Agric growth threatened as banks pull back funding

The agricultural sector, long considered the backbone of Zimbabwe’s economy, is under threat as banks grow increasingly wary of lending to the private sector without Government guarantees.

The reluctance stems from mounting risks, such as El Niño-related climate uncertainties, and a tightening monetary policy aimed at stabilising the nation’s economy.

As a result, many financial institutions are cautious on extending much-needed capital to agriculture, leaving the sector reliant on Government support.

According to a report by Morgan & Co., loans to the agriculture sector as a percentage of total loans have plummeted over the last 12 months due to the El Niño phenomenon, which disrupted weather patterns and, by extension, agricultural productivity.

The value of aggregate loans dropped by approximately 40 percent between December 2023 and March 2024, exacerbated by the Reserve Bank of Zimbabwe’s tight monetary policy aimed at reigning in money supply and stabilising exchange rates.

“The agriculture sector remains the biggest beneficiary of fiscal allocations after receiving 15 percent of the Government’s budgeted expenditure in 2024,” stated Morgan & Co.

“The sector utilised 60 percent of its allocation in the first half of 2024, and the bulk of these funds were channelled towards the procurement of agricultural inputs.”

Despite the agricultural sector’s pivotal role in Zimbabwe’s economy, private sector involvement remains stunted.

The report suggests that while La Niña might drive a rebound in agriculture loans in the coming year, the central bank’s continued restrictions on liquidity could keep private sector support in check.

With banks hesitant to shoulder the risks, many in the financial sector are calling on the Government to offer guarantees to de-risk private sector lending to agriculture.

These guarantees would allow banks to extend loans to farmers and agribusinesses without fearing the potential fallout of climate shocks or market volatility.

Fanwell Mutogo, Chief Executive Officer of the Bankers Association of Zimbabwe (BAZ), clarified the banks’ stance on funding agriculture.

“Banks are not saying they do not want to fund agriculture, but they need assurances. So far, there are banks owed by farmers for funds released last year, and for some, it’s been over two years. Although the Government eventually moved in to guarantee payments, the delays are concerning.

“As BAZ, what we want are guarantees that the Government will pay farmers on time, which will enable them to repay their debts promptly. These assurances will allow banks to confidently continue supporting agriculture without bearing excessive risks,” said Mutogo.

The importance of private sector funding in Zimbabwe’s agriculture is underscored by the 2024 summer agriculture plan, which was unveiled by the Ministry of Lands, Agriculture, Fisheries, Water, and Rural Development.

The plan outlines a significant increase in agricultural production, aiming to boost cereal production by 340 percent, from 744 271 tonnes in the previous season to 3,27 million tonnes in the 2024/2025 season. Overall, production volumes of major crops are set to rise by 347 percent, from 914 848 tonnes to 4,09 million tonnes.

Under the summer plan, the Government has predicted a ZiG$22 billion (US$1,6 billion) towards agriculture, with 40 percent of this budget funded by the Government and the remaining 60 percent expected to come from the private sector including banks.

Morgan & Co. noted that, “The Government has committed to ensuring that there will be enough seed for the coming season, as well as delinking agriculture from rainfall through building the country’s irrigation capacity, and this is aptly mirrored by the sector’s disbursements in the first half of 2024.”

However, the ambitious production targets require substantial financial backing, estimated at over US$1,6 billion.

The Government is expected to contribute 37 percent of this sum, while the private sector will be tasked with contributing 60 percent through contract schemes and self-financed farmers.

For banks, this means that private sector involvement in agriculture is not only necessary but inevitable.

Agronomist Anderson Magura commented on the critical risks posed by underfunding the agricultural sector.

He stated, “The risks associated with underfunding the agricultural sector are immense. As Zimbabwe aims to surpass its food and feed requirements by 33 percent, any gaps in funding could have severe repercussions on food security, employment, and the nation’s GDP.

“Should the private sector fail to meet its financial obligations, the Government will face increasing pressure to fill the funding gap. Without robust support from banks, which are already pulling back, the agricultural sector could find itself in a precarious position.”-ebsinesswekl