Currently, newly established smallholder sugar farmers pay some 31% of total earnings in interest for both seasonal and capital loans. In many cases, this leaves insufficient funds to cover even the repayment of the seasonal loan. This is contributing to growing levels of indebtedness amongst smallholder sugar farmers. This is proving a direct challenge to the operation of farmer associations as this leaves no income for distribution to members. Some of the farmers are finding their own solutions to the income needs of their families and such activities have led to a deterioration in the efficiency of smallholder sugar production.
It is essential that this downward cycle of declining efficiency be halted and reversed, before the financial effects of EU sugar sector reform are felt through the wider economy in Swaziland. Without such reversal and support, newly established smallholder sugar farms will become financially non-viable. The key to reversing this downward cycle is the financial restructuring of smallholder loans, and concerted efforts to improve efficiency.
Financial restructuring of existing loans is essential, since without it smallholder farmers will see no personal benefit from the implementation of measures to improve yields, increase sucrose content and reduce seasonal costs. Put simply, under current circumstances the benefits of any improvements in production efficiency are not realised as the beneficiaries of such are the owners of the capital they have borrowed. The argument goes thus, “why improve when the one to benefit from such will be the bank, not me?”. Also, the average operating costs in the smallholder sugar sector increase 40% since 2002.
Review of operating costs of smallholder sugar farmers
(based on seasonal loans extended)
2001 | 2003 | 2005 | % change | |
Capital Costs per hectare (R) | 22,000 | 26,000 | 29,000 | +32% |
Seasonal Costs per hectare (R) | 10,000 | 11,000 | 14,000 | +40% |
Why the Current Situation is Financially Unstainable
The
table below indicates the sucrose price (Emal 1,666 per tonne) which
would be required to meet current loan obligations under the currently
prevailing circumstances in which:
|
What type of financial restructuring is required
Analysis undertaken by the Swaziland Sugar Association suggests that, for the smallholder sugar-farming sector to be placed on a sustainable financial basis, two things need to happen:
a) seasonal loans need to be provided from a grant financed seasonal loan revolving fund on which a nominal administrative charge of 4% is charged;
b) the interest
rate paid by farmers on capital investment loans needs to be brought
down to 7% (and the repayment period extended to 10 years), so as to
ensure that there is a real incentive to adopt innovations which improve
yields, increase sucrose content and reduce seasonal costs.
The
question arises how can this be achieved without pushing the financial
institutions involved in lending to the sugar sector into financial
difficulties?
…how this can be achieved…
The
issue of seasonal loans and capital loans need to be tackled
differently. For seasonal loans the requirement is for the mobilization
of grant financing to constitute the revolving fund. This would need
to mobilise Emal.14 million per 1,000 ha of smallholder sugar production
involved in the scheme. A tripartite approach involving contributions
from the sugar industry (both as a whole and from the millers directly),
the Government of Swaziland and international donors offers the best
way forward for the constitution of this scheme.
For capital loans four steps appear to be required:1) a harmonization of interest rates by the financial institutions across all smallholder farmers involved in the scheme;
2) the unilateral reduction of interest rates charged by the financial institutions involved in the scheme to 12% and extension of the loan repayment period to 10 years;
3) the provision of an annual interest rate subsidy of 5% from the specially constituted Restructuring and Diversification Fund, envisaged under the “Budget Support/ Levy swap” arrangement
4) the linking of access to the
interest rate subsidy facility and seasonal loan facility to the
adoption of an agreed code of conduct on best farming practices and
best financial management practices.
Such a
scheme would restore financial stability to the smallholder-farming
sector and lay the basis for the introduction of measures to improve
yields, increase sucrose content and reduce seasonal costs. These
improvements would then equip the smallholder sector to be better able
to cope with the consequences of EU sugar sector reform.
The "Budget Support/Sugar Levy Swap" Arrangement
This
simple proposal aims to address both the principal and most direct form
of government revenue losses arising from the consequences of EU sugar
sector reform and the need to secure the early release of financing for
stakeholder led restructuring and diversification initiatives.
It
involves the Government of Swaziland seeking from the EU additional
annual budgetary support equivalent to the earnings currently derived
from the “sugar levy” (some €3.6 million). Such a programme would
extend over the eight year time frame of the EU sugar sector assistance
programme. In parallel with this, the government of Swaziland would set the “sugar levy” at zero while the Sugar industry through the Swaziland Sugar Association would raise a “restructuring levy” equivalent to the “sugar levy”, which would be paid into a “Restructuring and Diversification Assistance Fund”. This fund would then provide financial resources for support to specific targeted restructuring and diversification initiatives, designed to minimise the adverse effects of EU sugar sector reform on the Swazi economy and society. The first priority for this fund would be the provision of a 5% interest rate subsidy on smallholder capital investment loans and a contribution to the seasonal loan revolving fund. |
The benefits of the scheme
The
implementation of this scheme will put money into the hands of sugar
farmers at the end of each season, with the amount of income distributed
at the end of the season depending on the success achieved in adopting
innovations to improve yields and sucrose content. The successful
adoption of measures to improve yields and sucrose content would be
greatly improved if farmers know they would get the benefits of such
innovations come the end of the sugar season. What is more it would
seem reasonable to assume that efforts to contain the escalation in
seasonal costs would stand a good chance of success, if this directly
increased the money paid out to smallholder sugar farmers at the end of
the season.
In terms of the interests
of the financial institutions, this scheme would still provide the
financial institutions with a rate of interest above that recently
charged for car loans in Swaziland. It would furthermore remove the
burden of seasonal loans, repayment of which is becoming more and more
difficult. It would also, of course, remove the threat of substantial
defaults on sugar sector loans which overhangs the financial
institutions involved, since this scheme would ensure that the financial
institutions eventually got their money back.
Swaziland Sugar Association