By Chris Mfula
LUSAKA, May 23 (Reuters) - Zambia's decision to cut subsidies on maize and remove a fuel subsidy is likely to hamper output of the staple grain, raise prices and dash its goal of becoming a regional breadbasket.
The southern African country reduced a subsidy on fertiliser to 50 percent from 75 percent, so farmers will now pay more for the vital input.
The government also halted a practice that saw it buy maize from farmers at inflated prices, which it resold to millers at lower-than-market prices to keep a lid on food inflation.
Citing higher subsidy costs, Lusaka said it will now only buy maize for strategic reserves. This comes after the country in April removed a subsidy on fuel, leading to a more than 21 percent hike in fuel prices.
Zambia became a hot destination for regional buyers looking for maize after bumper harvests were reaped from the subsidies and good farming practices.
In a remarkable turnaround for one of the poorest countries on Earth with a fast growing population, Zambia went from being a maize importer to exporter, as output rose to more than 2.5 million tonnes from about 600,000 tonnes just over a decade ago.
Farmers now fear higher farm input and fuel costs will weigh on profits and hurt output.
"Our production costs are very high. The cost of borrowing is also very high, you can't risk borrowing to grow maize when you are not guaranteed a good price," said Request Muntanga, a farmer in Kalomo, 370 km (220 miles) south of Lusaka.
The government said it would still provide free seeds to some 900,000 peasant farmers.
Zambia's Agriculture Minister Robert Sichinga said the subsidy to millers was unsustainable, after the government spent 2.2 billion Zambian kwacha ($415.88 million) on it last year.
"The implication of the removal of the subsidy is that the price of our staple food will inevitably rise," Sichinga said.
Maize is a staple in southern Africa. For many it is the main source of calories and higher prices will stoke inflation, hurting the poor. According to the government, 65 percent of Zambia's 13 million people live on under $1.25 a day.
LOSERS AND WINNERS
Farm subsidies are common worldwide but the fate of maize subsidies in poor nations such as Zambia and neighbouring Malawi, where they have also lifted harvests, largely depends on donor aid and the state of government finance.
In Zambia, where the government solely funds the subsidies, the big concern had been whether economic growth would remain robust enough for the state to keep the cash flowing.
"The treasury had to borrow to finance the programme and often farm inputs were delivered late due to problems of funding," said Oliver Saasa, an economist at Lusaka-based Premier Consult.
But Saasa cautioned that Lusaka, in an effort to cut government spending, was doing too much, too fast.
"The austerity measures will be very damaging on Zambia's maize production if the sequencing is not done properly. The doctor may have the right medicine but the administering is wrong," he said.
The World Bank said the removal of fuel and maize subsidies would make both "losers and winners", but had the potential to impact on poverty reduction if the savings were used properly.
"The good news is that if savings are redirected smartly, Zambia can ensure that the winners could be the voiceless poor, and ultimately the whole country," Kundhavi Kadiresan, the Bank's country director, said.
Zambia's booming harvests also outpaced the country's ability to deal with the surplus as it only has storage facilities for around 740,000 tonnes of maize.
So another possible option for any savings generated from the subsidy cuts would be to direct them towards improving its shoddy agriculture infrastructure.
"If you produce 3 million tonnes where are you going to store the maize? We are embarking on the rehabilitation and construction of new storage facilities," Sichinga said.
Most of Zambia's grain silos are in a state of disrepair, with rusty, leaking roofs that expose the maize to rainfall. Some bags are just placed on timber logs and covered with tents.
Many railway lines have been vandalised and the metal sold as scrap. What used to serve as lines are now bare tracks used as bush paths.
Zambia, which competes with bigger rival South Africa for maize export markets on a regional level, plans to export 455,000 tonnes of the grain this year.
It is unlikely it will have such a surplus next year. ($1 = 5.2900 Zambian kwachas) (Writing and additional reporting by Olivia Kumwenda in Johannesburg; editing by Ed Stoddard and James Jukwey)