The pandemic has highlighted the significance of developing local food sources. Agricultural subsidies are a powerful tool to achieve that goal, and governments have a unique opportunity in the Gulf Cooperation Council (GCC) to establish the right agricultural subsidy scheme.
In many countries, agricultural subsidies are mainly based on output, in which governments reward farmers for finished agricultural products. Output subsidies offer many benefits as it increases efficiency and productivity for farmers and the entire agricultural sector. They also encourage a more sustainable approach to natural resources, and they make it easier for governments to monitor results.
The worldwide trend is currently moving to output-based subsidies and is moving to sectors around the GCC. In general, output-based subsidies improve production and productivity across the value chain of agriculture because they reward performance.
Salim Ghazaly Partner Strategy& Middle East
“Governments seeking to develop the agricultural sector in their country have a powerful tool available: subsidies. If structured correctly, agricultural subsidies can accomplish a range of policy objectives. They can ensure food security and social protection, enhance farmers’ productivity, stimulate exports, and speed disaster recovery. Each country’s situation and needs are unique and the best-suited subsidy scheme will vary by country. Selecting the most appropriate subsidy scheme, given certain objectives or the desired impact, is not easy”.
Saudi Arabia has recently embarked on a major subsidy reallocation program in the poultry sector aimed at reducing the number of animal feed subsidies and instead promoting finished agricultural products.
Mr. Roger Rabbat, a partner with Middle Eastern operations of Strategy& added, “The rationale for output-based subsidies is compelling. Output-based subsidies generally increase efficiency and productivity across the agricultural value chain because they reward performance.
“They achieve this through payments made for outputs that are agreed in advance so that farmers know what they have to aim for. By contrast, input-based subsidies can lead to inefficiency and environmental damage because they simply incentivize the use of resources, rather than effective and sustainable consumption of these resources,” he included.
According to Strategy&, Subsidies need to adhere to three policy design standards to succeed and they are policy integration, controls and transparency, and environmental protection.
GCC governments can create the best policies for their needs by concentrating on these three principles, and ensuring that subsidy programs generate the greatest possible impact.
Policy Integration
Instead of applying subsidies in isolation, as part of a wider strategy to improve the agricultural sector and make it self-sustaining, policymakers should combine them with other agricultural policies.
Controls and transparency
As with any government spending initiative, subsidies are vulnerable to fraud and misreporting. For that reason, subsidy programs need to include mechanisms and systems to identify fraud and other types of misuse, such as unlicensed operation, or the use of illicit materials or equipment
Environmental protection
To protect the environment and ensure the most effective use of water, energy and other resources, agricultural subsidies need to take environmental and sustainability considerations into account. In GCC countries, which have a persistent water shortage, water is a particular concern. Subsidies will reward the effective, responsible use of capital to ensure the long-term sustainability of the agricultural sector and the conservation of the environment, potentially through technology.
Ousama Elghazzi, a manager with Strategy&, Middle East said, “A ministry should integrate subsidies with other policies as part of a broader agenda to develop the agricultural sector, rather than applying them in isolation. Critically, subsidies should also be designed for eventual obsolescence. Rather than lasting indefinitely, they should offer temporary support to farmers and protect them until the sector can become self-sustaining”.
