Enterprise TV – Nigeria Wastes Billions Subsidizing Inefficient Agricultural Operators – Economist
Billions of naira channeled to inefficient small scale agricultural operators by the Nigerian government through subsidized lending, has been described as wasteful, by reputed economist and former Managing Director of Diamond Bank, Mr Alex Otti.
Presenting a dinner speech at the 59th Annual Conference of the Nigerian Economic Society in Abuja on September 27, 2018, Otti said: “poor agricultural performance relative to large fiscal outlays year-on-year, reinforces the notion in business circles that subsidized lending to small scale and unstructured agricultural operations is inept, ineffective and grossly wasteful.”
He said, the current system of funding small scale farming through single digit interest rate loans in an environment of double digit inflation (currently put at 11.26%) is a clear instance of economic subsidy for an activity in which the social and economic cost can be considerably high.
“The fact that poor farmers are given loans at subsidized rates suggests that the government is subsidizing the most inefficient operators in the sector, who in turn, given the fact that they have access to cheap loans continue to operate at subsistence and inefficient levels of production with a high tendency to default on agreed repayment schedules.,” he said.
Otti argued that discrimination against bigger farmers discourages such operators from expansion and leveraging the application of increasingly advanced technology in the farm-yard production process, while at the same time encouraging smallholders to remain pint-sized and risky.
“Larger farm holders, on the other hand, with more efficient operations are likely to face the ordeal of wringing out loans from the clamped fists of bankers who are more favourably disposed to risk- free lending to the federal government at coupon rates of between 12% and 14% per annum.
“The dilemma creates challenges that could be avoided if government’s fiscal policy sees beyond subsistence farming to a broader agric culture that deliberately links farmers together in a social arrangement that makes everybody better off,” he said.
Otti pointed out that the agricultural sector has remained primarily subsistence and this has limited growth opportunities.
“If Nigeria is to advance in agriculture and be a significant influence on the global stage, it must be prepared to nurture larger farm holdings with increased application of technology. While micro, small, medium-sized entities (MSMSE’s) will not disappear, it is, however, important to canvass the argument that a more efficient structure in the agricultural sector would be to have these smaller entities serve as out croppers to larger businesses.
“The larger farmer would secure bigger demand through access to larger markets, which feeds through the sectoral value chain by having these more efficient economic agents serve as off takers to smaller farm producers. The larger producer would be responsible for price discovery at a more competitive global rate, take charge of storage costs and provide some form of crop insurance by way of agreed forward pricing,” he argued.
Otti reasoned that this would indeed make agricultural financing more attractive to banks and other non-bank financiers, who would charge lower rates for safer agricultural risk assets.
“The agricultural ecosystem would be bootstrapped towards greater efficiency and effectiveness through larger operators buying up commodities from smaller farming entities. If these larger entities could be supported with storage facilities and an efficient domestic commodity market then agriculture as a proportion of GDP would be significantly higher than the recent 22% down from 36% in 2009 and 37% in 2008. Between 2014 and 2017 average contribution to GDP was in the region of 21% with a variance of 7.8%, notably in 2016 the contribution fell to a ten year low of 18.2% despite huge amounts of money channeled into the sector by way of Central Bank of Nigeria (CBN) preferred lending schemes,” he stated.
According to figures he presented, companies such as Okomu Oil and Presco (with a 16,900 hectare plantation) that produce Oil palm products for the local market (but export about 5% of its output) have seen sales rise by as much as 60% from the second quarter of 2016. Okomu’s profit before tax stood at N11.1b as at December 31, 2017 as against N5.9b in 2016. Similarly, Presco, improved its profit after tax from N21.7b in 2016 to N25.4b in 2017.
Contemporary figures he said show that Nigeria’s agricultural sector over the last four years, has experienced rising growth but within a declining band. For example, the agricultural sector grew by 3% in the first quarter of 2018 but dropped to 1.5% by the second quarter of the year.
“Indeed, heading into 2018 the agricultural sector made up over N550 billion of GDP but this has since fallen to about N355 billion by the first half of 2018. This is of major concern when it is realized that between 2009 and 2017 the government through the CBN’s Commercial Agricultural Credit Scheme (CACS) spent a thumping N551.18 billion (for 547 projects) without sustained growth. In 2017 alone, the government made provisions for N200billion in CACS of which N155billion had already been disbursed by February 2018,” he said.