Impact of Fertilizer Subsidies on the Commercial Fertilizer Sector in Nigeria: Evidence from Previous Fertilizer Subsidy Schemes

We examine whether and how much previous fertilizer subsidy schemes in Nigeria crowded-in or crowded-out the privatesector fertilizer. We apply a system of endogenous Tobit regressions which account for interlinkages between the subsidized fertilizer market, the commercial fertilizer market, and the open-market fertilizer price. We use data from two separate agricultural household surveys, one of which is a pseudo-panel. We find that:

1) higher subsidy rates might have depressed the non-subsidized open-market fertilizer price;

2) a majority of farmers use either commercial or subsidized fertilizer, but rarely both sources;

3) one kg of subsidized fertilizer supplied reduces demand for commercial fertilizer by between 0.19 and 0.35 kg;

4) the characteristics of the ideal beneficiaries under a fertilizer subsidy scheme in Nigeria are quite different from the beneficiaries under previous schemes; and

5) fertilizer demand is not affected by price.

We conclude that the success of any new fertilizer subsidy scheme in Nigeria partly depends on effectively reducing the crowding-out effects of the subsidy on the commercial fertilizer sector. This can be done through both improved targeting of beneficiaries and effective complementary policies that raise the financial return to fertilizer use among intended beneficiaries

NSSP Working Paper 23

by Hiroyuki Takeshima, Ephraim Nkonya, and Sayon Deb