The current government is fond of making populist policies without first pondering on the nitty-gritty of the effective implementation of such policies. A recent example is the decision to force financial institutions to increase their credit to agriculture sector. Nepal Rastra Bank (NRB) has made it mandatory for commercial banks to lend 10 percent of their total lending to agriculture and energy within the next three years. At face value, it sounds good, given the increasing realization that the agriculture sector that has been neglected so far needs to take center stage in boosting economic growth.
However, it appears that the government has taken the new initiative without considering the core of the problem, i.e. it is not the lack of credit that is constraining growth of the agriculture sector, but structural issues that have little correlation with available credit.
Over the last three decades, it was only in 1992-93 that the agricultural sector received the highest percentage of lending from banks at 24.8 percent. Since then, credit to this sector has continued to decline and the figure in 2010-11 stood at just 2.7 percent. So, before rolling out misplaced policies to increase the percentage of credit to this sector, the government needs to probe the reasons behind such a drastic decline.
The government has to realize that the receding attention of financial institutions to the agriculture sector is due to structural constraints that have rendered this sector financially less attractive compared to other sectors that have handsome rates of return on investment. First, take the case of human resources. It is increasingly hard to find and hire workers even in top producing districts. For instance, Syangja is one of the top performing districts in the production of oranges and coffee but there are hardly any adults in the working age population --- a result of the lure of high income for manual work abroad. All one can notice is either infants or old age people. Whatever youth has remained is busy drumbeating the slogans of political parties in Kathmandu. The decreasing interest in agriculture sector in the top performing districts itself and the exodus of working age population makes it a very unattractive sector financially. No wonder, financial institutions are reluctant to give credit to agriculture.
Government’s move to force financial institutions to invest more in agriculture without addressing underlying structural issues will yield no result.
To be sure, remittances are the backbone of macroeconomic stability right now. And, the high inflow of remittances indicates the high exodus of Nepalese (around 1000 per day). It amounts to about 20 percent of the Gross Domestic Product (GDP). But despite the huge influence of remittances in the economy, we have not stopped saying that Nepal is primarily an agricultural country. More than 70 percent of the total population is still dependent on the agriculture sector. Unfortunately, remittances have not had any noticeable impact on agriculture.
In such a scenario, merely increasing access to credit will not resolve the structural problems. To retain workforce and investment in this sector, the youth needs to be made to realize that the opportunity cost of going abroad is far greater than that of engaging in agriculture. Rather than forcing financial institutions to lend money, the government should aim at enticing youth to work in this sector.
Before touting about commercializing agriculture, the government needs to make sure there is proper infrastructure in place so that projects in the sector seem financially viable. It is ironical that despite having the potential to export apples, we import apples worth billions each year. It indicates that access to credit is less of an issue than having proper infrastructure in place. The road connectivity to link farms with markets still remains a far-fetched dream. The World Bank’s data shows that Nepal’s road density is one of the lowest in South Asia. Over one-third of the people in the hills are more than four hours away from an all-weather road. In addition, five district headquarters are yet to be connected by a road. The quality of the road network is also poor --- 60 percent of the road network, including most rural roads, cannot provide all-weather connectivity. The maintenance of roads and contracts going to party honchos, leading to sub-standard work, is another story.
Ask any commercially engaged farmer and you will find that the main complain is the high cost of transportation and at times, the complete unavailability of transportation. On top of that, other bottlenecks like syndicates, market manipulation and middle men in the sector are unnecessarily escalating the cost of goods and production. Even today, the actual farmer does not get a good share of the profit pie, thanks to the middlemen who are mostly tied to a party or a local co-operative. For instance, traders in organic coffee farming share only meager profits with the farmers while keeping the lion’s share in their own pockets. It costs Rs 550 per kilo for organic coffee in the market, but the farmer gets only Rs 120 per kilo. One wonders what the value addition of middlemen is that would justify them raking in Rs 430 per kilo.
Against this backdrop, the high pitch made by Prime Minister Baburam Bhattarai to revitalize and commercialize the agriculture sector is just an unprepared and populist argument that does not hold much water. It is true that productive agriculture is a crucial element of inclusive growth and enhancing the efficiency of irrigation systems will continue to be critical to boost productivity, income, and to support rural livelihoods. But, doing so by forcing financial institutions to lend more to the sector will neither increase productivity nor make the irrigation system efficient.
There needs to be a proper incentive structure that would encourage the youth to remain in the country and engage in profitable agriculture. And for that, the government needs to make sure the supply chain is functioning effectively. Specifically, it needs to make sure that there are adequate seeds, fertilizers and irrigation facilities and proper roads to connect farmers directly with markets. It also needs to eradicate syndicates and middlemen that are unnecessarily escalating the cost of production and assure the farmers of right prices for their produce.
Furthermore, the government needs to realize early in the process that interventions are needed to ‘kick-start’ markets, but they fail if managed poorly and implemented without successful prior investments in infrastructure and technology. Liberalization policies give further impetus to agricultural growth when implemented earnestly. They will work only after agricultural supply chains function without bottlenecks and loopholes.
Hence, the government’s plan to force financial institutions to promote investment in agriculture sector without taking care of structural issues will at best yield limited results, if at all. It needs to realize that banks are private institutions motivated by profits. They will not expand credit without the prospect of a reasonable rate of return and active participation of the private sector. And in order to entice the private sector, removing structural bottlenecks is a must.
The author writes on economic issues
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