the Strategic Grain Reserve, and the IMF

Adverse weather has contributed to recent crop failures and food shortages in a number of countries in southern Africa, including Malawi. But the causes of food shortages in Malawi are complex, also including lapses in the government's early warning systems, distortions in domestic markets, and mismanagement of food reserves. This factsheet describes these factors and the role played by the IMF, which has been misrepresented in a number of media reports. While the April-June 2002 harvest has temporarily alleviated the crisis in Malawi, large shortages are expected later in the year. Urgent action is needed to prevent starvation. The authorities are elaborating an appropriate response with the donor community.

Food policy and IMF- and World Bank-supported programs

The government's strategy under IMF- and World Bank-supported programs in 1998 and 2000 was to end government interventions in the maize market while providing targeted food subsidies to the poor. Interventions through the Agricultural Development and Marketing Corporation (ADMARC) distorted prices and other market signals and impeded the development of the market. They were expensive, as the government bore the costs of these interventions by repeatedly bailing out ADMARC. In addition, they rarely were transparent and so raised governance issues.

In 1998, the government agreed to eliminate price support operations for maize by ADMARC and prepare it to operate on a strictly commercial basis. It agreed to establish a National Food Reserve Agency (NFRA) to handle disaster relief involving the management of the strategic grain reserve in place of ADMARC, with a clear delineation of responsibilities between the two agencies.

Immediately upon its establishment in 1999, however, the NFRA engaged in substantial price stabilization operations, thus taking over the price support function relinquished by ADMARC. Following a bumper harvest, the NFRA intervened in the market to support prices and raised its stocks to 167,000 metric tons by end-1999. The purchase was financed mostly by commercial bank loans. (In contrast, between 1987 and 1999, Malawi maintained a strategic grain reserve that peaked annually at some 80,000 metric tons.) By behaving in this way, the NFRA was likely to become a burden on the budget, as with ADMARC before it. The World Bank and IMF staffs therefore urged the government to develop a transparent, rule-based, and cost-effective food security policy. In particular, they urged the formulation of new operational guidelines for the NFRA.

In 2000, the government commissioned a study, financed by the European Commission, which was to form the basis for the new food security policy. The study concluded that a maize buffer stock of between 30,000 and 60,000 metric tons would be sufficient to address a localized disaster. The size of the buffer stock was based on the use of early warning systems (which would signal an impending crisis six to nine months ahead), on the logistics of importing maize, and on the high cost of maintaining a maize buffer stock, which was generally about 20 percent of the value of the stocks themselves. Instead of a large physical buffer, the study recommended the buildup of international reserves to finance any maize imports needed to prevent food shortages.

The government of Malawi subsequently adopted these recommendations, which implied a substantial reduction from the large end-1999 stock to the level of 60,000 metric tons. Implementation also required a change in the NFRA's deed of trust to eliminate the possibility of price support interventions and to specify that the NFRA would engage only in disaster relief operations. These measures were supported by the World Bank's Third Fiscal Restructuring and Deregulation Program, approved by the Bank Board in December 2000.

The World Bank has served as the lead advisor on agricultural and food security policy reform. Given the impact of agriculture on the budget, however, certain elements of the reforms were supported under recent IMF arrangements as well. But while the government did make reference to the reduction in the maize stock and the restriction of the NFRA's role to disaster relief in its letter of intent to the IMF of December 2000, the letter did not include any conditionality related to food security policy.

The emergence of the food crisis

The causes of the food shortages are complex, but begin with output declines. Rainfall in the 2000/01 and 2001/02 agricultural seasons was uneven, with dry spells and floods reducing yields substantially. Producer prices were depressed in 2000/01 when the government sold its grain reserve to the domestic market after a bumper harvest. This reduced output by leaving farmers with insufficient income to purchase fertilizer and seeds, and contributed to defaults on agricultural credit. Moreover, as part of the coping strategy at the beginning of 2002, crops were harvested prematurely, further reducing output in the agricultural year that began in April 2002.

Following reports from nongovernmental organizations that some regions were experiencing starvation, the government undertook field visits in February 2002, which revealed that the food shortages went beyond the usual seasonality. The government declared a food emergency in late February 2002. It turned out that two components of that carefully formulated food security policy had not been as effectively implemented as expected:

  • The early warning systems did not signal a crisis. These systems, which included monitoring and forecasting of weather and crop production by satellite as well as assessments on the ground, did predict a maize shortfall in 2001. But they relied on flawed agricultural statistics, which indicated that the shortfall would be more than compensated for by an increase in other food crops. The failure of the systems became only apparent in February 2002, when Malawi ran out of food.

  • The NFRA had sold virtually the entire maize stock by the beginning of 2001 and could not replenish the reserve owing to the bad harvest in 2001. It was generally acknowledged that it was necessary to rotate the grain reserve, that is, to sell all maize but to purchase in parallel fresh maize. However, the NFRA sold the maize stock before information on the 2001 harvest was available. The government started importing 150,000 metric tons of maize in late 2001, but the maize arrived late because of logistical problems.

With a crisis identified, the government expanded its social safety net programs, donors increased their humanitarian efforts, and the World Food Programme started an emergency operation. As part of this effort, the IMF mission that arrived in Malawi on February 25 immediately focused its discussions with government and donors on a response to the crisis.

Although the crisis was alleviated in April with the new harvest, the U.N. food agencies concluded in late May that the new harvest was going to be worse than last year's. They projected a shortfall of 485,000 metric tons of maize for the period August 2002-March 2003. They estimate that half of the shortfall amount should be made available as humanitarian aid to the poor, and half on commercial terms. Donor pledges broadly cover the assessed humanitarian needs, and the European Commission is restocking the strategic grain reserve. The government intends to undertake a large part of the commercial imports and provide this maize at a subsidized price. The IMF staff is discussing with the authorities the budgetary and balance of payments impact, with the understanding that any government spending necessary for food relief would be accommodated by increasing the fiscal deficit.

Strengthening food security policy

The strategy to improve the transparency of maize operations, stop price distortions, and reduce the costs to the budget was not successful in several areas.

  • Improving transparency. ADMARC, which continued to operate the strategic grain reserve on behalf of the NFRA, sold 68,000 metric tons between August 2000 and January 2001, without authorization--but also likely without the knowledge--of the NFRA management. Moreover, there have been allegations in the news media that some of the maize went to politically connected people at below market prices. An audit by the Auditor General has been conducted, and the Anti-Corruption Bureau has started an investigation. The government, in response to a request from donors, has agreed to an external audit.

  • Removing price distortions. Most of the maize sales by ADMARC and the NFRA from mid-2000 to January 2001 went to the domestic market. These transactions depressed maize prices further after the 2000 bumper harvest, thus creating disincentives for producers and contributing to the shortages in early 2002.

  • Reducing costs to the budget. The budget was derailed in fiscal year 2000/01, in part because the government bailed out the NFRA by repaying its commercial loans (the budget only included funds for servicing the debt, but not for full repayment). In addition, budgetary support amounting to 1½ percent of GDP was provided to ADMARC during 2000-01.

The food crises, however, also point to weaknesses in Malawi's agricultural policies. One problem is Malawi's overreliance on maize. Maize is not drought resistant, and to maintain yields, it requires fertilizer--as it exhausts soil nutrients quickly--and fresh hybrid seeds each year. The diversification into other food crops appeared to have been one of the achievements in agricultural policy. However, the data now suggest that the extent of the diversification was much smaller than previously believed. Moreover, government interventions in the food market, including through free agricultural inputs, have not led to the expected increase in farmers' incomes.

Both the staffs of the European Commission and the World Bank have re-affirmed that the recommendations of the government-commissioned study of 2000, including on the size of the maize buffer stock, were sound and remain valid.

The international donor community is now working with the Malawi government to strengthen the implementation of the food security strategy, even while responding to the current crop shortfalls. The World Bank, together with the U.K. Department for International Development, intends to take the lead in assisting the government in revamping its food security operations. To date, it has started to review agricultural policies and is preparing a project. The European Commission will work with the government to improve the NFRA's operating rules. The IMF is continuing to support these efforts.


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