Michael Tome
Business Reporter
STAKEHOLDERS in the tobacco industry have started taking a closer look at interventions that are required to increase the current limited net benefit to Zimbabwe from production of the golden leaf, amid calls for the country to explore new sustainable models of local funding for the lucrative crop.
While the sub-sector generates hundreds of millions of dollars annually, the net inflows remain insignificant largely because of the external financing model for the crop and limited value-addition activities.
The crop remains one of the biggest foreign currency earners, generating upwards of US$1 billion annually, although only a fraction of that is retained in the country.
The bulk of the earnings go offshore, towards settling loans extended to farmers by merchants.
Experts say Zimbabwe has the potential to realise up to US$60 billion from tobacco and tobacco product exports annually. According to them, most of the potential earnings are being lost to raw exports or semi-manufactured tobacco shipments and externally sourced funding.
Zimbabwe is the sixth-largest producer of tobacco in the world, accounting for nearly 7 percent of the world supply. Additionally, it is the fifth-largest tobacco exporter in the world.
Proposals to optimise returns from the tobacco crop and industry, in general, include the need to put in place financing mechanisms for the procurement of state-of-the-art machinery needed for value addition.
Presently, Zimbabwe is value-adding and beneficiating less than two percent of the total tobacco crop grown in the country.
Notably, something is happening in this regard, but the scale remains too small if the sub-sector is to reach its full potential.
A few companies have started producing cigars using locally grown tobacco.
One of them is Mosi-oa-Tunya in Victoria Falls, which established its operations with the assistance of the Tobacco Research Board. The board helped with technical expertise and the development of varieties.
A kilogramme of tobacco reached a high of US$4,99 at this year’s tobacco auction floors, but value-added cigars can fetch up to US$6 000 per kg, while a kg of cigarettes can be sold for much more on global markets.
Addressing delegates at a recently held tobacco conference organised by the Business Weekly newspaper in Harare, the Ministry of Lands, Agriculture, Fisheries, Water and Rural Development Permanent Secretary, Professor Obert Jiri, said more efforts should be channelled towards value addition of tobacco to realise more revenue inflows.
“Figures show that our tobacco industry has the potential to have US$60 billion value, then you try to look for the US$60 billion, you cannot find it. Our last year production was 296 million kilogrammes, and the impact of that tobacco was not tangible,” he said.
According to official statistics, the country is retaining an average of 12 percent of its value from tobacco exports. Last year, Zimbabwe exported tobacco worth roughly US$1,3 billion.
“I cannot find that impact because our farmers are crying, tobacco merchants are crying, auctioneers are still crying and the processors are still crying and most importantly, our economy is crying.
“There is no congruency between what we are producing and the value we must get; the economy is not realising the value of tobacco.
“We must transform, value add the leaf that we produce to a product that we can export, that is the crux of the tobacco value chain strategy that we have as a ministry, giving more value to the economy,” said Prof Jiri.
He said in the mining industry, the Government had come up with regulations to ban the raw export of lithium, suggesting the same could be done with tobacco to internalise value.
“In the mining space, they are curbing the export of raw minerals; they are saying lithium should be exported as sulphates. We can do the same and say yellow gold must not be exported raw, it must only be exported when value added.”
On the tobacco financing side, Prof Jiri said there was a need to develop sustainable domestic financing models for the production of tobacco.
He said the current scenario where 95 percent of the funding comes from outside the country should be changed.
He also implored pension funds and other financial players to consider providing financial support to the tobacco sub-sector.
“If we can build these buildings using pension funds, why can’t we build the agriculture sector, particularly the tobacco industry, using pension funds in tobacco farming? We literally can grow the money.
“All these stories about us getting 95 percent offshore financing must be corrected, because we do not want to continue exporting our foreign currency; we need to create value for our country,” said Prof Jiri.
Economists, farmers and bankers proposed utilising retirement savings, Government bonds and diaspora funds as potential sources of capital.
Speakers also urged local banks to develop creative financial products tailored to the tobacco value chain.
Weighing on the issue, POSB divisional director Mr Farai Chirikure said the banking sector would continue exploring ways to increase capacity to finance the sub-sector, in collaboration with the Government.
“Yes, banks currently have limited capacity, but I still see scope in us coming together to increase the capacity to support agriculture, and tobacco in this instance.
“We, however, have limitations in terms of accessing external lines of credit. Some of the international financiers are not supporting tobacco farming already, like anti-smoking campaigns, so we have limited capacity in terms of accessing lines of credit.
“We also have agro bills that have been done before.
“These can assist in mobilising a little bit more local funds to support the tobacco business, which the country is currently relying on in terms of foreign currency,” said Mr Chirikure.
Economist Mr Persistence Gwanyanya said the contractors were getting away with the biggest chunk of money in the value chain, hence the need for the Government and stakeholders to find ways of alternative financing.
“There should be a right mixture of external and domestic funding. In the past, there was a statutory instrument that limited financing of tobacco from external sources.
“There is a need for increased private sector participation and increased mobilisation of domestic resources. I am sure the Government has approved the raise of US$60 million for the tobacco sector funding.”
Mr Brains Muchemwa, an economist and founding director of financial services company Oxlink Capital, said it was a tall order for local banks to adequately fund the tobacco sub-sector.
“Our local banking sector is limited; it is currently not able to finance this huge sector,” said Mr Muchemwa.
Zimbabwe Farmers’ Union executive director Mr Paul Zakaria is on record saying local funding can save the sub-sector from going the same route as the cotton industry, which was almost destroyed by the huge influx of contractors.
“Over 90 percent of locally grown tobacco is funded by contractors, and once farmers produce, you pass it on to the contractor. Most of these contractors are fronting (foreign) merchants.
“The real value of tobacco is in value addition, yet as a nation, we retain only four percent, which is freely funded. We have no power over the rest as it is exported in its raw form by these merchants. We need to reverse that and revive our auction system where free tobacco goes,” Mr Zakaria told The Manica Post recently.
“We need to make sure that we have our own localised financing mechanism to produce our own tobacco, add value by processing it into cigarettes and then export to realise huge foreign currency earnings. What we are currently doing is as good as exporting jobs and foreign currency.
“We should actually work with 20 percent of contractors and 80 percent locally funded, which puts us on track to attain Vision 2030 of an upper-middle-income society, as we will be putting more money in the pockets of local people, not foreigners, like we are doing.”
