Agriculture Struggles Despite Renewed Attention

Ethiopia’s economic growth over the last two-plus decades has been lauded as exemplary by many, including the World Bank and IMF. Nonetheless, development in terms of food self-sufficiency, unemployment reduction, and self-sustaining industrial growth have remained distant goals. The reality of the economy’s most important sector – agriculture – highlights the lack of meaning in encouraging annual economic reports or praise for unprecedented economic growth. Although there has been improvement, agricultural output remains low and the country still imports a large portion of the grains it consumes. Skyrocketing inflation and growing import bills have pushed the administration to double down on initiatives aimed at better productivity. It is the right call, but it will be difficult to achieve the goals without addressing the core issues plaguing farmers – lack of access to finance, the unavailability of mechanization, surging prices for inputs, and an ever-decreasing average landholding size. EBR’s Bamlak Fekadu explores the realities facing the Ethiopian agricultural sector and what the future holds for smallholder farmers.

During an address to parliament this past June, Prime Minister Abiy Ahmed (PhD) doubled down on his administration’s ambitions to enhance agriculture and efforts to use domestic farms’ output as a way to curb the skyrocketing food inflation. The Premiere hopes to see a focus on the expansion of mechanized farming and the application of cluster farming initiatives play a key role in increasing productivity.

He claimed that no less than 336 million quintals of crops had been harvested during the autumn season, and went on to reveal plans to include 45 Pct of the country’s total farmland under the cluster farming system this fiscal year. The efforts to boost productivity in the agriculture sector and the measures taken by the government to ensure food security and self-sufficiency are resulting in a positive outcome, according to the PM.

It is true that the agricultural sector is the main contributor to the government’s revenues. According to Abiy, recent sector reforms have helped the country increase annual export earnings to USD four billion in two years, up from less than USD three billion prior to the reform.

More than a quarter of last year’s earnings came from coffee exports, with over USD one billion recorded in the first 10 months of the 2021/22 fiscal year. The export of fruits and vegetables brought in slightly less than USD 83 million. The PM attributed the achievement to government efforts to resolve the core challenges in the sector, particularly related to the shortage of finance, through increasing access to loans. He also pointed to the ETB 15 billion in government subsidies to farmers, equivalent to ETB 1,000 per quintal to help tackle the unbearable increase in fertilizer costs.

The Homegrown Economic Reform Agenda (2020) sets agriculture among the strategic pillars for the administration’s aspirations for economic growth. Other pillars include manufacturing and mining. The agenda aims to develop the agricultural sector by leaving behind on traditional, rainfall-dependent farming methods, as well as facilitating mechanization, contract farming, private sector participation, and climate-resilient sustainable development. The reforms looks to inlcude pastoral and agro-pastoral areas in development by improving rural finance, including credit and insurance, to encourage livestock, farming, and irrigation agriculture.

Aside from cluster farming, which accounts for 45 Pct of total farmland, 5,000 tractors have been deployed to provide mechanization services, implying that 28 Pct of arable land has been cultivated using mechanized farming systems, according to the PM’s parliamentary address.

Abiy envisions Ethiopia, which is currently the world’s 33rd largest producer of wheat, moving up to the position of exporting wheat. During the ongoing summer irrigation-based wheat production, close to 24 million quintals of crop are expected to be harvested.

According to the global agriculture information network, wheat production is forecasted at a record of 5.18 million metric tons, whereas corn is likely to register at 8.63 million metric tons although federal officials say they are working to improve the figure through the supply of inputs.

Of the ETB 267 billion in loans the government has provided to the private sector this year, more than 34 Pct was allocated to those engaged in the agricultural sector. So far, approximately USD 1.2 billion has been disbursed to private agricultural investments, according to Abiy. Despite the regime’s effort and claims of achievement, food inflation remains at an all-time high. The Ethiopian Statistics Service (ESS) report from May indicates that inflation is accelerating by 2.2 Pct, an increment from the preceding month, which stood at 36.6 Pct, while food inflation was recorded at 42.9 Pct.

Ethiopia has been experiencing one of the most severe La Niña -induced droughts in the last forty years following four consecutive failed rainy seasons since late 2020. The prolonged drought continues to compromise fragile livelihoods heavily reliant on livestock and deepen food insecurity and malnutrition. According to a report from UN-OCHA, more than 7.2 million people require food assistance, and 4.4 million need water assistance. At least 2.1 million livestock have died, while at least 22 million livestock are at risk. Rainfall in the early part of the long rainy season (March-May) has been broadly below normal. There has been an increase in the number of new severely acute malnourishment cases. The increased proportion is 37 Pct in the State of Somali and 27 Pct in the Southern region.. The UN and non-governmental organization partners have previously stated they require at least USD 560 million to support the drought response from June to December this year.

Meanwhile, the Ministry of Agriculture (MoA) has drafted an agenda of vision 2030 to transform Ethiopian food systems to attain sustainable development goals of zero hunger. To achieve both the long-term and intermediate outcomes, action tracks and action areas, respectively, the Government of Ethiopia has identified “game-changing” solutions to maximize the benefits of the agricultural sector and improve the productivity of small farmers and pastoralists.

The agenda boldly states financial inclusion and adopting innovative technology as crucial enablers to attain the 2030 goal. It explains that to increase access to inputs and technologies and improve land management and agro-ecological practices, access to agricultural and rural financial services is key.

According to the Agricultural Transformation Institute’s (ATI) annual survey, only 28 Pct of smallholder farmers reported access to financial services. Farmers lack access to financing, which is essential to facilitate investment in productive technologies and equipment. This lack of financial institutions specifically serving Ethiopia’s vast smallholder farmer population has prevented households from capitalizing on their farms, preventing them from increasing incomes.

Ethiopia’s food system currently struggles with low levels of yield and productivity. The introduction of mechanized agriculture and livestock has significant potential to improve labor productivity and reduce food loss. To ensure the success of these modern agricultural technologies, Ethiopia will need to build capacity to train machine users and also ensure a strong and stable supply of trained maintenance technicians to ensure high utilization levels.

According to Samuel Assefa (PhD), an agronomist with over three decades of experience, smaller agricultural landholdings present a major challenge to increasing yield and efficiency in production and put pressure on farmers to produce even more output from small plot sizes, which leads to environmental degradation and soil depletion. He perceives that the high level of land fragmentation, coupled with declining land per capita, confines the application of mechanized farming.

“The lack of access to financing or lease financing for small farmers coupled with the prohibitive cost of machinery and lack of skilled labor, is a major obstacle for the growth of mechanized farming,” he remarked.

According to data published by the MoA in 2020, levels of mechanization are particularly low. There are 11,000 tractors with 70–180 horsepower (hp) plus 3,000 of the machines with 40–65 hp. That is 14,000 tractors and 1,800 combine harvesters for a total of 12.86 million hectares under cereal, pulse, and oilseed cultivation. All machineries are owned by both private and public-based agribusinesses in all states, but machines above 200 hp, mostly found in sugar industries, are not included. The figures come out to 918.8 hectares for a tractor and 7,145 hectares for a combine harvester. This is by far the lowest ratio compared to the world and Sub-Saharan Africa, as of MoA’s vision 2030.

The Position Paper on Agricultural Financing Improvement by Precise Consult highlights key issues that hamper the sector’s performance, such as inadequate national budgetary support for agriculture, low agricultural loan disbursement, and undiversified and non-corporatized agriculture. Despite agriculture’s huge development impacts, the budget allocation for agriculture remains very low, at less than 10 Pct of the total. Agriculture employs more than 85 Pct of the 110 million people in the country, and the expanded geographical coverage with enormous growth potential could have been a strong justification for the government to increase budget allocation to the sector.

The current fiscal year’s budget for agriculture was ETB 19 billion, which is substantially less than the ETB 67 billion, ETB 66 billion, and ETB 20 billion allocated for roads, education, and defense, respectively. In some years, the budget allocation is even lower than the principles endorsed by African heads of state for the Comprehensive Africa Agriculture Development Program (CAADP), which recommends allocating at least 10 Pct of national budgets to agriculture.

The growth in crop yield driven by agricultural intensification is slow due to inefficient land management, rain-dependent farming, droughts, low or non-existent farm capitalization, and increasing levels of environmental degradation.

Farmlands are spatially organized in small plots with a national average of 0.65 hectares, which is inefficient and hinders modern land management systems and environmentally sound food production. The size of farmland plots is decreasing, driven by rapid population growth.

Samuel perceives the recently introduced cluster farming for strategic crops in various parts of Ethiopia as a significant enabler to increase smallholder farmers’ productivity and market access. He believes cluster farming encourages farmer specialization and aggregation to facilitate scaled production and contract farming.

Financial services are critical enablers for sustainable economic growth, poverty reduction and food security. However, the financial service offerings to agricultural sector players in Ethiopia face gaps in terms of access to credit, savings, insurance, and payments. Only a few financial institutions serve rural areas in Ethiopia, leading to low levels of financial inclusion.

Based on the Development Bank of Ethiopia’s (DBE) annual report, the agriculture sector has been marginalized when it comes to loans disbursed over the past 40–50 years. The agricultural sector accounts for only 30 Pct of disbursed loans, compared to 60-65 Pct for manufacturing.

As a result, the share of bank loans for the agricultural sector remains very low compared to that of other economic sectors like manufacturing and services. The agriculture sector’s share varies year to year, falling as low as five Pct in 2018/19 fiscal year, which has a significant impact on planned agricultural activities.

According to the Economics Association’s Agricultural Finance and Insurance in Ethiopia’s Challenges and Policy Options Publication of 2021, rural households and micro, small, and medium enterprises in Ethiopia are significantly underserved with in terms of loans, saving, insurance, and remittance. Around 40 Pct of farmers are smallholders whose farming relies on fertilizer, and microfinance and cooperatives continue to be viable financial sources for farmers to obtain fertilizer.

Accordingly, more than 18 million small-scale farmers use Input Voucher Sales (IVS) to buy fertilizers, improved seeds, and agrochemicals. It is a system introduced by the ATI. It assigns microfinance institutions (MFIs) to provide credit to farmers through vouchers. The farmers are given up to a year to pay back the debts. Farmers utilizing fertilizer are in shock due to the skyrocketing price of fertilizer that has jumped by as much as 170 Pct over the last two years, or ETB 4,700 per quintal. Accordingly, the government faced a USD 1.6 billion fertilizer import bill, which is more than double compared to last year’s USD 688 million for the import of 1.8 million tons.

According to theFAO, Ethiopia’s growth rate of expenditure on food and agriculture from 2004–2018 exhibited a 26 Pct nominal growth rate, followed by Malawi at 22 Pct , Kenya at 18 Pct, and Uganda at 17 Pct.

Financial cooperatives and microfinance institutions are the two major sources of rural finance in Ethiopia. There are 39 MFIs that are currently operational, mainly serving micro, small enterprises (MSEs) with approximately 5.5 million credit account holders and with outstanding credit of more than ETB 64 billion. These MFIs face a number of obstacles, including strong competition from commercial banks, lack of automation that leads to high operational costs, and lack of linkage with commercial banks, among others.

The National Bank of Ethiopia (NBE) recently issued a directive that establishes a rule for MFIs to graduate into micro-finance banks, allowing MFIs to provide leasing services without the need for an additional license. Following the directive, Addis, Amhara, Oromia, and Omo, credit and saving institutions are scrambling to secure a license to form  full-fledged banks, while some have already secured it.

Access to finance is a big problem in agriculture. In the agricultural sector, capital is formed but invested in other sectors such as construction. It is very difficult to access foreign currency to even import fundamental inputs such as fertilizer, although most foreign currency is generated by the export of agricultural commodities.

Despite the government’s efforts and r policies to boost the sector’s performance, Samuel urges the authorities to amend policies to open up the sector more to private investment, which can take up a bigger share of the government’s burden, like importing fertilizer, maybe through franco valuta.

Existing banks (both private and state-owned) and the DBE are geared towards medium and large-scale farms, with minimal incentive to support the smallholder farmers that dominate Ethiopian agriculture. Ethiopia will need to support agricultural, cooperative, and rural development banks and develop the necessary legal and operational frameworks and regulations that can be rolled out throughout the country.

Addis Weg highlighted the establishment of an inclusive agricultural financing system in the light of supporting smallholder farmer development and agriculture-related livelihoods and encouraging access to improved inputs and technologies.

Many newer banks are being established and joining the financial sector. Although agriculture is a significant contributor to the economy, it continues to receive little financial support from over 20 private commercial banks, all of which are scrambling to meet the minimum threshold and none of which specialize in agriculture. Embedded in the draft Agriculture and Rural Development Policy, the Ministry of Agriculture was also tasked by the NBE to develop a detailed strategy for the establishment of an agricultural bank.

According to Anteneh Girma, senior policy advisor at MoA, the sector receives less than 10 Pct of total loans disbursed in the country, emphasizing the importance of establishing an agricultural bank to increase access to financing.

“Banks should provide between 30 and 40 Pct of total farm loan funding,” he said in the Addis Weg discussion regarding the agricultural reform. Anteneh highlighted how smallholder farmers are largely excluded from credit and other financial services due to a lack of bank branches, other financial outlets, or fintechs in rural areas.

According to Frezer Ayalew, director of bank supervision at the NBE, the financial inclusion strategy highly encourages financial institutions to address smallholder farmers with access to credit, among other services they can offer.

“Even at a time when there are requests to form specialized banks, there hasn’t been a request to establish an agricultural bank,” Freezer said, emphasizing the perceived low profitability of agricultural ventures, and how far the “moral hazard” on loan repayment has faded away lenders’ trust in agricultural investors.

A study by Precise, a firm specializing in finance, investment, business intelligence, and private sector development advisory services, urges the reinstatement of an agricultural bank with mandates to provide wholesale and retail banking services, and monitor institutions engaged in the supply of agricultural finance, and further promote private firms’ further engagement in agricultural financial markets through “equity finance,” “angel investment,” or “agent banking.”

A study by Precise suggests that if the agriculture sector in general and the smallholder farming system and pastoralists in particular are helped with access to adequate financial services (credit, saving, insurance, and payment services), positive and transformative results would be a reality. Subsequently, the employment of agricultural finance would bear positive outcomes, including improved adoption of farm technologies, employment of irrigation and mechanization that can double production, processing of agricultural products, diversified farming and development of commercialization.

DBE has been dedicated to agricultural financing, which goes back to 1909 when the first attempts of its kind were known as the Societe Nationale d’Ethiopie Pour le Development (the Society for the Promotion of Agriculture and Trade). Agricultural finance policy and regulatory systems were well organized, and agricultural mechanization and large-scale agriculture were encouraged and facilitated during the Emperrial regime.

Before the Ethiopian “socialist” revolution, commercial farms were flourishing in many parts of the country. There was an Agricultural Development Bank (ADB) which was operating at full-swing, financing commercial farms. Though few, there were also commercial banks that were encouraged by policy to finance investments in the agriculture sector.

The regime changes in the early 1990’s by the Ethiopian People’s Revolutionary Democratic Front (EPRDF) made policy pursued since then has made no significant deviations from that of the previous regime except “Liberalization of Agricultural Marketing”. The liberalization, however, did not fix agricultural production bottlenecks, including lack of access to financial resources, which is basic to financing technologies to enhance farm productivity and production.

The regime’s “Agriculture Development Led Industrialization (ADLI)” strategy was also an ambitious strategy that was aimed at not only developing the agriculture sector but also supporting the country’s economic and industrial development.

The lack of emphasis on agricultural financing by the ADLI strategy was the major factor that made achieving the strategy’s objectives, including food self-sufficiency at a country level, unattainable. EBR

EBR 11th Year • Dec 2022 • No. 113

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