Finance has become a major hurdle to the recovery of Zimbabwe's agricultural sector, but experts say Harare's latest proposed solution looks like a non-starter.
Small Zimbabwean farmers chronically lack cash to purchase seed and fertilizer, which was often supplied by the state Grain Marketing Board in the past. The banking sector doesn’t consider a long-term lease on farmland to be good collateral given the uncertainties of ownership following a decade of disruptive land reform.
The government and a banking partner are now moving to float $100 million in agro-bills guaranteed in part by the government. But financial experts doubt investors will jump into such notes as they will have to count on farmers to repay half of the debt.
The Commercial Bank of Zimbabwe is the Harare government’s financial market partner in the launch of the latest agricultural financing instrument to be brought forth.
An inter-ministerial committee on commercial financing of agriculture led by Deputy Prime Minister Arthur Mutambara drew up the latest farm finance scheme, which proposes to match up investors with farmers who need capital.
The basic instrument is a US$10,000 agro-bill bearing a 10 percent coupon - though the envisioned tender operation could result in a higher yield or market interest rate, to which a two percent processing fee will be added.
Harare hopes to raise $100 million through this mechanism – not only to finance the 2012 cropping season but to pay down US$21 million the Grain Marketing Board owes farmers and US$18.6 million the government itself owes seed houses and fertilizer companies, plus another US$4.5 million to “kick-start” seed and fertilizer makers.
So in fact only about $56 million will go to finance farmers, the rest covering government debts and costs, but the government is offering only a 50 percent repayment guarantee. This is likely to discourage the kinds of risk-averse investors the program proposes to attract, particularly ultra-cautious pension funds and insurers.
Though the funds will go to meet official debts and costs, investors will have to rely on farmers making good on their commitments to repay following harvest.
So investors must be willing to bet that the government will make good on its guarantee, that the upcoming harvest will be a good one - some are not optimistic given longer-term weather signals - and that farmers receiving funds will do the right thing.
Nonetheless, Mutambara expressed confidence investors will step up to buy agro-bills, helping cashless farmers pay for their inputs.
“Our banks have not been forthcoming in terms of grain production. They have done good work in supporting cotton, they have done good work in supporting tobacco. So what we have done is come up with a scheme that gives incentives to the banks to put their money into agriculture for a profit," Mutambara said.
“We have given them the liquid asset status, tax exemption and a 50% government guarantee. This will allow every farmer in the country, communal, A2, A1 to have access to inputs without paying anything but with a stop order where they will pay after they have harvested,” Mutambara said.
CBZ Chief Executive John Mangudya said the government has done all it can to make the securities attractive to investors including insurance companies and banks.
Some see the program as a desperation move as agricultural experts warn that farmers have found it more difficult than ever to access the seed and fertilizer they need.
Zimbabwe Bankers Association President John Mushayavanhu said the planting season started last month so it is somewhat late to be raising funds.
“But the main problem is that these bills are only 50% government guaranteed which mean the other 50% is unsecured," Mushayavanhu said.
"Obviously the risk that investors and bankers are taking is higher than would have been the case if they had been 100% government guaranteed.”
Economist John Robertson said the scheme will only work if financial institutions are willing to guarantee the 50 percent not covered by the government, but opined that the risk is too high for most players given currently low expectations for 2012 harvest.
“A thing like this has to be done properly and on time for the people who have borrowed the money to have a chance to get a good enough crop, to earn enough money to pay back the loans," Robertson said.
But CBZ’s Mangudya said there is still time to make a difference, particularly as this is not the only scheme put in place to bolster farmers. “There are NGOs that are providing assistance. There are commercial transactions that the banks are financing ... and the government has put in place some other schemes – the $30 million facility, the $45 million facility. This is only in addition to what is happening on the ground.”
Mangudya and Mutambara emphasized that funds from agro-bills would be accessed by all farmers – be they small communal cultivators or larger commercial players.
But Mushayavanhu of the Bankers Association said such a scheme is only feasible with commercial farmers, as most small-scale bankers are unable to meet lending requirements, which could impede their access in this case.
“Unless the government is going to disburse the money directly to those farmers – in which case then the risk is with government,” Mushayavanhu said.
Less skeptical is analyst Masimba Kuchera, who says that although the Reserve Bank of Zimbabwe went broke from 2004 to 2008 supporting similar agricultural schemes, this initiative could help wean farmers from government dependency.
Yet Kuchera doesn’t see banks other than CBZ jumping in as it is not clear how they’ll get their funds back from defaulters without holding any collateral.
Mutambara insists the government will push on using what he calls “moral persuasion” to convince bankers to seek profits where few have been forthcoming.
The government and its private sector partner have launched and promoted the program, so it remains to be seen how many investors will convert capital to seed money.