Banks reluctant to fund tobacco production
LOCAL funding of tobacco remains elusive as banks are reluctant to lend money to farmers despite a push by Government to finance the crop using domestic resources.
In an interview with The Sunday Mail Business on Friday, Tobacco Industry and Marketing Board chairman Mr Patrick Devenish said the majority of the farmers will again be financed under contract schemes this season.
In August this year, the Reserve Bank of Zimbabwe (RBZ) had to scrap the requirement that compelled merchants to source offshore financing to support production in a bid to boost local funding of the country’s second largest foreign currency earner.
In terms of the Exchange Control (Tobacco Finance) Order, Statutory Instrument 61 of 2004, merchants were required to source offshore financing to produce and buy back green leaf tobacco.
Merchants who failed to secure offshore financing were required to apply to the RBZ for authority to raise money on the local market.
The development was expected to boost funding of tobacco using local money, in line with the Tobacco Value Chain Transformation Plan, which seeks to raise the localisation of tobacco funding to 70 percent by 2025 to keep more value in the country.
About 95 percent of tobacco production is financed using offshore loans under contract farming. The offshore pre-financing arrangement means tobacco merchants bring into the country part of export proceeds in the form of inputs. After exports, the bulk of the proceeds is used to pay offshore loans (capital plus interest). However, concerns remain over the value of inputs. There seems to be a consensus among stakeholders in the industry that the costs of inputs are in most cases inflated.
It has been noted different merchants have been supplying inadequate inputs or inflating the costs. Merchants have also been using different costing structures for inputs, with most tending to principally make money through inputs distribution.
Some put margins, add administration costs or put interest charges on the value of inputs, and this has become a channel of transfer pricing, according to industry players.
This has the effect of increasing the price of the inputs and, in turn, increases foreign obligations and reduces net export proceeds.
While tobacco is the second single largest foreign currency earner after gold, the central bank estimates average net inflows from tobacco are just 12,5 percent of total exports.
“This season, most of the tobacco will be funded through contract schemes but I know the banks are trying to find ways of funding farmers; that would be for the next season,” said Mr Devenish.
The majority of indigenous tobacco merchants, also known as surrogates, are contracted by multinational companies. They act as middlemen between tobacco farmers and big merchants. The surrogate companies typically provide farmers with inputs — such as seed, fertiliser and pesticides — and then buy the cured tobacco from the farmers. They sell cured tobacco to big merchants, who then process and export the product. The surrogates often pay farmers low prices so that they can realise better profits. Some critics have argued that local banks should come up with innovative ways of lending, even without collateral. They say collateral is not always a reliable indicator of a borrower’s creditworthiness.
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