Wednesday July 16 2014

There is an urgent need to establish an agricultural bank

By Augustus Nuwagaba

For a long time, I have argued and still contend that we urgently need an agricultural bank. The reasons are simple. First, agriculture is the backbone of Uganda’s economy. The sector employs 72 per cent of the population. Secondly, Uganda is a regional food basket. The country produces her own food and has capacity to feed the whole eastern and southern Africa region. There is sufficient production of food with minimum food imports (if any). Thirdly, the country is endowed with favourable climate, water resources and fertile soils, all of which provide high leverage for high performance of the agriculture sector.
However, notwithstanding these attributes, the sector remains riddled with rudimentary technology, is based on small holder, low productivity culminating in declining contribution to GDP. There is a cross-section of constraints to the agricultural sector, prominent of which include:
Lack of financing: One critical impediment to the agricultural sector has been lack of access to affordable financing. The available sources of finance are traditional commercial banks. The disadvantage with commercial banks is that they charge not only high interest rates but also do not provide the critical consideration for appropriate grace period given the peculiarity of agriculture borrowing. While commercial borrowing comprise receiving of loans and purchasing the capital goods, say a public transport vehicle such as a bus for which the loan has been acquired, agricultural investments take long to generate returns. Yet, commercial banks are not concerned about this phenomenon. They charge interest on agricultural loans as if such loans were for usual commercial activities.
This problem can be solved by the establishment of an agricultural bank. Such a bank can raise the asset base through financial deepening focusing on listing the bank on stock exchange. The international best practices we can learn from, is the Agricultural Bank of China (ABC). By 2013, this bank had amassed financial assets amounting to $24 billion - a venture that may beg the question: “How did China pool such hefty asset base?” This was done through listing the bank on stock exchange. Because of the breadth of this effort, the bank was not only able to raise the assets beyond expectations, but bank is also able to set its policies such as interest rates.
This is because the people themselves are the share holders. They control the bank and, therefore, they make sure the bank serves their interests. Because of such resource outlay, this bank is able to charge low interest rate and still remain highly profitable. One argument that has been advanced by liberal economists is that de-marketising the interest rate by such an agricultural bank will distort the financial markets. They further contend that favouring agricultural borrowers with low interest rates will attract unscrupulous business persons who will borrow from the agricultural bank purportedly for investing in agricultural enterprises, but eventually misdirect such investments to other lucrative short-term commercial enterprises.
I do not agree with this argument because it tantamounts to what is usually called “throwing the child with bath water”. It concurs with the assertion that if someone is involved in stealing, then you chop off the hand. Imagine adopting such an approach in addressing the problem of theft in a community! The bank employs more than 10,000 employees and, therefore, contributes significantly to the Chinese economy. This bank is arguably among the most imposing corporate companies in the world (Broomberg news, 2014).
Marketing: It is always fundamental that for the agricultural sector to be viable, there must be a linkage between production and consumption centres. However, farmers encounter tremendous constraints in marketing of agricultural products. There has been great improvement in road infrastracure and this is a step in the right direction. It is hoped that the sustained investment in roads and railway systems will greatly enhance marketing of agricultural products. Once roads are improved, they will cut-off middle men who always want to exploit farmers because of remoteness of their farms. The improved prices will further enhance the incentive for farmers to improve production. Therefore, government should continue and even accelerate investment in infrastructure.
Supply side constraints: Weather conditions characterised by failure of rains, long drought spells, lack of irrigation infrastr=ucture and floods cause havoc to agricultural production. The major reason for the pervasive nature of these constraints is because we have up to now left agricultural production to God’s mercy. However, depending on nature will not guarantee expected production levels. Indeed, between 2010 and 2011, there was economic crisis arising from bad weather, which resulted into low food production, and the consequent hyper food inflation estimated at 45 per cent (UBOS 2012).This, coupled with the political crisis in the Middle East led to scarcity of petroleum products, a situation that saw rising oil prices. Because of the centrality of oil in both manufacturing and transport, there was inflation which greatly affected the Uganda’s economy.
Other factors: Other factors that have greatly hindered agricultural production include: Lack of access to land, low value addition and lack of agricultural insurance. The latter is critical because farmers who incur losses have no safety net. It would be helpful to have agricultural insurance as an incentive for farmers because this guarantees security to farmers as their farming activities are shielded from unpredictable vagaries of weather.

Prof Nuwagaba is a consultant in economic transformation.