Zimbabwe Launches of US$100 Million AGROBILLs
CABINET OF ZIMBABWE PRESS STATEMENT
THE LAUNCH OF AMA AGROBILLS INITIATIVE, 5th December 2011
Summary of Recommendations
Following extensive consultations with financial institutions, seed houses,
fertilizer companies and millers, the Cabinet Inter-Ministerial Committee on
the Commercial Financing of Agriculture proposed commercial investment of
US$100 million of new money from Zimbabwean financial institutions into
Agriculture for grain production, particularly maize in respect of the
2011/2012 agricultural season. This scheme was adopted by Cabinet on the
22nd of November 2011, and will provide funds to cover:
• US$21 million that GMB owes farmers
• US$18.6 million that Government owes seed houses and fertilizer companies
• US$4.5 million kick-start deposit that seed and fertilizer companies
require in order to start delivering seed and fertilizer for 2011/2012
• US$56.2 million new commercial financing to all farmers (Communal, A1,
Commercial, and A2).
This funding framework is achievable through Government approved issuance of
270 to 360 days US$100 million Agricultural Marketing Authority (AMA)
AGROBILLs through CBZ. In order to make the AGROBILLS attractive, Government
has accorded the following special features to the AGROBILLS; prescribed
asset status, liquid asset status, tax exemption, and 50% Government
guarantee. As a broader enabling arrangement, the Committee recommended the
establishment of an interbank market through the introduction of Treasury
Bills. In addition to its traditional role of ensuring a strategic grain
reserve, GMB must be transformed into a commercially viable entity that
continuously buys (paying promptly) and sells grain at competitive market
rates.
BACKGROUND
Recognizing the importance of food security, and that of agriculture as the
mainstay of the Zimbabwean economy, Government wants to ensure that the
2011/2012 agricultural season is a success by making inputs available to
farmers (involved in grain production) at reasonable prices and in a timely
manner. Furthermore, Government takes cognizance of the current liquidity
constraints affecting the entire economy, in particular the insufficiency of
both the state efforts (the US$30 million input/grain swap scheme, and the
US$45 million subsidy scheme) and the intervention of the NGOs.
Consequently, the Cabinet set up an Inter-Ministerial Committee with the
following mandate:
Develop a scheme that provides affordable commercial financial resources for
grain production in the 2011/12 Agricultural season, without further
burdening the fiscus.
THE 2011/2012 AGRICULTURAL SEASON
Government support for the current agricultural season is, so far, not
enough to meet the requisite supply of inputs to farmers, especially with
regard to inputs at subsidized prices. The Government’s pledge of $45
million is inadequate to achieve the desirable levels of grain production.
The US$30 million grain/input swap has had a slow uptake. There is need to
supplement the Government effort with funds from commercial sources. A
considerable percentage of farmers are unable to purchase inputs from
reputable companies at commercial rates without Government assistance in the
form of a subsidy.
If the current situation is not addressed, the result will be low
agricultural production as well as a glut of seeds and fertilizers. Seed
houses and fertilizer companies are at the same time heavily borrowed in
preparation of the 2011/2012 agricultural season. These input suppliers are
also still owed UD$18.6 million from the previous season’s programme.
Furthermore, the input suppliers have not been paid the 10% deposit they
would have needed in order to start implementing the Government’s planned
US$45 million programme for the 2011/2012 season. Further complicating the
issue is the fact that the fertilizer suppliers owe Sable Chemicals
significant amounts for the supply of Ammonium Nitrate (AN). Sable Chemicals
in turn owes ZESA for the supply of electricity, which has led ZESA to turn
off electricity supply to Sable, halting production of AN.
This agricultural finance grid lock needs to be solved urgently to avert a
potential disaster in agriculture production which might end up being very
costly as the country would be forced to resort to food imports. GMB has
been unable to pay for grain deliveries by farmers due to limited funding.
GMB owes farmers US$21 million, money which would have enabled some farmers
to finance their own input requirements and to effectively plan for the
2011/2012 season.
DETAILS OF RECOMMENDATIONS TO REDRESS THE SITUATION
To avert the problems associated with underfunding of the 2011/2012
agricultural season, Government is implementing a Commercial Funding
Programme for the season consisting of the following elements:
Issuaing of 270 to 360 days US$100 million Agricultural Marketing Authority
(AMA) AGROBILLS through CBZ Bank. CBZ Bank is the current leading bank in
agricultural finance.
Utilizing the proceeds from the AGROBILLS as follows:
Purpose Beneficiaries Amount (US$)
Paying off farmers for grains delivered to GMB depots GMB 21 000 000
Providing funding for the 2011/12 farming season Fertilizer companies and
seed houses 56 200 000
Paying off outstanding amount from 2011/12 winter season Fertilizer
Companies 8 200 000
Paying for the 10% deposit to kick-start the US$45 million facility
Fertilizer & Seed Companies 4 500 000
Paying off debt outstanding from 2010/11 season Seed Houses 10 400 000
Total 100 000 000
ANALYISIS OF THE US$100 MILLION FACILITY
The different uses of the US$100 million sourced through the AGRI BILLs
complement each other.
The payment of the debt owed by GMB to farmers (US$21 million) will unlock
cash into the Agricultural sector as farmers are able to utilize some of
their cash in grain production related activities. The payment of farmers
for grain delivered to GMB will also improve the reputation of GMB as a
buyer of grain, thus attracting more grain, and enhancing GMB’s potential to
play a meaningful role in the commercial funding being proposed in this
paper.
Paying the fertilizer and seed companies what is owed to them by Government
(US$18.6 million) and providing them with the 10% kick-start deposit of
US$4.5 million, will provide them with the liquidity they need for their
operations, in particular the immediate movement of grain and fertilizers to
depots and farmers throughout the country. The Sable Chemicals ZESA bill
which has led to Sables being switched off is around US$6.5 million. The
fertilizer companies owe Sable, once they are paid what Government owes them
they will be able to pay Sable, and Sable will be able to settle its debt
with ZESA, and hence power will be restored. Sable will thus be operational.
Hence, the provision of commercial financing to cover the Government debt
(US$44.1 million) to both input suppliers and farmers, partly unlocks
liquidity for grain production for the 2011/2012 season. In fact, the
injection of any new commercial finance into the procurement of inputs by
farmers is inconceivable without addressing this debt.
The injection of US$56.2 million to finance the procurement of inputs by
farmers for the season 2011/2012 is the new money being added directly into
grain production by the Financial Institutions. This will then complement
the efforts of the Government (the US$45 million subsidy facility, and the
US$30 million swap scheme) and those of the NGOs.
PRICING OF THE AGROBILLS
In line with international pricing of Bonds in the region, the Bills are
expected to be raised at a coupon rate of around 10%. The pricing will be on
a tender basis. With an onward lending interest rate of 2%, the effective
interest rate to the farmer will be 12%.
Facility Repayment by Farmers
Farmers will settle their obligations at maturity from sales proceeds of the
financed produce. The Agricultural Marketing Authority (AMA) and the Grain
Marketing Board (GMB) have agreed to work out the modalities that would
ensure that all farmers who are funded under this programme will have a stop
order facility which will be utilized to collect the financed amount from
the proceeds from grains delivered to the GMB to settle loans with the
funding banks.
It is critical that this stop order facility works, and collection for
financing repayment is effective. In developing this instrument lessons must
be learnt from cotton and tobacco experiences including regional best
practice. The issue of side-marketing of grain must be addressed. Grain
production is a viable business, the farmers will produce enough grain to
pay their debt, and remain with extra grain for own use or trade. The
challenge will be on effective collection for repayment. The ability to
collect grain for repayment will define whether this commercial scheme
succeeds or fails.
GMB; Facility Repayment & Role in Stop Order Execution
GMB should settle their obligation from sales proceeds of grain that it is
currently holding. Government wiil be authorizing GMB to offload the grain
at current import parity prices of around US$240 per tonne, which ultimately
would imply a subsidy of US$45 per ton. At a price of US$240 per ton (which
the millers are agreeable to), GMB will realize US$48 million if it sells
200 000 tonnes. This revenue is adequate to (a) repay the US$21 million to
be made available under this scheme, (b) provide liquidity for the
transportation logistics of this proposed programme, and (c) the cash
required to promptly pay for new grain deliveries.
Once GMB has demonstrated capacity to pay and has a record of timeous
payments, more producers will willingly sell their grain to GMB. In fact,
GMB will be the preferred buyer of grain. In this way the SGR will be
maintained. As a general reform beyond the repayment, GMB must operate as a
commercially viable and efficient institution.
Major reforms are required at GMB. While the SGR must be retained, grain
must circulate. GMB must be able to continuously buy and sell grain. This
will ensure that the SGR is maintained with fresh grain. GMB must also
consider re-introducing maize grading. The GMB board must reflect all the
key agriculture stakeholders; fertilizer companies, seed houses, millers,
commercial banks, and other corporates.
The reformed GMB must be our millers’ preferred seller of grain and our
farmers’ preferred buyer of grain.
If GMB cannot be quickly reformed, another commercial institution must be
appointed or structured to develop and execute the farmer stop-order
repayment system.
AGROBILLS Special Features
In order to make the AGROBILLS attractive to potential investors Government
has accorded the Bills the following special features:
• Prescribed asset status
• Liquid asset status
• Tax exempt status
• 50% Government guarantee
The following documents have already been issued by Government and RBZ to
operationalize the issuance of the AGROBILLS:
Prescribed Asset Status Certificate issued by the Commissioner of Insurance
and Pension Funds
Liquid Asset Status Authority by the Reserve Bank of Zimbabwe
Tax Exemption Certificate by the Ministry of Finance
50% Government Guarantee by the Ministry of Finance.
Through consultations, it was agreed that there is a 50% Government
guarantee over the entire $US100 million. This means for the purpose of the
guarantee the $US100 million will be considered indivisible. The 50%
guarantee is spread across the entire amount. This means the Government and
Financial Institutions are equally sharing the risk, and should work closely
together to ensure repayment of the finance. Thus, there will be no
defaulting and the guarantee will not have to be exercised. In the worst
case scenario, that none of the farmers pays back, the Government will have
a debt of $US50 million, and the Financial Institutions will lose $USD50
million. Of course this will not happen. As demonstrated in the Ministerial
report, grain production is a very viable and highly profitable business.
The key issue is for the Government and the Financial Institutions to work
together in developing an efficient and effective stop order system to
facilitate collection of repayments. If this is done the Government will not
accrue any debt and the Financial Institutions will not lose any money. In
fact they will make healthy profit, while as a country we achieve food
security and inclusive economic growth.
LONG TERM ISSUES
There is need for a long term funding strategy for Agriculture, in order for
us to avoid the fire-fighting and crisis management that led to the
establishment of this Inter-Ministerial Committee. A process for the
development of a long term and comprehensive agricultural policy, including
the funding thereof, must be structured, discussed and adopted. Some of the
ideas and concepts in this paper can form part of this long term strategic
framework for Agriculture.
The issue of improved yields per hectare has to be addressed. The most
important variable in grain production is productivity, i.e., yield per
hectare. It is not enough to provide inputs for agriculture. The matters of
yield management and innovation leading to higher productivity are critical.
Agritex initiatives, use of high yield seeds, special fertilizers, and
creative methods such as Farming God’s Way (FGW) are necessary but too late
to affect this year’s yields. Programmes must be started nationwide for the
remainder of the season and for all future seasons for all farmers in
particular small scale farmers. Commercial funding of these yield management
and innovation activities must be sought as part of the long term
Agriculture policy and strategy.
……………………………………………………..
Hon. Professor Arthur G.O. Mutambara, MP
Deputy Prime Minister, Republic of Zimbabawe
Chairman of the Inter-Ministerial Committee on Commercial Financing of
Agriculture