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Agriculture needs more financial investment to boost productivity

By John Odyek

Added 28th July 2019 05:35 PM

The newly released Agricultural Finance Year Book (AFYB) states that lending to the agriculture sector attracts higher interest rates compared to those offered to other sectors.

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Byarugaba launching the Agricultural Finance Year book at the Sheraton Hotel, Kampala.Looking on are officials from Bank of Uganda, EPRC and ministry of finance. Photo by John Odyek

The newly released Agricultural Finance Year Book (AFYB) states that lending to the agriculture sector attracts higher interest rates compared to those offered to other sectors.

KAMPALA - The low financial investment to the agricultural sector is one of the major setbacks to improved agricultural productivity and agro-industrialisation in Uganda.

The newly released Agricultural Finance Year Book (AFYB) states that lending to the agriculture sector attracts higher interest rates compared to those offered to other sectors. “The higher interest rates that agricultural loans attract are due to the risks associated with the type of agriculture practices in Uganda and associated risks such as bad weather, bad harvests, fall in prices,” reads the AFYB.

AFYB notes that even when financed, agriculture attracts more short and medium-term loans at high-interest rates of 30%, a practice that limits the long term investments needed to transform the sector. The report compared agriculture lending rates in the period 2015-2018 to the trade and manufacturing sectors that were getting the majority of loans at rates of about 18%.

Bank of Uganda said the AFYB provides a knowledge base and a diversity of experiences from which policymakers can draw lessons necessary for planning and improving on the performance of the economy.

Dr. Louis Kasekende, deputy executive director Bank of Uganda said industrialisation is central to the structural transformation agenda of Uganda in which we seek to shift much of the population from informal low marginal productivity activities such as subsistence farming to sectors like manufacturing where labour productivity increases and is certainly much higher.

This was during the launch of the ninth edition of Agriculture Finance Yearbook 2019. The function took place at the Sheraton Hotel, Kampala. The book was produced by the Economic Policy Research Centre (EPRC) entitled ‘Development financing for agro-industrialization’.

In a speech read for him by Dr. Richard Byarugaba, director of finance Bank of Uganda, Kasekende said an export-led industrialization strategy will enhance productivity because firms that face competition on the international market are likely to enhance productivity growth than enterprises that focus on supplying the domestic market.

“An obstacle to agro-industrialization drive is the failure to modernize agriculture so as the industries can be assured of a reliable supply of quality produce. Also, integration efforts to reduce costs of access to international markets by removing trade barriers need to be boosted further,” Kasekende said.

Dr. Sarah Ssewanyana, executive director Economic Policy Research Centre (EPRC) said low funding to the agriculture sector has impacted on expanding the production base, improving agro-manufacturing capacities, improving Uganda’s domestic and international competitiveness.

“Despite the budget allocations to support the ministry of agriculture’s Agriculture Sector Strategic Plan 2015-2020, there are major financing gaps for the strategic ad priority commodities. The total financing deficit for selected enterprises such as vegetable oil, tea, coffee, cotton, meat, livestock is estimated that sh1 trillion over the next five years. This deficit has implication for unlocking agro-industrialization in Uganda,” Ssewanyana said.

In a speech read for her by Dr. Ibrahim Kasirye, director research EPRC Ssewanyana noted that government budgetary allocations target the production segment at the expense of processing and marketing segments, while the Agricultural Credit Facility focuses on the processing segment.

“Commercial bank credit to the agriculture sector has been focused on the processing segment because it is perceived to be less risk which puts other value chain segments at stake,” Ssewanyana said.

Alonso Cires Adolfo, international cooperation officer agribusiness, European Union said Uganda’s agriculture sector was dominated by family firms, sole proprietors and individuals who are unable to attract large scale funding.

Adolfo said there was little use of private equity which consists of funds and investors that directly invest in private agriculture companies. He said private equity can provide funding for long term periods of six years and above.

He called for creating an investment act that will create incentives for private equity investments in Uganda. “The investment act is missing in Uganda. Investors are forced to register companies and when they make money, they are taxed twice, because they have to pay capital gains tax,” Adolfo said.

Ramathan Ggoobi, an economics lecturer at the Makerere University Business School said whenever one thinks of investing they think they have to use their own money yet there are other options. Ggoobi said many educated people cannot run the business successfully because they lack business development services and skills to run businesses.

Mona Muguma-Ssebuliba, aBi Finance said the lack of collateral to access loans and technical support was a big challenge to smallholder farmers which hinders their progress. She said aBi was assisting farmers by giving them guarantees for loans and technical support to manage their farms.

“When farmers borrow you don’t have to put a rope around their neck before harvesting. Giving farmers loans without technical support is not enough. You have to make holistic support in the agriculture sector from to producers, processors, buyers for it to succeed,” Muguma-Ssebuliba said.

Tony Niro, a businessman said farmers need loans that are customized hence the need for setting up an agriculture bank. “Commercial banks have their own agenda which does not favour smallholder farmers. Their interest rates are too high for farmers,” Niro said.

Martin Fowler, an official from USAID said the enabling environment in Uganda’s agribusiness is weak. He said that according to the World Bank, Uganda’s ranking in this area is low. Fowler noted that the returns on capital to investment in agriculture is low due to fluctuating world prices of commodities hence sometimes agriculture attracts low levels of investment.

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