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Disrupting Agriculture’s Fiscal Model

If Pakistan is to ever open up the economic potential of its agricultural sector, it will have to substitute outdated and ineffective financing methods in favour of ‘an enabling capitalist model’, argues Aijaz A. Nizamani.
Updated 08 May, 2024 11:28am

The Industrial Revolution changed the world when governments began to prioritise industries over agriculture. The process led to rapid economic growth in western Europe, North America and parts of Asia, mainly north Asia. The Industrial Revolution was run on fossil fuels and although it massively improved living standards, it led to an existential crisis in the form of carbon emissions, now totalling over 35 billion tons a year.

Humanity is now at a crossroads where we have to heal the planet and, at the same time, develop a sustainable path of economic growth and a system of global governance that will develop markets in parts of the world that were left behind by the Industrial Revolution. The world needs a new and enabling form of capitalism that will rapidly bring in sustainable growth and benefit the agro markets of the developing world.

Globally, there are approximately 570 million farms, and they can be largely categorised as those falling in the developed and developing (or underdeveloped) parts of the world.

The agriculture sectors in the US and the EU receive massive government funding and subsidies, mainly as direct fiscal transfers to farmers. These countries have smaller populations engaged in agriculture (1.3% and four percent in the US and the EU, respectively), and their governments have ample fiscal space to support and subsidise agro producers. In developing countries, a far larger proportion of their population is engaged in agriculture (in India and Pakistan, over 40% of the respective population is engaged in agriculture, and the figure for rural labour is even higher), and governments do not have the fiscal space to provide support to the people engaged in agriculture. In fact, in much of the developing world, government policies are focused on providing cheap food, mainly by controlling food prices. The consequences of this extractive nature of macroeconomics are manifested by the rural population migrating to urban centres in search of jobs.

The question is, what can be done at the macro and operational levels to stem the tide of rural migration and protect our planet? Much depends on the vision and political will of those who have the power to make such decisions.

The challenge is: how can the developing world produce enough food to feed its local population and then have enough to export to developed countries? Globally, we have the technology to gather data on every farm in the world, and in the last two decades, we have acquired two significant tech capabilities: satellite imaging and digital payment systems – they have the potential to transform rural businesses in the developing world. It is this kind of enabling capitalism that is needed in countries like Pakistan, especially in sectors where there is a lack of business and economic opportunities.

A Level Playing Field for Rural Businesses
The question is, how to introduce the kind of capitalism that brought rapid development in agriculture in the developed world, and in this respect, the first reality that has to be acknowledged is that stakeholders have to agree that these countries cannot provide the kind of fiscal support richer countries can give their farming community. The best that developing countries can do is provide their farming and rural communities with a level playing field, aided by enabling capitalism. The most obvious step is to stop suppressing food prices. In most developing countries, the availability of cheap food is ensured through different means, but the bottom line remains the same. In India, the government procures food at a minimum price and it is then provided free or at subsidised rates to poorer households, effectively raising the price for the producer. In Pakistan, food prices are suppressed through administrative measures and export controls – sugar is a case in point. Instead, governments should ensure food availability by purchasing the produce at market rates and then providing it to vulnerable households in both rural and urban areas. For example, the US government supports farmers with nearly $50 billion worth of fiscal transfers and subsidies and provides $87 billion to augment the agro produce market. This is an important lesson that our economic policymakers should learn: it is possible to support food producers without suppressing the market for agro produce.

Finance for Rural Businesses in the Digital Age
Finance is to business what air is to our lungs, and agricultural and rural businesses in the developing world are starved of competitive sources of finance. In countries where agriculture is massively subsidised, detailed data collection is essential to understanding issues and opportunities. It helps governments respond and support farmers in managing risks and seizing opportunities. In the EU, every farmer receiving a minimum of 200 euros per acre must apply every year, and it is this mechanism that allows governments to gain a full picture of the agricultural sector.

In Pakistan, there is a dearth of reliable data for the agriculture sector, and at times, it seems that we are happy to apply faulty data to policy decisions. For example, every year, the State Bank of Pakistan (SBP) fixes the agro credit target to the tune of trillions of rupees (the current year’s target is Rs 2.250 trillion). However, according to Salim Raza, a former governor of the SBP, agro-lending stands at only three percent of the banking sector’s lending portfolio, while the figure in India is 19% and in Bangladesh it is 21%.

So how does one motivate the banks to increase their agro-credit, especially given the sector is vital for Pakistan’s wider economy, as well as being a good market for banks? Experience has shown that banks are the last among stakeholders to extend credit to farms and livestock enterprises because of a fear of agro markets – a fear that is not restricted to Pakistan but is present across the developing world. In Pakistan, bankers fail to differentiate between their fears and legitimate business risks. The result of this mindset is that despite celebrations about ‘achieving agro-credit targets’, institutional sources of finance for farmers in Pakistan are almost non-existent.

Policymakers need to look beyond bankers towards alternative sources of finance and tap into peer-to-peer lending options. Peer-to-peer lending has been prevalent in the region for a century and has now gone global, with tech platforms extending this concept on a massive scale. In 2022, Pakistan formalised peer-to-peer lending (rather, they killed it) and the government permitted a maximum limit of rupees one million to a borrower, funded by at least two investors. It was a classic case of how not to do things.

As a highly regulated industry, banks need to be disrupted before they are ready to enter the rural finance market as a business opportunity, rather than being coerced by the SBP or because the government has set a target. Livestock and dairy account for over 50% of agriculture’s GDP, yet farm credit data hardly shows up on the credit assets of most bank balance sheets. The consequences of such low financing are reflected in lower farm productivity, with farmers depending on money lenders and arthis for their running finance and asset acquisition needs. Pakistan’s agricultural transformation will not be possible with the kind of mediaeval financing options available to farmers.

Agriculture Infrastructure and Climate Change
Infrastructure is a major handicap throttling the transformation of Pakistan’s agriculture sector, and in this context, the irrigation network is the most important. Drainage is the other side of the irrigation coin and functionally does not exist in Pakistan, resulting in salt accumulation in the soil at the rate of one ton per acre per year. The problem is that for most world policy gurus, infrastructure largely means roads, bridges, ports and power stations, and does not include irrigation installations such as barrages and canal networks. Although no formal asset valuation of Pakistan’s irrigation system exists, (comprising three large dams, 19 barrages, 43 main canals, hundreds of branch canals and over a million water courses in the Indus Basin), its asset value must be in the hundreds of trillions of rupees. Given the government’s lack of fiscal space, these assets should be used to raise international finance, including government, private sector and hybrid finance, if Pakistan is to reduce its climate change vulnerability.

Despite the rain damage in Sindh and Balochistan and the devastation caused by the 2022 floods, policy planners have done absolutely nothing and we continue to wait for calamities to strike. There is enough evidence to show that borrowing for water in the name of climate change has made matters worse. Both the Left Bank Outfall Drainage (LBOD) and Right Bank Outfall Drainage (RBOD) projects have proved worse than useless. The severity of the 2022 monsoon rains was caused by climate change (as confirmed by Imperial College’s World Weather Attribution), but the damage was exacerbated by faulty irrigation and drainage infrastructure. The Geneva Conference in January 2023 pledged more than what Pakistan requested, yet we have failed to submit quality and investment plans, while we wait for yet another rain disaster.

Agro Technology
In Pakistan’s agricultural context, nothing is more important than drainage technology. Tile drainage is a Dutch invention dating to the Middle Ages and is used to control the rise of the subsurface water table caused by supplementary irrigation. In Pakistan, particularly in Sindh, where the groundwater is saline and where options to use groundwater for irrigation and lower the water table are limited, farmlands continue to suffer and efforts have to be made to develop tile drainage commercially.

Any sort of meaningful commercial enterprise in irrigated areas will not be sustainable without a salt removal mechanism – in other words, drainage – and it is sad that despite borrowing billions of dollars from international lenders and investing them in public sector entities, Pakistan’s irrigation system is more vulnerable than ever. What is needed is a revamping of the irrigation and drainage technology options, along with smart policies aimed at making the agricultural sector sustainable. In this context, the private sector, mainly fertiliser companies, must enhance its capacity to respond to the needs of Pakistan’s agriculture. If necessary, they can tap concessionary international finance.

Technology for Produce Processing
There is a huge need and potential for commodity and agricultural produce processing, based on modern-day financing. Here again, funding has become an almost insurmountable constraint given the lack of understanding by formal (and urban-based) financial houses in Pakistan. China has a $400 billion meat market, from which Pakistani farmers and exporters can benefit. However, the availability of the right technology and funding remains an issue.

Marketing of Agro Produce
Marketing agro products is limited since Pakistan faces a hostile neighbourhood. Pakistan has no trade links with India; there is a war-like situation in Afghanistan; and border trade with Iran has almost dried up. Vietnam and Thailand have agro exports worth $53 and $38 billion respectively, due to their free trade agreements (FTA). Pakistan signed an FTA with China in 2006, but the benefits of this have yet to be seen. Pakistan’s foreign policy has to pivot to economic issues if agriculture is to become a source of foreign exchange earnings.

All these issues, related to finance, technology, marketing and infrastructure, affect Pakistan’s agricultural productivity and require a thorough understanding of the needs and how to match them to opportunities arising in global markets. This is the single most important challenge. Sadly, agro investment has historically been seen through the lens of aid dollars and executed by unaccountable and agri-illiterate bureaucrats. The time has come to change this.

Aijaz Nizamani is a hands-on farmer and agri entrepreneur.