As a consequence of a 37% decline in the value of the
Euro against the Rand since 2002, the smallholder sugar farming sector in
Swaziland is facing a severe financial crisis. This was a major factor
contributing to a 21% decline in the sucrose price between 2002 and 2005. With
smallholder farmers responsible for investment in on-farm capital equipment
including irrigation systems, the decline in the sucrose price has had profound
effects on their financial viability. This is further compounded by the high
interest rates charged on their finance.
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.
Also,
the average operating costs in the smallholder sugar sector increase 40% since
2002. Individual grower margins and a 20-year cashflow budget are shown in
Annex III-01 and Annex III-02, respectively.
If
a form of financial restructuring can be undertaken which ensures that
smallholder farmers gain the financial benefit of any innovations adopted and
which also ensures that, over time, financial institutions get their money
back, then a sustainable basis can be laid for Swazi smallholder sugar
production, which enables it to survive the financial consequences of EU sugar
sector reform.
Measures
·
a
programme for the financial restructuring of seasonal loans, and laying a basis
for future funding will need to be developed. It might for example take the
form of a revolving fund which would subsidise the rate of interest on seasonal
loans. For it to bring about the necessary relief on the farmers’ financial
situation, the revolving fund would need to be financed from grants, rather
than loans;
·
persuading
financial institutions to restructure the terms of their loans by on one end
lowering the interest rate charged, and on the other, extending the repayment
period to about 10 years;
·
linking
the above initiatives to a commitment to adhere by certain farming practices,
that ensure improved productivity, and good financial management.
In
the absence of such a financial restructuring the current downward cycle of
declining efficiency and escalating indebtedness will continue. This will be bad for smallholder sugar
farming in Swaziland and bad for the financial institutions which have lent
extensively to the smallholder sugar farming sector.
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 and the accompanying lower price.
The
implementation of this scheme will put money into the hands of sugar farmers at
the end of each season. The amount of income distributed at the end of the
season would depend 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 at the end of the sugar season. It is also possible that efforts to contain
the escalation in seasonal costs would stand a good chance of success when this
scheme directly increases 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, more importantly, remove the
threat of substantial defaults on sugar sector loans which threatens the
stability of the financial institutions involved, as this scheme would ensure
that the financial institutions eventually get their money back with good and
predictable returns.