The challenges which will face agriculture in an oil economy

By Prof. Emmanuel Tumusiime-Mutebile

1. Introduction

FOR a country with fertile land and abundant rainfall which give it a strong comparative advantage in agriculture, Uganda’s agriculture performance is weak. Agricultural productivity per worker, at approximately $200 per year, is among the lowest in the world.

Real growth in agriculture has averaged only two percent per annum over the last 10 years, less than a third of the average growth of the rest of the Ugandan economy. Productivity is especially low in the food crop sub-sector, which is dominated by smallholder farmers, because farmers use rudimentary farm technology and produce mainly for subsistence rather than the market. 

The production of oil on a commercial scale will intensify the problems facing the agricultural sector. The spending of the revenues from oil in the domestic economy will inevitably bring about some appreciation of the real exchange rate. As a result food imports will become cheaper in real terms and agricultural exports such as coffee, tea and cotton will lose competitiveness.

Higher wages paid in the non-traded goods industries such as services will pull labour out of agriculture. All of these effects have been observed in many oil producing countries around the world, including those in Africa such as Gabon and Nigeria; they are features of the phenomenon known as Dutch disease.

Unless there are radical changes in our approach to agriculture, our agricultural performance will weaken further, with very deleterious consequences for rural poverty, employment, inequality, geographically balanced growth and food security. 

It is imperative to implement a comprehensive strategy to support smallholder agriculture if we are to avert a long term decline in the agricultural sector; a decline which will be accelerated by the exploitation of our oil resources.

If we can help the broad mass of farmers in this country to become more productive, raise their yields and sell more of their output on the market, it will be possible to create a more dynamic agricultural sector which is strong enough to survive despite the adverse impacts of oil on the real exchange rate.

Furthermore, by supporting Uganda’s farmers to increase their marketable output, we can boost agro-processing industries and thus promote industrialisation. Strengthening agriculture will not be possible without devoting more public resources to support the sector, but how we spend public resources is critical. 

2. What should be our strategy for agriculture? 

The goal of agricultural strategy should be to support the modernisation of agriculture. Modernisation entails farmers adopting good agricultural practices to maximise their profit and selling more of their output on the market. It will bring about a switch towards the production of higher value crops, as well as raising yields per acre and yields per worker. 

A feasible strategy for agricultural development in Uganda must have at its centre support for smallholder farmers. Smallholders comprise 96% of Uganda’s farmers. It is unrealistic to expect that Uganda’s agricultural performance can be turned around by ignoring smallholders and focusing instead on large farms. 

3. Policy measures to support agricultural modernisation 

Lawrence Bategeka and John Matovu of the EPRC in their research examined how agriculture would be affected by the spending of oil resources. In their baseline scenario, under which oil revenues are simply used to fund an expansion of Government, the real appreciation of the exchange rate leads to a significant reduction in agricultural production, especially production of the traditional agricultural exports.

However, Bategeka and Matovu find that, if additional budgetary resources are targeted at the agricultural sector, in ways which improve agricultural productivity, the negative impact of oil on agriculture can be mitigated, enabling the sector to avoid a decline in output.

Uganda currently only allocates about 3.5% of the Government budget directly to agriculture. Raising budgetary allocations to agriculture and for investment in rural areas should be a strategic priority. 

4. Agricultural finance 

Agricultural finance generates controversy in many developing countries, including Uganda. There is often an assumption that agriculture faces inherent difficulties in mobilising credit and that this is a binding constraint on expanding agricultural output which justifies government intervention to provide or subsidise finance.

There is no doubt that providing credit to small farmers involves very large transactions costs and high risks for financial institutions, which means that most small farmers are excluded from formal credit markets. Formal financial markets are subject to failures when serving small farmers which, in principle, provide grounds for Government intervention to promote financial inclusion. 

Modernising smallholder farming will entail smallholders making greater use of purchased farm inputs. Hence modernisation will require smallholders having better access to finance.

Nevertheless finance is unlikely to be the binding constraint on modernisation of smallholder agriculture and unless more important constraints are tackled, enhancing smallholders’ access to finance will be ineffective.

Policy measures to strengthen the provision of financial services in the rural areas must be part of a much broader set of interventions to support smallholders to adopt modern farm technology and produce for the market, of the type I have already mentioned.

Unless smallholders have adopted good agricultural practises, such as the use of improved seeds, proper field preparation, timely planting, weeding and pest control, proper harvest and post harvest handling, etc – practises which can improve yields significantly - they will not be able to utilise credit effectively because their farms will not be profitable. 

Microfinance institutions (MFIs) and savings and credit cooperatives (SACCOs) are much better suited institutionally than commercial banks to serving small farmers, but they are often constrained by managerial and technical weaknesses. Hence there is an important role for Government to assist MFIs and SACCOs to strengthen their management and the professional skills of their officers.

The Bank of Uganda is encouraging the larger tier 4 MFIs to upgrade to become licensed deposit taking MDIs. Assisting MFIs and SACCOs to strengthen their technical and managerial capacities so that they can mobilise funds from the communities that they serve and intermediate these funds to creditworthy farmers is a much more sustainable and effective approach to developing rural finance than providing them with funds from the budget for on-lending. 

5. Conclusions 

I want to end this talk by highlighting what I believe are the four key messages. 

First, agriculture in Uganda risks being severely damaged when oil production comes on stream unless comprehensive measures are taken to modernise the sector, by raising productivity and promoting commercialisation. 

Secondly, the focus of agricultural strategy must be smallholder farmers, who comprise the vast majority of farmers in Uganda, rather than large farms. 

Thirdly, Government should allocate a much larger share of the budget to agriculture and investment in rural infrastructure, but this spending should be allocated to public goods and services, not the subsidised provision of private goods. 

Fourthly, rural finance can contribute to agricultural modernisation in Uganda, but only if it is accompanied by effective measures to encourage farmers to adopt good agricultural practices, improve access to markets, improve control of animal and plant diseases and strengthen land rights.