Subsidies serve several economic and policy objectives: correcting market failures where social benefits exceed private benefits, supporting strategic industries deemed vital for national security or development, redistributing income to vulnerable populations, and stabilising volatile markets such as agriculture.
Accounting for roughly 21 per cent of Kenya’s GDP, agriculture is rightly seen as a strategic sector, and successive governments have backed it through subsidies, price supports, concessional credit schemes and other state-led interventions.
The economic rationale often focuses on addressing externalities, supporting infant industries, or ensuring food security and, more recently, building climate resilience.
In practice, subsidies take various forms such as direct cash payments, tax breaks, price supports, input subsidies (seeds, fertilisers), credit subsidies with below-market interest rates and infrastructure investments that benefit specific sectors.
Kenya currently operates several government subsidy programmes and market interventions aimed at supporting farmers.
These programmes are managed by different institutions and often overlap in purpose and function, contributing to a classic case of bureaucratic duplication and market distortions.
They include the fertiliser subsidy programmes. The government has implemented different fertiliser subsidy policies since 2009, with the most recent being the one that came into effect in September 2022.
It is part of the National Fertiliser Subsidy Programme, which aims to make fertiliser more affordable and accessible, supporting food production and stabilising food prices.
The subsidised fertiliser is sold at a reduced price of Sh2,500 per 50kg bag, compared to the market price of Sh6,500. The estimated cost of this new subsidy was Sh45.5 billion, according to the Institute of Economic Affairs.
Additionally, the Commodities Fund provides loans to farmers at an interest rate of as low as three per cent. The fund supports farming operations, price stabilisation and other approved activities. It operates as a separate source of agricultural credit, alongside commercial banks.
The existence of COMFUND as a parallel agricultural banking system with three per cent subsidised interest rates particularly exemplifies the knowledge problem– a government agency attempting to perform credit allocation functions that market interest rates would handle more efficiently.
There is another programme for coffee farmers under the Coffee Cherry Advance Revolving Fund. This programme allows farmers to receive early payments for their coffee at Sh80 per kilogramme of cherry as a form of minimum guaranteed return.
Instead of waiting for the full payment after selling their coffee, farmers receive an advance payment per kilogramme of cherry delivered to processing units. The fund has been allocated up to Sh6.7 billion in the current financial year.
This is alongside other infrastructure and processing subsidies that focus on improving coffee production and processing. They include rehabilitation of coffee factories, subsidies for equipment and support for transportation costs.
Besides these interventions – free subsidy, low interest loans and advance payment – the government announced a waiver of Sh6.8 billion in debts owed by coffee societies in June 2024 and more recently by the CS in his budget speech.
This means the government will write off the debts and the societies will no longer be required to repay them. While these interventions are designed with noble intentions, supporting farmers and ensuring food security, this raises a clear trade-off.
Beyond cost, market distortions are emerging. Artificially low input prices and guaranteed price floors risk fostering dependence among farmers. They may also deter private sector actors from investing in critical segments of the value chain.
Kenya’s coffee sector already struggles with marketing inefficiencies, and state-driven interventions may be entrenching, rather than resolving, these problems.
From a public financial management perspective, Kenya cannot afford to maintain expensive subsidy programmes indefinitely.
The country's fiscal space is constrained and every billion shillings spent on subsidies represents foregone investments in education, healthcare, infrastructure or debt reduction.
Reforming subsidies could free up resources that could fund thousands of kilometres of rural roads, hundreds of health facilities or significant debt reduction. The opportunity cost of current subsidy spending is simply too high to ignore.
The path forward is not to eliminate agricultural support but to reform it. Kenya needs to shift from blanket subsidies to more strategic, time-bound interventions.
First, instead of repeated price guarantees, the government could invest in systems that improve market functioning. Warehouse receipt systems, digital marketplaces and commodity exchanges would help farmers secure better prices without distorting incentives.
Second, resources should be redirected toward genuine public goods. These include agricultural research, extension services, rural roads and climate-resilient technologies. Such investments generate long-term productivity gains without creating market dependencies.
Finally, all subsidy programmes should include sunset clauses. Each intervention must have clear performance metrics and defined exit strategies. This would create a framework for accountability and avoid permanent reliance on state support.
The sector already benefits from significant tax incentives, including VAT exemptions on key inputs and machinery. What is required now is a shift toward policies that promote private investment, improve productivity and build market resilience.
The case for reform is urgent. Delaying action risks deeper fiscal pressure and abrupt spending cuts down the line. Kenya has the tools to support its farmers more effectively. What it needs is the political will to deploy public resources where they will have the greatest, most sustainable impact.
Farzana is an economist specialising in fiscal policy and development
