Fringilla Lodge, October 2009

A PRESENTATION AT THE MULTI STAKEHOLDER MEETING BY ZANACO

FOOD AND AGRI FINANCING

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Contents

Introduction Financial Sector and Agriculture Zanaco Overview Zanaco and Agriculture Recommendation Conclusion

Introduction

Food and Agriculture

Key economic sector Under performed in the last 3 years; sector contracted by an average of 1.2% p.a. between 2006-

2008; 4% contraction in 2008 alone due to a 7% reduction in crop production Crop production reduction was mainly due to;

– Extreme whether patterns; floods, drought etc– High cost of inputs– Limitation to credit facilities, inputs, and extension services– Inadequate infrastructure– Poor livestock management– Weaknesses in the FSP and;– Failure to attract private investment in the sector

This is despite MACO having a medium term target of attaining 30% GDP contribution by 2015

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MACO NAP 2004-15

Food and Agriculture (cont’d)

Good water availability but untapped; over 1.7 trillion cubic meters of under ground water resources, and about 40% of surface water resources in the SADC region

Ineffective water rights and regulatory/demand management mechanisms Inadequate attention to research and extension needs of the irrigation sector Estimated 10.5 million hectares of land currently being used for agri production, despite 42 million

hectares of land classified medium to high potential for agro production (14% utilisation)

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MACO NIP 2006-11

Financial sector and Agriculture

Banking Sector Overview

Low banking penetration with a ratio of deposits to GDP of approximately 20-25% High historic growth rates of deposits (25-30% p.a.) and loans & advances (30-35% p.a.) Focus on primary agriculture 20% loan assets to agriculture sector 50% of provisions to agriculture sector; root causes;

– Tenor of financing does not match investments/capex need– Currency mismatch– Short term views by banks on agriculture borrowers and assimilated at normal corporate

borrowers– Lack of long term view to address cyclicality issues

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Challenges of financing food and Agric

Inconsistency and/or lack of continuity in policies (volatility in government policies) Distorting subsidies and spur of the moment import/export bans that decimate farmers and that

discourages banks from lending to the sector due to resulting price volatilities Lack of value chain infrastructure support i.e. feeder road network, land tenure and administration,

energy, communication etc, which creates linkages between supply side and demand side of the sector

Lack of warehouse financing legislation Lack of silos in the country forcing crops to be sold after harvest; too much power with

millers/traders Weak commodities market to provide risk management solutions (hedging) High energy costs Lack of long term funds for irrigation Outsourcing mechanization with risk of non-availability of harvesters etc versus underutilized assets

if owned by farmers

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Challenges of financing food and Agric (cont’d)

Some banks exiting the business, leaving farmers in a lurch for their seasonal requirements; Limited availability of long term funding; need to explore other long term funding options i.e. bond

issuance, Notes etc Privatize extension services; improve efficiency and investment availability Opportunity for guarantee schemes (CEEC, DBZ etc) Insufficient skills and information resources for the successful development and operation of

irrigation system

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Zanaco and Agriculture

Zanaco and Agriculture

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Strategic relationship with ZNFU (4% shareholding, 1 Director on the Board) Dedicated Agri business team On-going initiatives;

– Facilities for Commercial farmers – IFC; Emerging farmers– ZNFU; Lima scheme– NAPSSF; Munda Scheme– ADB; Zampip

Relationships with and funds distributed to 5,900 small scale, subsistence and emerging farmers Between 20% and 30% of the loans and advances portfolio is in Agriculture loans (depending on

seasonality) Improved credit turnaround times

Recommendation

Food and Agriculture sector sustainability

Top 6 issues from Zanaco’s perspective;– refurbish or build silos/warehouses– Enact warehousing finance legislation– Need for consistent and predictable government policies (no policy shifts); no spur of the moment

import/export bans– Professionalize/privatize extension services– Focus on yields!!!– Strengthen Regional Commodity markets

Strengthen value chain support infrastructure; land tenure and administration, road network, energy, etc

Incentivize creation of long term funding mechanism for the agric sector (fiscal and/or monetary) Minimize distorting subsidies and spur of the moment import/export bans Financial institutions initiatives to create hedging solutions for farmers Finalize CEEC, DBZ guarantee schemes Promote bilateral long term funding for irrigation Work closely with Banks on managing the FSP program

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Conclusion

Zambia should be a bread basket

Lots of land Fertile Soils Good water resources and availability if irrigated Reasonable rains nation wide Good banks Good farmers

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