Agricultural Subsidies: A case for Uganda

Introduction

Subsidies are among the trade policies countries use to support agricultural production, improve farmers' incomes, and promote food security. However, a debate remains on the efficacy of agricultural subsidies, especially at the World Trade Organization. Many countries consider agricultural subsidies to be the main drivers of unequal trade imbalances, and large corporations and businesses often benefit more than small-scale farmers and local communities. Agricultural subsidies in more affluent countries can also constrain the capacity of least developed countries to compete on a level playing field. On the environmental side, agricultural subsidies can harm forests and other natural ecosystems and contribute to biodiversity loss.

Although agricultural subsidies can be an important trade policy tool to promote sustainability, they are often designed in a way that harms economies and people's livelihoods. The Organisation for Economic Co-operation and Development estimates that more than USD 600 billion is spent annually to support agricultural production alone in 54 countries -much of it directed toward activities that harm the environment. Agricultural subsidies focus heavily on a few key commodities that provide many calories and lack essential nutrients.

This article explores Uganda's agricultural subsidies and their implications for the economy, the agricultural sector, people's livelihoods, and the environment. It also offers recommendations for rethinking the design of agricultural subsidies in Uganda for sustainability.

Government Spending on Agriculture is Limited

Agriculture is the main source of livelihood in Uganda and provides employment to about 66% of the population. The sector is a major contributor to GDP (24.5%) and is critical for food security. Achieving food security and nutrition and alleviating poverty continue to be significant challenges in Uganda. Most farmers depend on rainfed agriculture, use rudimentary tools with limited access to agricultural inputs, and rely heavily on family labour. Since the nature of Uganda's agricultural production is uncertain, agriculture support and subsidies to enhance its resilience and sustainability are vital.

While Uganda has prioritized agriculture in its development agenda, limited budget allocation constrains the sector.

While Uganda has prioritized agriculture in its development agenda, limited budget allocation constrains the sector. African leaders agreed in the Malabo Declaration to allocate at least 10% of public expenditure to agriculture, but Uganda's contribution is below that commitment.

In Uganda's context, agricultural subsidies can be broadly divided into two categories: input subsidies and general services support to the agricultural sector as a whole.

Some Subsidies Aim to Help Farmers Obtain Inputs

The country has rolled out initiatives such as the National Agricultural Advisory Services (NAADS) and Operation Wealth Creation to enable farmers to access inputs. NAADS was established in 2001 with a mandate to support the management of agricultural input distribution chains, the promotion of strategic community interventions, agricultural value chain development, and farmer access to agricultural financing. The Operation Wealth Creation initiative was rolled out in 2013 to raise household incomes and create wealth by shifting farmers from subsistence to commercial farming. Through this initiative, the Ugandan government distributes agricultural inputs-for instance, seedlings-to local farmers.

Accessibility to farm inputs has increased due to various initiatives. For example, under the NAADS program, 623,870 Hass avocado seedlings for have been distributed to farmers to establish 3,125 acres in 80 districts. NAADS has also subsidized Hass avocado seedlings.

Importantly, Uganda has provided direct financial support to farmers through farmers' groups. With funding from the World Bank, the government implemented the Agriculture Cluster Development Project, which provided farmers with better agricultural infrastructure, greater access to inputs, improved post-harvest handling, and more competitive prices for both inputs and outputs. The project focused on five priority commodities (maize, cassava, beans, rice, and coffee) and benefited 450,000 farm households in 12 clusters.

Beneficiaries were also given e-vouchers to help cover part of their cost to buy key agricultural inputs, such as fertilizer, seeds, small-scale irrigation equipment, and mobile phones. The government implemented the e-voucher system through the private sector, which provided all the inputs. However, the system was marred by poor implementation, low quality, and late delivery of inputs. The auditor general's report for the year ending June 30, 2023, revealed that a huge amount of funds was used ineffectively under the e-voucher system.

Insurance Subsidies Help Farmers in High-Risk Areas

Under Uganda's Agriculture Insurance Subsidy program, the government subsidizes 50% and 30% of agriculture insurance premiums paid by smallholder and large farmers, respectively. This insurance subsidy is designed to cushion farmers from risks associated with losses arising from natural disasters and to attract financing to agriculture. Under the initiative, the government contributes an insurance subsidy of about USD 1.35 million a year to support both small- and large-scale farmers in high-risk areas.

There has been a significant increase in the uptake of the subsidy, which has greatly benefited farmers who have access to insurance. Records show that 687,608 Ugandan farmers were insured under the scheme as of March 2023, while only 45,704 had insurance coverage 6 years before. It should be noted, however, that most beneficiaries of this insurance subsidy are medium- and large-scale farmers.

Uganda's government also introduced the Agricultural Credit Facility to enhance the financing of agriculture projects, including the acquisition of agricultural machinery, agro-processing and post-harvest handling equipment, and storage facilities. Agricultural inputs required for primary production and working capital requirements are also considered under this facility, which has provided much-needed funds for farmers at affordable interest rates. However, complicated documentation requirements and a lack of information have made it difficult for small-scale farmers to benefit from this facility.

On top of agricultural subsidies, Uganda has a tax system that supports the agriculture sector. Uganda's Income Tax Act grants a tax waiver of 10 years for operators who process agricultural goods or manufacture chemicals for agricultural use. Machines that process agricultural or dairy products, tools, and implements suitable for use only in agriculture are also exempt from taxes. However, and given the high thresholds to benefit from it, this tax system tends to benefit large investors.

These initiatives are designed as support mechanisms for farmers and agriculture value chain actors to enhance production and productivity. They offer opportunities to many beneficiaries and have improved the livelihoods of small-scale farmers. More recently, there has been a marked increase in coffee production and export. Uganda exported 837,915 60-kg bags of coffee valued at USD 221.63 million in August 2024-a 13.15% increase in quantity and an 82.98% in value compared to August 2023. This rise in coffee prices has dramatically improved farmers' livelihoods. The production boost has primarily been attributed to increased government support to the coffee sector for seedlings and fertilizer, as well as through direct financial support.

Value addition to agricultural products is limited, leading to low prices in both local and global markets and, often, agricultural wastage.

Along with the positive outcomes, several factors curb the effective realization of the objectives of agricultural subsidies. Value addition to agricultural products is limited, leading to low prices in both local and global markets and, often, agricultural wastage. Furthermore, farmers need extension services when agricultural inputs are provided, but these are often unavailable. At the ratio 1:2000 to 1:3000, Uganda still falls short of the recommended ratio of extension services of 1:500 (extension worker: population ratio). This implies that more than 2,000 farmers rely on one extension worker for agricultural support. There has also been no marketing to underpin subsidies. For instance, no efforts were made to identify sustainable market opportunities or ways to add value when input support was provided for Hass avocados.

Supply, not demand, drives agricultural subsidies. This explains why farmers typically receive support late in (or even after) the season. Sometimes, they receive inputs they do not actually need-for instance, hybrid seeds. This can cause farmers to either miss the opportunity for a full harvest or suffer from reduced yields due to improper timing. Farmers may also receive inputs that are not suitable for their specific farming conditions or preference-for example, hybrid seeds often require specific growing conditions, advanced farming techniques, or high input management that small-scale farmers may not be equipped to handle.

On the environmental side, agricultural subsidies contribute to climate change by supporting the purchase and intensive use of agrochemicals and the promotion of monoculture, which increases greenhouse gases. They also promote the use of hybrid seeds, which undermines farmers' seed systems and the sustainability of agriculture in Uganda. Hybrid seeds are input-intensive and require farmers to buy seeds every planting season. The implemented agriculture subsidies are poorly managed and underfunded, making it difficult to meet the many challenges facing the agriculture sector in general and small-scale farmers in particular.

How to Design and Implement Agricultural Subsidies Effectively

As identified above, there have been challenges in the design and implementation of agricultural subsidies in Uganda. They are designed in a top-down manner with minimal involvement of key stakeholders, especially small-scale farmers. This partially explains why farmers often have difficulty accessing subsidies. The need to rethink the design of agricultural subsidies is, therefore, timely. This includes the effective participation of all key stakeholders-including government agencies, private sector representatives, scientists, academia, and civil society organizations.

The design of agricultural subsidies in Uganda should fully support value chains, from input to market.

In terms of implementation, agricultural subsidies in Uganda are characterized by low quality and late delivery of inputs, which has stymied their objectives. The design of agricultural subsidies in Uganda should fully support value chains, from input to market. The mechanisms should be adequately funded to achieve the intended goals, and the implementation of these mechanisms should be effectively monitored to ensure value for money. Moving forward, the government should reconsider the design of agricultural subsidies while keeping in mind their intended beneficiaries. For small-scale farmers, the government should also streamline the procedures for accessing agricultural subsidies.

Jane Nalunga is Executive Director of the Southern and Eastern Africa Trade Information and Negotiations Institute in Uganda (SEATINI). Jonathan Lubega is a Program Officer, Agricultural Trade for Rural Transformation at SEATINI Uganda.

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