Tobacco contract financing needs rethink

Source: Tobacco contract financing needs rethink | Sunday Mail (Business)

Business Reporter

OVER the past two seasons, net foreign currency inflows from tobacco stood at US$87 million from nearly US$1,6 billion in exports.

Reserve Bank of Zimbabwe (RBZ) statistics also show that net inflows were US$47,5 million in 2019 and US$39,4 million in 2020, but, in the same period, the value of tobacco shipments were US$843 million and US$763 million, respectively.

Zimbabwe is apparently losing significant value from a crop that was once considered the country’s second-largest foreign currency earner after platinum, and previously gold.

The central bank estimates average net inflows from tobacco are 12,5 percent of total exports.

About 95 percent of tobacco production in Zimbabwe is financed using offshore loans under contract farming.

The pre-financing arrangements mean after exports the bulk of the proceeds are used to offset offshore loans (capital plus interest).

However, there are concerns over the pricing of inputs that are given to farmers as part of the contract farming arrangements, as most believe that the value is usually inflated.

Merchants are also accused of using different costing structures for inputs, with most of them making money through these.

Some of them put margins, add administration costs or put interest charges on the value of inputs.

“There are so many loopholes in the offshore pre-financing arrangement and merchants are taking advantage of that,” said Mr Gabriel Tazvarwa, an analyst with more than 20 years experience in the tobacco industry.

“We need to find viable ways of financing tobacco locally to maximise export revenues.”

According to the Tobacco Value Chain Transformation Plan that was approved by Cabinet recently, local funding of tobacco has the potential to maximise net export proceeds accruing to Zimbabwe.

“If the banks are to get offshore loans for lending to farmers, the next export improvement would be zero, if not negative, as that only saves to transfer the foreign funding from tobacco merchants to banks,” reads part of a document prepared by the Ministry of Lands, Agriculture, Fisheries, Water and Rural Development.

However, banks are reportedly reluctant to provide loans to farmers, and this has been compounded by their unwillingness to accept 99-year leases as collateral.

“Most farmers do not meet the requirements to access loans as individuals so they end up going for the contract schemes.

“In the immediate term, the exports can be optimised through a standardised input pack and costing and guarding against underpricing by exporters,” adds the plan.

The strategy also focuses on beneficiation to maximise exports from the crop.

Zimbabwe, which is the world’s sixth largest producer of tobacco, is processing only 2 percent of the commodity.

The latest push for beneficiation and value addition seeks to unlock US$5 billion in export revenue by 2025.

It seeks to localise tobacco funding to 70 percent by 2025, boost output to 300 million kilogrammes, increase the level of value addition of the leaf into cutrug and boost the production of cigarettes to 30 percent from 2 percent.