There is need for an agricultural and industrial bank

Dear Editor,

Recently the Government of Guyana (GOG) entered into an agreement with the Caribbean Development Bank (CDB) to undertake a feasibility study as a precursor to establishing an agricultural and industrial development bank here in Guyana. Should the government’s decision be entirely dependent upon the CDB’s findings, or should that be juxtaposed with other critical concerns for socio-economic development?

We have had such a development bank (Gaibank) in the past, one that ended in the mid-1990s amid many accusations of mismanagement, poor recoveries and fraud. Whether enough efforts were made to validate such claims, and to even right those wrongs remains debatable. And yes, we may have all heard stories of borrowers filing for bankruptcy here in Guyana, while owning streets of real estate in Florida and apartment complexes in Queens. But hindsight is said to be 20/20 vision, and certainly we may want to acknowledge that things need to be done differently should we go this way again.

I believe firmly that there is need for government-sanctioned/administered credit programmes to ensure that there is equitable and structured access to affordable investment financing for entrepreneurs in our country.   One of the consistent complaints of small and medium-scale farmers, agro-processors and exporters, is obtaining access to affordable credit for developing their enterprises. Other complaints include lack of access to markets, suitable technology and affordable energy sources, and the poor prospects for value-added production, due mainly to prohibitive costs. All of these complaints can be traced back to two basic things – inadequate financing and poor competitiveness. Other factors that contribute to these problems, are economies of scale and scope – our agricultural operations are just too small and undiversified.

Agricultural investments carry a markedly higher level of risk that is not compensated for by any other instruments such as crop or flood insurance in Guyana’s private financial markets. Therefore, agricultural loans obtained in the local banking sector, inclusive of micro-financing, tend to carry interest rates that are significantly higher than loans provided for other forms of investment. Such loans obtained in the private financial markets tend to add tremendously to the overall cost of production and marketing, and can become a disincentive for agricultural investments, given the facts that the markets into which our agricultural products are sold are inherently unsophisticated, poorly differentiated and consistently offer producers low prices.

To encourage agricultural entrepreneurship and up-scaling of agriculture-related enterprises, the state is often required to provide forms of indirect subsidy, such as loans that have sub-market interest rates, or extended repayment periods. Other means of support that a government can provide include mechanisms for the waiving of certain collateral requirements (of particular importance, given our current state of land tenureship) and the provision of technical guidance along with incremental financing. These must be seen as necessary incentives for encouraging current operators and potential investors, and to aid the growth of what can still be considered as infant micro-industries within a rather uncompetitive sector.

ExxonMobil has indicated that petroleum production in Guyana is set to come on stream in 2018. The current government is reported to have asked the oil giant to front-load some of the expected oil revenues, probably to test the confidence of the company by asking it to “put its money where its mouth is”. Let us suppose that all goes well and we gain access to a significantly cheaper source of fuel that can dramatically reduce the cost of food production and improve cost efficiencies in value-adding downstream industries. This will create investment opportunities for entrepreneurs along the whole value-chain for each primary commodity, be it rice, fruits, vegetables, meat, etc. We can expect that many things previously deemed unfeasible will become economically possible with such developments.

The recently-concluded GuySuCo Commission of Inquiry coyly suggests that some form of privatisation of the sugar industry must be adopted. If we were to distil this recommendation, and examine the possible areas for privatisation, one can see avenues for a gradual, limited divestment of sugarcane production. If this were to entail the leasing to individual farmers and growers’ cooperatives parcels of arable lands held by GuySuCo, or the expansion of cane farming on privately held lands, the limiting factor to do so aggressively still remains entrepreneurs’ access to investment and working capital.

If the rice industry is to step up primary production and value-added processing, instead of relying too heavily on the export of paddy and cargo rice – practices which in many ways rob allied industries such as the livestock sub-sector of basic inputs – access to affordable credit financing again becomes critical. The local aquaculture sub-sector is another area that is somewhat stagnated, again because of issues related to financing and sustainability. If affordable credit becomes available, this can be an area for quick revival.

So there are enough reasons that justify our government taking the step to re-establish an agricultural development bank. However, the approaches described in the foregoing, cannot be construed as economically sustainable, lest its retention encourages dependency. Inherent in the operations of any development bank is the fact that there is a deadweight loss to society, but one that is necessary to bear because of the fledgling industries they are intended to support. At some stage the operations of such an agricultural development bank must be reviewed, with the objectives of weaning-off borrowers – sort of graduating them to become customers of fully commercialised banking ‒ and of making itself financially and perpetually sustainable.

Therefore, if we are to get to the “good life” our government envisions for us, and all things work out for the better with regards to our petroleum prospects, it would seem we have nothing to lose by getting on with the work of setting up the agricultural development bank many have been clamouring for. Maybe the first tranche of ExxonMobil’s front-loaded money can be the seed-capital for the bank!

 

Yours faithfully,

Khemraj Tulsie

Around the Web

Comments