Treasury’s vision to boost agricultural growth

By Tebogo Mashabela (Agricultural Economis).

On Tuesday, 27 August 2019 the National Treasury released a discussion document titled” Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa” to outline steps that could bolster economic growth and address the unemployment rate (29%) in South Africa. The document proposes a range of reforms on how to revive the GDP growth, including how the agricultural sector can help to grow the economy.

The discussion document highlights five fundamental building blocks of sustainable long-run growth and identifies a series of specific and detailed reforms to raise potential growth. These growth reforms are organised according to five themes drawn from priorities identified in the National Development Plan (NDP), namely: (i) modernising network industries; (ii) lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth; (iii) prioritising labour-intensive growth in sectors such as agriculture and services, including tourism; (iv) implementing focused and flexible industrial and trade policy; and (v) promoting export competitiveness and harnessing regional growth opportunities.

What does the discussion document say about the role of agriculture and how the sector should help to revive the domestic economy?

The discussion documents state that the domestic agriculture sector receives less government support than those of global peers, and calls on government to implement policies to help unlock inclusive, labor-intensive economic growth in agriculture. It puts forward some recommendations to grow the agricultural sector, and consequently the economy. The document argues that there has to be an enabling environment for investment in agriculture including:

Implementing innovative financing solutions required by farmers

Farmers have unique financing requirements, and they typically require high levels of debt to offset uneven revenue streams which arise from the seasonal nature of the agriculture production cycle and are therefore very sensitive to interest rates. Access to finance is essential for the implementation and long-term sustainability of agrarian transformation.

Concessional agricultural credit (e.g. declining subsidised interest rate loans) can play an important role in targeting export-oriented and labor-intensive commodities and support various developmental objectives. Concessionary finance could also increasingly be provided to commercial farmers in exchange for developmental concessions such as equity for farmworkers or contract farming arrangements with smallholders (to ensure they do not crowd out agribusiness products offered by commercial banks). An effective means to support agriculture, while limiting the financial burden on the state, is through subsidised interest rate loans. In recent years, the Land Bank has expanded its concessionary finance offering by blending different sources of funding to provide more attractive terms for farmers.

Introducing adequate and affordable agriculture insurance

The agriculture sector plays an important economic and social role, given its extensive links with the rest of the economy and importance for food security, and therefore business continuity in the sector is critical. Agricultural insurance can be an important tool for managing business continuity, and for ensuring food security on the one hand and stimulating rural economic development and the modernisation of the agricultural sector on the other.

Many agricultural producers in South Africa are not insured against the negative impacts resulting from natural disasters, such as drought, mainly due to the high costs associated with agricultural insurance. The National Treasury thus proposes that the Land Bank should take an active role in expanding the range of agricultural insurance products to support business continuity, ensure food security, spur rural economic development and modernise the sector.

Improving extension services for smallholder and emerging farmers

The discussion document notes that in South Africa, the quality of extension services is largely inadequate, and the coverage ratios are very low. If smallholders and emerging farmers are to transition to higher-value horticulture crops, intensive and high-quality extension support services are required. The document recommends that South Africa can adapt the Chile model that uses state subsidies to enable private service providers to deliver extension services to smallholders.

Enhancing trade promotion, market access, and access to water for irrigated agriculture

National Planning Commission (2012) emphasised in the NDP that access to water and irrigation systems are critical for unlocking increased investment in agriculture. There has been an insufficient investment to reduce the substantial loss of potential crop area and production arising from inefficient irrigation practices and maintenance backlogs.

Investing in establishing innovative market linkages for smallholders

The discussion document identifies contract farming and strategic government procurement, for example, as an effective method to help smallholder farmers achieve greater productivity, scale, access to inputs and markets, and ultimately facilitate promotion to emerging and commercial status. Contract farming typically involves agribusinesses providing small-scale farmers with key inputs (including among others financing, seeds, fertilizer, and training) and then purchasing a certain percentage of the farmers’ output.

As is the case with various government policies, including the NDP, that identify strategic government procurement as a tool for supporting smallholder farmers, the discussion document emphasises that to solve the market access constraint faced by smallholders, a strategic procurement mechanism could be put in place to connect smallholder farmers with government contracts in a structured and sustainable way.

Innovative joint ventures can boost agricultural production and promote agrarian transformation

Joint ventures can yield encouraging results for smallholders, including increased production, access to services such as training and technical assistance, access to inputs and production credit, as well as access to formal markets (including compliance with standards).

Cooperation with commercial farmers and large agribusinesses (and, in certain cases, with retailers) could be crucial in order to provide smallholder and emerging farmers with an effective channel to access domestic or international markets. Being incorporated into existing market linkages and value chains (of their commercial farmer or agribusiness partner) is decisive in enabling these farmers to expand and diversify production.

Most of the above series of recommendations to grow the agricultural sector, and subsequently the economy by up to 3% per annum is not new as most are stipulated in the NDP. The government is good at coming up with brilliant policies, but implementation has always being a challenge and as such it is to be seen if the National Treasury’s proposals contained in the report will be implemented.

Tebogo Mashabela is an Agricultural Economist by profession with two master’s degrees, Master of Science (MSc) Agricultural Economics and Master of Business Administration (MBA).

Treasury’s vision to boost agricultural growth
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