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Business Reporter

The Reserve Bank of Zimbabwe (RBZ) has scrapped the requirement that compelled merchants to source offshore financing to support the production and buying of the green leaf from contracted farmers, governor Dr John Mangudya said.

In terms of the Exchange Control (Tobacco Finance) Order, Statutory Instrument 61 of 2004, merchants were required to source offshore financing to produce and buy back green leaf tobacco. The merchants who failed to secure offshore financing were required to apply to the RBZ for authority to raise money on the local market.

The development is expected to boost funding of tobacco using local money and is in line with the Tobacco Value Chain Transformation Plan, which seeks to raise localisation of tobacco funding to 70 percent by 2025 to keep more value in the country.

About 95 percent of tobacco production is financed using offshore loans under contract farming. The offshore pre-financing arrangement means tobacco merchants bring into the country part of export proceeds in the form of inputs.

After exports, the bulk of the export proceeds are used to pay offshore loans (capital plus interest).

However, concerns remain over the value of inputs. There seems to be a consensus among stakeholders in the industry that the costs of inputs are in most cases inflated.

It has been noted that different merchants have been supplying inadequate inputs or inflating the costs. Merchants have also been using different costing structures for inputs with most tending to principally make money through inputs distribution.

Some put margins, add administration costs or put interest charges on the value of inputs and this has become a channel of transfer pricing, according to industry players.

This has the effect of increasing the price of the inputs and in turn, increases foreign obligations and reduces net export proceeds. While tobacco is the second single largest foreign currency earner after gold, the central bank estimates average net inflows from tobacco are just 12,5 percent of the crop’s total exports.

“With immediate effect, there will be no restrictions on the use of locally sourced funds to support the production of tobacco in the country,” Dr Mangudya said in the Mid-Term Monetary Policy Statement last week. “Considering this development, the Exchange Control (Tobacco Finance) Order,

Statutory Instrument 61 of 2004 shall be amended to take account of this change.”

Industry players have welcomed the move by the central bank, saying this would open the industry to more indigenous players. While the majority of the merchants are indigenous, most of them are surrogates who contract farmers on behalf of multinational companies.

“This makes life easier for local merchants,” said an executive with a local tobacco company. “Seeking a special dispensation from the central bank to source local funding created a regulatory impediment for local players to jump through.

“By allowing merchants to source local funding, this opens the industry to more indigenous players.”

Terrence Ngarwe, a Harare-based agriculture economist said the new policy measure would see the country “retaining more value” from tobacco. “By having tobacco funded with local money, it means more money stays in the country,” said Mr Ngarwe.

Zimbabwe Farmers Union executive director Mr Paul Zakariya said while boosting local funding of tobacco was a welcome development, the industry needed to move away from the contract farming model while at the same time boosting the processing and manufacturing capacity if the country was to realize more earnings.

“The financing mechanism through contract is not viable even if we are to fund tobacco using local money,” said Mr Zakariya. “We need to alter the whole production environment to an extent that farmers can be self-financed and get loans from the banks and sell tobacco at the auction. 

“It is equally critical that exports of processed tobacco are regulated so that more volume can be fed into manufacturing plants.” Under the Tobacco Value Chain Transformation Plan, the country seeks to unlock as much as US$5 billion through beneficiation and value addition.

This year, the country produced a record 295 million kg of tobacco, up 205 last year due to a good season, improved agronomic practices, and better funding packages by merchants, according to the Tobacco Industry and Marketing Board.