Economic Governance Watch 02/2022 - Command Agriculture The Debt Sinkhole

ECONOMIC GOVERNANCE WATCH 2/2022

[20th April 2022]

Command Agriculture : The Debt Sinkhole

Introduction

In November last year the Minister of Finance and Economic Development tabled in Parliament a comprehensive statement of public debt of Zimbabwe in terms of section 300(4)(b) of the Constitution, which reads:

“The Minister responsible for finance must … at the same time as the estimates of revenue and expenditure are laid before the National Assembly … , table in Parliament a comprehensive statement of the public debt of Zimbabwe.”

The statement, which can be accessed on the Veritas website [link], showed that Zimbabwe's sovereign debt has been growing at an alarming rate and, as of September 2021, stood at US$13,7 billion.  A significant portion of the debt was accumulated after 2015 when the government embarked on its Command Agriculture programme.

Background to the Command Agriculture Programme

The Command Agriculture programme was started in 2015 as a way to improve agricultural production following the land reform programme.  Banks were reluctant to lend money to farmers who had no title deeds to their land so the Government thought it would start funding agriculture by providing the farmers with inputs, for which the farmers would reimburse Government after they had harvested and marketed their produce.

The programme has been run by the military, which organised the procurement of inputs and supervised their distribution to farmers.  Inputs were initially provided by way of loans to the farmers with their debts being guaranteed by the State.  However there was a high default rate on the loans – 85 per cent – so the State as guarantor of the loans has had to bear most of the cost of the programme.

Between 2015 and 2018 the programme was funded outside the national budget, and an amount of US$3 billion in unbudgeted funds was expended on the programme during this period.

The US$3 billion came to public notice when the Auditor-General revealed it as unappropriated expenditure when she appeared before the Public Accounts Committee. She said the country had paid a number of companies for inputs. Two of the companies appeared before the Public Accounts Committee where they accepted that they received the money for the inputs but said they were not responsible for distributing them or collecting repayments from the farmers.

The New Agriculture Financing Model

For the 2020/21 agriculture season the Government contracted CBZ Bank as its agent for the Command Agriculture programme.  Farmers had to apply for loans or inputs to a division of the bank called CBZ Agro Yield (Pvt) Ltd, and would repay the loans to the bank after harvesting.  The farmers’ debts to the bank were guaranteed up to 80 per cent by the Government.

In 2020, according to paragraph 33 of the statement of public debt, the Government issued domestic guarantees to CBZ Agro Yield to cover the following disbursements:

ZW$1,5 billion, to finance the winter wheat crop.  An amount of ZW$1,21 billion has been recovered, representing a 77 per cent recovery rate.

ZW$76,8 million to finance the winter maize crop.  Out of that amount only ZW$440 000 has been recovered, representing a 0,6 per cent recovery rate.

ZW$21,7 billion to finance the summer maize crop.  Out of that only ZW$4,8 billion has been recovered, representing a 22 per cent recovery rate.

ZW$1,5 billion to finance the summer soya crop.  Out of that only ZW$199 000 000 has been recovered, representing a 13,29 per cent recovery rate.

In 2021, according to paragraph 31 of the statement of public debt, the Government issued guarantees for the following amounts:

ZW$100 million to finance horticulture and oil seed production.

ZW$20 billion for the purchase of grain.

US$750 000 for working capital for a company engaged in exporting roses.

It is too early to say what the Government’s ultimate liability will be on these guarantees.

Repaying or Refinancing the Debt

Due to the debt default by farmers the government faces a huge bill that has to be paid or refinanced in 2022  The Minister confirmed the seriousness of the debt default in paragraph 33 of the statement of public debt:

“Guarantees issued [in 2020] to Agricultural Finance Corporation (AFC), formerly Agribank, Silo Food Industries, IDBZ, and CBZ Agroyield (winter wheat) are on track, while guarantees issued to CBZ Agroyield for the winter maize and summer maize/soyabean cropping season are facing challenges of timely recoveries of the loans from the beneficiaries, which indicates a relatively high probability of being called-up in 2022."

In the current financial year, the Treasury will have to pay ZW$37 billion to service the matured Treasury Bills that were used to fund agriculture in the 2020/21 season.  The Treasury has no capacity to repay this loan and it seems the debt will have to be rolled over and new bills issued.  This will be expensive, as the Minister acknowledged in paragraph 12 of the report:

“The domestic debt maturity profile reflects the short-term nature of the domestic debt securities/TBs [Treasury Bills], as investors of government securities have a preference for short term instruments to hedge against inflationary pressures.  The maturity profile reflects Government’s refinancing risk, as ZW$ 31.3 billion (81 per cent) of outstanding domestic debt securities is maturing in 2022, with a corresponding interest bill of ZW$5.1 billion.”

Points to Ponder

The government has put billions of dollars into resuscitating agriculture production, but statistics in the Statement of Public Debt confirm that this has not helped Zimbabwe, as over the years it has continued to import maize, wheat and soya at a great cost to the taxpayer.

Private debt by farmers is being guaranteed by the State, and if farmers default, as most of them seem to do, the public has to pay their debts. In simple terms, some people (farmers) are using public finances for personal profit.

The giving of a few companies broad powers to purchase and distribute agriculture raise questions of State capture unless the processes are done transparently and the bidding for such tenders is done openly and can be scrutinised by the public.

Conclusion

Financing Command Agriculture has disproportionately bled Zimbabwe’s finances with little commensurate benefit to the public.  It is time for Command Agriculture to be reviewed with the aim of making individual farmers responsible for their debts.  If that means giving them bankable title to their land, then it should be done.  Funding agriculture is desirable and even necessary so long as it does not become a perpetual burden on taxpayers.

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2022