Leveraging on tobacco for currency stability 

Source: Leveraging on tobacco for currency stability – The Zimbabwe Independent May 4, 2018

It is quite concerning that, given the abundance of natural resources commanded to her care by God, Zimbabwe continues to face currency instability.

Persistence Gwanyanya,Economist

With the recent opening of the tobacco selling season, one is naturally tempted to reflect on whether the country is maximising value from the yellow leaf to support its currency as well as other economic imperatives. Ostensibly so, because tobacco is one of the top revenue earners in commodity-dependent Zimbabwe. Whilst our economy relies heavily on the yellow leaf, there is, arguably, a lot of untapped potential from this commodity owing to suboptimal financing and marketing structures.

Regrettably, this inadequacy occurs at a time when there is increasing demand for the country to innovate itself out of economic challenges as over-reliance on financial assistance from traditional financial institutions such as the International Monetary Fund (IMF) and World Bank is getting out of fashion. Thus, the most credible recovery strategy for Zimbabwe is through leveraging on its rich natural resource resources.

As usual, the opening of the tobacco auction and contract floors on the 21st and 22nd of March 2018 respectively ignited monumental excitement in the economy.

Besides sustaining the livelihoods of more than 100 000 families, tobacco is hailed for seasonally oiling the country’s nostro balances. Regrettably, however, I don’t expect much relief from the yellow leaf this year because the country has already squandered the bulk of the anticipated foreign currency from the commodity.

Remember the US$600 million Afreximbank Nostro Stabilisation Facility was provided as a bridging finance pending the receipt of foreign currency from this 2017/18 tobacco selling season. Our understanding is that this facility is being replenished at a lower level of US$400 million this fiscal year. This, together with the fact that most tobacco is prepaid attest to my proposition that not much relief should be expected from the yellow leaf this year.

Clearly, the highlighted situation demonstrates why piecemeal solutions to unlock value from our commodities are not sustainable. The country should come up with a wholesale strategy that unlocks significant billions of dollars from the yellow leaf, as well as other commodities, which will provide meaningful relief to the economy.

Clearly, the construction of our tobacco industry needs to be revisited as it exposes both farmers and the economy at large to the whims of tobacco merchants, who control the financing and marketing of the crop. Whilst more than 70% of our tobacco is contributed by small-scale farmers, it is largely financed by tobacco merchants, on their terms, as banks are averse to participating in the risk associated with grower finance. As such, more than 70% of tobacco is financed by merchants who buy it back at prices which they largely control.

The average contract price of around US$3/kg, is largely lower than prices obtained by merchants and from the final offtakers. Worse still, only a few merchants who have access to foreign markets end up exporting the processed crop. Due to the growing cartel in the tobacco industry as well as our stringent exchange control regulations, which require proceeds from tobacco sales to be remitted within 90 days from export of the crop, our tobacco is largely exported through middlemen in nearer destinations such as South Africa, at prices ranging from US$6-8/kg, which denies the country the opportunity to earn more revenue from the final offtaker.

Regrettably, more than 60 percent of this tobacco ends up in China, where it fetches handsome prices, which could be above US$15/kg. It is difficult for most merchants to sell directly to China, which normally takes up to a year to be paid, due to the distance between the two countries, yet the Reserve Bank of Zimbabwe requires the proceeds from tobacco exports to be remitted in 90 days.

Most important is that China as well as other huge tobacco countries have formed a strong cartel in tobacco, making it difficult for individual companies to challenge this without government-to-government agreements.

The only way to go around the marketing challenge for tobacco is for Zimbabwe and
China to structure a deal in which the former forward sells its crop to the latter and receives significant billions of dollars, which will be used to support production of tobacco, as a way of capacitating the country to meet its commitments under this structure, as well as sort out other key economic imperatives. Zimbabwe has potential to earn US$1,3 billion from its tobacco annually and, with proper financing and marketing of the product, this amount can easily be doubled or trebled. The country can easily unlock US$10 billion by forward selling its tobacco production for the next five years to China. From an annual production of, say, US$3billion, the country can comfortably meet its commitments towards the structure. Issues such as drought and low yields will be mitigated by investment in irrigation infrastructure and mechanisation.

If this approach is applied to other commodities such as gold, Zimbabwe can easily introduce its own currency, which is supported by foreign currency generated from the proposed structure. Then the country can use local currency for mainly operating expenses towards generating these exports.

That is how a normal economy should operate. It should sweat its local currency to generate foreign currency. Regrettably, it took many years for the RBZ and the Tobacco Industry and Marketing Board (TIMB) to realise the importance of this approach.

Commendably, the RBZ has now warmed up to supporting the bulk of the 30% of farmers who are not signed up to tobacco merchants under contract farming providing them with input support through the TIMB.

The body has supported more than 5 300 farmers during the 2016/17 farming season from whom it is expecting about 2,5 million kgs. The RBZ has increased its support for this programme to US$70 million, which is a clever way of creating value from Real-Time Gross Settlement money.

Importantly, the apex bank has opened a window for deserving merchants to usen funds sourced locally to purchase tobacco for export this year, which will have the concomitant effect of neutralising the growing cartel in tobacco.

It is always important for the country to realise that we have nobody but ourselves to blame for a faltering economy, when we have rich natural resources commanded to our care by the Creator. It is time to think outside the box and put back the economy at work again. Gwanyanya is the founder and managing director of Bullion Leaf Zimbabwe, which is a recently licensed Class “A” tobacco buyer.

Gwanyanya is the founder and Futurist of Percycon Global Fund Managers (South Africa). The company specialises in sovereign funding structures for central banks and governments. It also provides finding solutions to the private sector. Persistence is also the founder of Bullion Leaf Zimbabwe, which is a recently licenced class “A” tobacco buyer. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society, email: kadenge.zes@gmail.com, cell +263 772 382 852.