Give us our annual subsidies

By Admire Mavolwane

AGRICULTURE is, for a variety of economic, political and sentimental reasons, a highly emotive issue. According to the official figures, the sec

tor accounts for as much as 18% of the country’s gross domestic product (GDP); 22,8% of foreign currency earnings and about 23% of total formal employment. (This was before the disruption of commercial agriculture starting in 1999.) The above statistics underline the “economic” importance of the sector.

It is for this reason that real GDP growth estimates are based on the recovery, or otherwise of this all important sector. The main reason being that agriculture as a primary industry is highly linked to manufacturing and other value adding activities in the economy and has a huge bearing on food security, exchange rate stabilisation and inflation control. Given the fact that farm output has declined significantly over the years it has thus become more crucial than ever before for agriculture to recover hence the increasing role that is being played in its activities by previously non traditional agents like the Reserve Bank of Zimbabwe.

Since the turn of the millennium the Reserve Bank has provided concessionary funding in an effort to try and breathe life not only into agriculture but the whole productive sector. In 2000, the central bank put up a $100 billion facility for the export and productive sectors (PSF), of which $35,5 billion went to agriculture. By June 2005, the PSF facility had been expanded to $3,1 trillion with agriculture’s share increasing to 40,3%.

In May 2005, a month before the expiry of the productive sector facility, the RBZ set up the Agriculture Sector Productivity Enhancement Facility (Aspef) with $7 trillion being set aside for lending to agriculture and export sectors. The interest rates applicable under the facility are 20% for irrigation, beef cattle, dairy, other crops and livestock, and piggery and poultry support activities whilst 5% was applicable to horticulture and other exports.

By December 2005 a cumulative $5,62 trillion had been disbursed to some 2 560 applicants under this facility. In addition to the cheap funding, farmers were supposed to access fuel from Noczim at $20 000 per litre compared with the economy- wide price of between $185 000 and $210 000 per litre.

In the past couple of weeks, an emotionally charged debate has been raging regarding tobacco and seed cotton pricing structures, with that on tobacco, in particular, being played out in the press. The central bank on April 7 unveiled the 2006 Tobacco Support Framework, which would have seen the farmers who got the 20% funding and $20 000/litre fuel being guaranteed a minimum price of US$1,80/kg.

For every kilogram sold on the auction at less than US$1,80, the grower would have been entitled to a top up differential payable in local currency. As a sweetener, those who would have delivered their crop before 1 July were entitled to a $40 000/kg bonus. In other words, the Reserve Bank had reincarnated the tobacco support price arrangement at the same time hiking the price from $5 000 to $180 000/kg.

A simple sum worked on the current average price of US$1,35/kg, and the inter-bank rate of $99 201,58 showed that the central bank would have paid around $2,5 trillion for every kilogram of the 55 million kilogrammes expected to go under the hammer this year. On April 24, on the eve of the commencement of the selling season, the central bank announced a new, modified framework which scrapped the complicated price guarantees and support prices and replaced them with a more “transparent” scheme. Under the new arrangements, farmers would be entitled to a delivery bonus of 30% of the crop value sold before July 31 which reduces to 15% up to August 31. The US dollar proceeds will be converted in full at the ruling inter-bank rate.

Cotton farmers, who theoretically should have benefited from the 20% money, through either the input schemes or directly from the banks, are also clamouring for a support price of $60 000 per kilogramme. This would be in addition to the $23 000/kg that cotton merchants are offering. Last year, a similar arrangement was in place with the Reserve Bank essentially buying the seed cotton from farmers as it paid $3 500 out of the $4 500 the farmers were receiving from merchants. The support price arrangement was abolished at the end of December 2005 following the introduction of the inter-bank foreign currency market.

It appears on the one hand, that our farmers have either a short memory or have developed an embedded lopsided mentality and on the other hand, state interventions in the sector are mistimed and not fully explained. Prior to the commencement of the planting season in October or November, farmers “demand” cheap this and cheap that. Come April, when they are supposed to deliver their crops, all of a sudden they start demanding premium prices and real exchange rates.

The whole economic model becomes flawed and highly inflationary especially given that the money for the subsidies and support prices is straight off the printing press. Cheap money should supposedly be a substitute for a fair value exchange rate. There has to be a “give and take” scenario in the whole set up. In his January 2006 monetary policy statement, the Governor alluded to Apsef as having been one of the major causes of money supply growth in the July to December period of 2005. In essence, the central bank is now the main financier and buyer of agricultural output.

What the whole tobacco and cotton farmer scenario highlights, however, is that there is something wrong with the agriculture value chain and also the pricing of foreign exchange. At one end of the chain, the farmers exist and operate in this subsidised economy both at planting and at harvesting level, whilst the merchants at the end of the local value chain play the game at international level competing with both subsidised and non subsidised farmers from other economies.

As an economy, there is something we are missing in the way the value chain is structured. When and at what point should the government intervene in the chain and what role does the exchange rate, whether fair value or not, play in the whole exercise. Some would say tongue in cheek; “the government needs to set up a commission made up of all stakeholders to analyse the agriculture value chain and come up with fair and workable proposals”.

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