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Transforming the tobacco value chain

By Victor Bhoroma

The Zimbabwean government recently approved a Tobacco Value Chain Transformation Plan targeted at transforming the value chain into a US$5 billion industry by 2025. The plan focuses on increasing primary production of the crop from 206 million kilogrammes (in 2021) to 300 million kg by 2025, localising financing for the 150 000 debt-ridden small-scale producers, value addition and beneficiation and export of cigarettes instead of raw tobacco. The plan aims at increasing value addition from the 2% of total tobacco produced to over 30%. This strategy is aimed at increasing income for small-scale farmers who remain poor despite topping production charts in Africa.

In 2020, Zimbabwe earned US$782 million from exports of 187 million kg of the commodity to the world market. Tobacco production has enormously recovered in the last decade from the 2009 season when production had plummeted to less than 50 million kg that year due to hyperinflation and viability challenges.

Zimbabwe is the largest grower of tobacco in Africa and the 6th largest grower in the world behind China, India, Brazil, United States and Indonesia. Three varieties of tobacco have traditionally been grown in the country — Virginia flue-cured, Burley and Oriental tobacco). Over 95% of Zimbabwe’s tobacco consists of flue-cured tobacco, which is renowned for its flavour by the global market.

Tobacco production moved from subsistence to commercial through the gazetting of Tobacco Marketing and Levy Act in 1936 and the subsequent formation of the Tobacco Industry Marketing Board. The legislation enabled the selling of tobacco through the auction floors and later on contract floors from 2004 up to date. Contract floors now account for 96% of the delivered crop in the country.

Missed billions

Zimbabwe is missing billions annually through exports of raw tobacco to various countries. These countries further process the tobacco and export cigarettes which fetch higher prices on the world market.

Zimbabwe exports 98% of its flue-cured tobacco as threshed or semi-processed (cut rag) and only a small percentage completes the whole production chain to manufacture cigarettes locally with British American Tobacco (BAT), Pacific Cigarette Company and Gold Leaf Tobacco leading the pack in cigarette manufacturing.

The average export price for raw tobacco from Zimbabwe was US$4,06 per kg in 2020 (down from US$4,85/kg in 2018 and US$4,51/kg in 2018) while the average price for cigarettes is over US$30/kg. In Europe, a 20 pack of Marlboro Cigarettes costs an average of US$10, while in the United States it costs US$8, Asia US$4,15 and in South Africa it costs US$3,28. In Zimbabwe the same pack costs US$2. By exporting the same amount of kg as cigarettes (after factoring in weight losses in manufacturing), Zimbabwe could realise more than US$5 billion in a year.

Zimbabwe exports raw tobacco to China, South Africa, UK, UAE, Belgium, New Zealand and Turkey which proceed to manufacture billions of cigarette sticks and export them at higher values under renowned brand names such as Marlboro, Camel, Davidoff, Newport and Dunhill. This simply means the global market for processed flue-cured tobacco and cheaper cigarettes from Zimbabwe exists. The market is vast and lucrative enough to warrant policy change from Zimbabwe.

Value addition incentives

The government has pointed out that it seeks to create an enabling environment to incentivise investors to value add locally rather than export Tobacco in raw form. A closer look at some of the tobacco processors from South Africa, Zambia, Botswana and UAE shows a worrying pattern where Zimbabwean nationals or former investors in Zimbabwe decided to set up export processing plants in those countries due to the enabling business climate they were afforded. The manufacturers ride on the popularity of flue-cured tobacco from Zimbabwe to export to the rest of the world (including back to Africa).

Part of the constraints local manufacturers of cigarettes face is the high cost of production with a complex taxation regime, high fuel costs (alternative energy and transportation) and financial costs ranking high. To create an enabling environment, the government should start by scrapping any export license fees or levies paid by cigarette exporters and provide tax incentives to investment aimed at cigarette manufacturing in Zimbabwe.

The Zimbabwean market is relatively small in terms of cigarette consumption, as such, export oriented value addition should be our primary focus as a country. Through utilising the export processing zones and other incentives, potential investors can produce renowned global brands under license for export purposes only.

From a foreign currency retention point of view, raw tobacco exporters and cigarette manufacturers cannot be treated in the same way. Cigarette exporters should be allowed to keep 100% of their export proceeds and benefit from export facilitation or other government guarantees.

Exchange controls

The current exchange control regulations where 40% of the foreign currency earned by farmers is exchanged using a pegged auction rate has led to decline in production, reduced viability (debt trap) and unending poverty for farmers. The key constraint being the disparity between the auction rate (US$1:ZW$86,30) and the parallel market rate (US$1:ZW$160) used by contractors and retailers of agriculture inputs.

With farmer production costs estimated to be 70% in foreign currency, the disparity means that farmers are left with meagre real foreign currency earnings or significant losses after paying back contractors and others statutory levies in hard currency.

As such, the current exchange control regime is one of the major reasons why tobacco production remains below potential. To address these viability concerns, the auction system needs to be market determined with the central bank playing the regulatory, not the allocation role.

Addressing liquidity challenges

Contractors and international lenders poured over US$600 million into tobacco contract farming in 2020 and the result is that over 80% of small-scale farmers are living in debt even to a point of selling personal possessions to pay back loans or increase hectarage.

According to a report published by Tobacco Control in 2019, more than 90% of tobacco farmers want out of contract growing, but cannot find alternative funding to buy inputs, pay for services and transport the crop to the market. Farmers lack title deeds and local banks lack the adequate liquidity to finance tobacco farming. To address this gap, the government needs to provide a platform where local banks become primary sponsors of tobacco farming.

Key to this is the provision of land tenure to farmers. Additionally, farmers can self-finance provided they retain all their foreign currency or sell at market determined rates.

Addressing poverty

Currently, tobacco farming provides direct employment to more than 150 000 small-scale farmers who supply 80% of the crop and supports over 1,2 million in family dependents.

The industry also adds 50 000 indirect jobs in the value chain with auction houses, merchants, processors, cigarette manufacturers, input suppliers, retailers and financiers being direct benefactors. However, the viability challenges and dominance of foreign contractors means that 60% of the foreign earnings in each year stay abroad.

The benefits of value adding tobacco in Zimbabwe are immense. These range from higher export earnings, local employment creation, economic (GDP) growth, widening of the tax base, downstream value creation, economic diversification and manufacturing capacity development. These benefits will uplift the economy in terms of balance of trade considering the country’s perennial deficit position when it comes to the current account.

Value addition in the tobacco industry has been talked about in equal measure to other sectors of the economy such as mining and agriculture without any tangible efforts on policy implementation or follow through by the government. If it would be clear to the government that what Zimbabwe is getting through raw tobacco exports is less than 20% of the billions missed in exports of the finished product, maybe it will sound alarm bells for the much needed policy implementation (not blueprints or plans).

  • Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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