Zimbabwe: Tobacco Proceeds Channelled Offshore

(File photo).

Senior Business

There are growing fears that earnings from tobacco, which remains touted as the country's second single largest foreign currency earner after gold's net export proceeds, might be far less in foreign receipts compared to other commodities because most of the contract schemes are sponsored using offshore funds.

Reports say after export, most of the proceeds remain offshore in the hands of funders and the country benefits less since it's just a production platform. The central bank is on record that the country earns an average US$800 million from tobacco annually, but the huge amounts of money running into billions realised after value adding the cross as it circulates in global value chains is not enjoyed in Zimbabwe.

Stakeholders said it was high time the country reverts to domestic funding of the crop, as was the case two decades ago to also ensure viability of the farmers and continuity of the auction marketing system.

Foreign tobacco merchants claim they bear a lot of costs and risks, including borrowing and production costs, which according to reports, are passed to farmers and as a result making them less viable.

In as much Zimbabwean farmers are paid nothing beyond US$6 per kg, a local contractor that cannot be named for professional reasons, said high quality Zimbabwean tobacco can fetch more than US$15 per kg on global market and the amount increases along the value chains.

Similarly, the bulk of the money earned from tobacco exports is kept offshore largely to repay the said loans obtained for sponsoring the contract schemes mainly inputs.

According to figures from the Tobacco Industry and Marketing Board, about 96 percent of the farmers this season were under contract schemes, amid concerns that this may lead to the demise of the auction system.

"It's good on paper (the contract farming system) but there are many costs involved which are passed on to farmers and this renders them less viable yet on global market they (contactors) benefit a lot," Reserve Bank of Zimbabwe Dr John Mangudya said recently.

"The model is now expensive and needs to be reviewed so that we can have kind of an equitable mix of contract and auction."

Zimbabwe, which ranks among the world's largest producers of the "golden leaf", has a dual marketing system where the produce is sold through both auction and contract.

The local auction system used to be the marketing model in the world, but "free-funded" tobacco volumes have shrunk as most farmers who benefited under the land reform joined contract schemes as they lack capacity to borrow due to lack of collateral.

Besides, costs of farming inputs are too high, leaving farmers with no option than to borrow.

Over the years, the auction system, which determines minimum grade prices for contract sales, has been declining, with 96 percent of the crop now sold through contract.

With only 4 percent of farmers self-funded,

and the majority having been financed by contractors, this means very little volume will be sold through the auction system and might be insufficient to determine the minimum grade price of tobacco. This also means less proceeds of tobacco circulating locally.

There are growing worries among industry players that the demise of the auction system could see massive price manipulation in favour of contractors, which would frustrate tobacco farmers from growing this key commodity in the future.

In the 2021 Budget, Finance and Economic Development Minister Prof Mthuli Ncube, said local financial resources were critical to fund tobacco if the country was to maximise value.

"In order to ensure the country derives maximum value from tobacco farming, the country will be utilising more domestic financing facilities to finance tobacco farming activities as opposed to foreign loans in order to maximise foreign currency earnings from the sub-sector," said Minister Ncube.

Zimbabwe Tobacco Association chief executive officer Rodney Ambrose, recently said there was need to restore the viability of the auction system to insulate farmers from all kinds of abuse by the merchants.

"We need to return to a system where farmers self - finance themselves so that the auction system remains viable," said Ambrose in an interview last week.

"We cannot have a situation where contractors determine the price of inputs, the price of extension services; the prices of the final product. This leaves farmers in debt. Besides, the contract system is not healthy in terms of foreign currency generation." First published in our sister paper www.ebusinessweekly.co.zw

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