HomeNewsAgricultural financing under the Maputo Declaration

Agricultural financing under the Maputo Declaration

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Last week we discussed how African central banks are considering broadening their mandates to include financing for development.

This week, we continue to “mine” the theme of financing for development by focusing on the rich vein of agricultural financing, a sub-topic which previously attracted significant interest from followers of this column. So why would agricultural financing command such attention?

Firstly, the immense growth potential of agriculture cannot be ignored by anyone who intends to take part in worthwhile growth momentum.

In its present state, Africa’s agriculture sector bears a striking resemblance to the telecommunications sector of the late 1990s, on the verge of a massive boom!

As in telecommunications, it is the early movers who will reap the benefits of growth.

An agricultural sector in full bloom is thought to hold more promise for transformational change in the lives of Africa’s one billion people than ICTs.

Notably, some 70% of Africans depend on agriculture for their livelihoods, and it accounts for about 40% of Africa’s gross domestic product (GDP).

The contribution of agriculture to GDP in Zimbabwe, at a lowly 15,5% (2009), exhibits immense upside potential.

Secondly, access to and affordability of financing is a key determinant of agricultural competitiveness.

According to the World Economic Forum’s Global Competitiveness Report for 2011, access to financing tops the eight most problematic factors for doing business in Zimbabwe.

Thirdly, the financing of agriculture is an area of significant interest for policymakers and regulators alike.

The African Union (AU) issued the Maputo Declaration in 2003 requiring member states to grow investment in agriculture to at least 10% of their budgetary allocations.

Disappointingly, only eight out of 53 countries had met that target as at April 2011. The big question has to be:

How do the other 45 countries ever hope to lift their people out of poverty by investing very little of their budgetary allocations in the sector on which the majority of people depend?

Zimbabwe has done fairly well in complying with the Maputo Declaration, and is one of eight countries with more than 10% national expenditure on agricultural development.

Some of the key constraints cited for countries’ non-compliance with the Maputo Declaration include inadequate high level political will to prioritise agriculture in the National Budget;
inadequate agricultural sector policy strategies; high debt service ratios which divert resources away from agriculture and lack of AU sanctions on those that fail to comply.

Presenting the 2011 Budget Finance minister Biti said that its thrust was “geared towards supporting increased agricultural production” in line with the 2003 Maputo Declaration.

He however highlighted that “government’s capacity to fully provide the resource requirements for the sector on its own is limited”. So how did this inability of governments to commit decent financing to agriculture arise?

According to Kwaku Owusu-Baah, an agricultural economist in the 1980s and 1990s, African countries pursued economic recovery programmes or liberalisation programmes under which they reduced support for agriculture, predicated on the well-meaning but erroneous assumption that market forces would pick up the incentives so created. This was however not to be — the private sector was not ready!

A lot of water has since passed under the bridge, but is the private sector now ready? In Zimbabwe the bank regulatory framework provides, through moral suasion, for banks to realign thresholds for lending so that agriculture accounts for at least 30%.

However, a snap survey of 13 banks shows that as at December 31 2010 only three banks complied with the threshold.

Average lending to agriculture at sector level was in the region of 17%. Reasons often cited by banks include lack of long-term liquidity; lack of useable collateral; the risk profile of agricultural lending and sometimes lack of specialist skills required for successful agricultural banking.

According to the Short-Term Economic Recovery Programme of March 2009, the government said: “Financing of agriculture should ordinarily be the responsibility of our banking system, drawing from the deposits by the general public.”

The government must however be mindful of its role in developing a conducive environment for the banking sector to play that role.

If the right conditions are created, the government can expect to encounter minimal problems in inviting private sector players to complement its efforts in the form of seed funding (grants), patient capital or bank loans guaranteed under suitable schemes with cooperating partners such as non-governmental organisations.

For its part the government must make haste in valorising land by introducing the long-awaited “registrable, executable and transferable” 99-year leases, if private capital must flow faster into agriculture.

Banks will recognise such land as a tangible economic asset that can be securitised for borrowing purposes.

For their part, banks must rethink their engagement models with the agriculture, such as Trust Agriculture did a while ago and CBZ Agriculture is doing now.

They also need to adopt a value-chain approach to lending instead of focusing on the traditional balance sheet lending.

Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. Feedback: omen.muza@gmail.com

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