The government held an emergency meeting with the tobacco players yesterday amid indications that Zimbabwe has lost the bulk of the proceeds from the sale of the golden leaf through the repayment of debts to tobacco merchants.
Tobacco, which is a multi-million dollar industry and one of the country’s major foreign currency earners, is also on the global onslaught of a possible ban under the World Health Organisation (WHO) Framework Convention on Tobacco Control.
To date, tobacco sales have generated over US$366m from 135m kilogrammes and a possible US$540m is expected to be generated from the 200m kg this year.
But from US$366m generated so far, the country is benefitting only US$55m with US$311m going towards the repayment of offshore loans to the tobacco merchants and insurance.
Of the expected US$540m, close to US$460m will go towards the repayment of loans and insurance while US$80m will benefit the country.
With over 95% of the country’s tobacco production being contract farming, the bulk of money will go back towards the payment of their obligations.
Government and players in the industry believe local financing of tobacco will benefit the country and will reduce the influence of the tobacco merchants.
“In interrogating and discussing the Tobacco Transformation Plan, I urge you to be bold, with sufficient magnanimity in outlook, while resisting the temptation to be bound by our personal short term gains, so that we can pitch this discussion at a national pedestal, where it deserves to be, to ensure that our country derives maximum benefits from its tobacco,” Lands, Agriculture, Fisheries, Water and Rural Resettlement minister Anxious Masuka said on the occasion of the National Tobacco Value Chain Transformation Plan Validation Workshop in Harare yesterday.
Tobacco exports contribute 50% of national agricultural exports and tobacco is the biggest single contributor to agricultural GDP at 25%.
But given the over borrowing from tobacco farmers, some have ballooning debts which are getting out of control.
Tobacco Industry and Marketing Board chief executive Meanwell Gudu told Business Times that the country is getting inconsequential amounts due to over-indebtedness of the tobacco growers hence local financing will improve farmers’ livelihoods.
“I can tell you that for every United States dollar that is earned in the country, over US$0.70 is going to the tobacco merchants through the repayment of offshore loans, hence, we would like the quick operationalisation of the Agriculture Finance Company to begin onshore lending,” Gudu said.
He wants to improve local funding to 70% in the next four years to improve the viability of the tobacco sector.
The tobacco merchants have been accused of manipulating the tobacco pricing system including the violation of the Tobacco Marketing Act which states that contract prices should be at par or higher than auction floor prices at all times.
Tobacco is the fourth largest foreign currency earner behind platinum, diaspora remittances and gold.
But the sector has been ravaged by the contractors and merchants, who have the financial capacity to extend lines of credit to farmers.
Tobacco merchants deduct their dues at the floors, a situation which has seen some tobacco farmers taking home negative balances as some debts are carried forward.
Zimbabwe Tobacco Association chief executive Rodney Ambrose said the low retention levels of 60:40, managed exchange rate and rising US dollar costs of tobacco production will not aid viability.
“Farmers may clear significant portions of historical debt but profit margins will be minimal and in the absence of significant local funding for tobacco production, farmers will borrow in US$ from the contractors and so the cycle will continue,” Ambrose said.
“This naturally will result in less new US$ being generated for the fiscus by tobacco production and there needs to be rapidly moving away from offshore funding of tobacco production to local funding and as per the Ministry’s and Government’s strategy, where at least 70% of tobacco growing funding must be locally sourced. The funding must be easily accessible, affordable and long term. This will improve grower viability and increase new foreign currency inflows.”
He estimated that 80% has gone to clearance of loans.
Farmers’ output, they claim, have not been creating sufficient returns to repay the loans in full and at least take home something significant.
This implies that the pressures on tobacco farmers are significant.
The dire situation has threatened farmers’ viability, a situation that has left most tobacco farmers living on the margins.
Farmers claim that the debt levels are now unsustainable with some having ballooned to critical levels.
The debts some farmers have been building up in the past few years.
About 90% of growers are now 100% US$ borrowed from their contractor, implying no new US$ comes into the country until US$ loans are repaid.
The government believes the Tobacco Transformation Plan’s objectives will help to increase tobacco production and productivity to 300m kilogrammes annually, primarily through yield increases, and post-harvest loss reduction, while enhancing traceability, compliance and environmental stewardship.
The strategy is expected to enhance value addition and beneficiation to 30% from the current 1% to generate US$5bn by 2025 and explore alternate and alternative crops in case tobacco is banned by WHO.