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Zim Needs A Green Bond Market For Sustainable Agriculture Financing

Zimbabwe is at a crucial moment of redefining its agriculture in the face of climatic vagaries and financing gaps that have crippled crop yield in recent years while exposing millions of its citizens to extreme poverty and hunger.

A 2019 World Bank report titled Public Expenditure Review (PER) with a Focus on Agriculture, warned that- “Without Climate-Smart Agriculture Investments, Zimbabwe’s staple food crop, maize, is expected to see a 33 percent yield reduction by 2030.”

Given this background, it has become imperative for the country to construct viable financing options to boost productivity while proffering eco-friendly solutions.

In the past three years, the country has experienced two devastating droughts, coupled with a series of cyclones (Idai, Eloise and Kenneth) – all affecting crops and livestock.

Yet between 2017 and 2019, government pumped more than US 3 billion into agriculture with little outcome to show for this massive investment.

Furthermore, an average of US$ 800 million was spent annually on grain imports during the same period to cover for the huge deficit.

Now the government adopted the Agriculture and Food Systems Transformation Strategy, targeting US$8 billion gross agriculture production value by 2025 and increasing the contribution of agriculture to 20 percent of GDP from current 12 percent yet inadequate finance and climate change remain the two greatest challenges to the attainment of this projection.

Killing Two Birds With One Stone,

At a global stage capital markets are fast emerging as viable financing options into agriculture and climate action with innovative financial instruments, notably the Green Bonds coming into the fray.

Green bonds are essentially debt instruments or loans from investors (creditors) that are meant to finance viable new and existing eco-friendly projects with environmental benefits.

By their nature, green bonds serve the dual purposes of an investment instrument and also as a sustainable development instrument.

First issued by the European Investment Bank in 2007, green bonds issuance has over the past six years gathered momentum mainly in developing countries such as Brazil, South Africa, Nigeria, Morocco and Kenya and are expected to play a bigger role in post COVID-19 global recovery.

According to the Harvard Law School Forum on Corporate Governance, green bonds issuance gained significantly following the drafting and signing of the Paris Climate Agreement in 2015, reaching a record high of US$ 257 billion, globally in 2019.

In February 2020, Nigeria’s Access Bank sought an international listing on the Luxembourg Stock Exchange for its N15bn ($41.1m) green bond after it was fully subscribed on the Nigerian Stock Exchange a year earlier.

The five-year bond paid a coupon rate of 15.50 percent per annum and was earmarked to fund for loans including projects for flood defence, solar generation and agriculture.

“Green bonds are among the fastest-growing financial assets in the world even though their emergence in Zimbabwe has been delayed. The bond will help improve value chain financing in Agriculture considering that most local farmers lack capital in their quest to improve yield,” capital markets analyst, Victor Bhoroma said.

“The local market has liquidity challenges which hinder optimal production especially for capital demanding crops such as Wheat, Soya & other horticulture. Most of the credit facilities available on the local market do not have competitive interest rates (30% rate) which make it difficult for farmers to source those and make profits from farming,” added Bhoroma.

But the problem with local capital markets  thus the Zimbabwe Stock Exchange (ZSE) is that it has limited offerings of financial instruments, and focuses mainly on equity (company shares).

This is however set to change following an announcement by the ZSE last year to the effect that it had began the process of crafting the framework for the country’s first ever Green Bond.

“The use of proceeds for green bonds shall be aimed at addressing key areas of environmental and climate matters including but not limited to climate change adaptation, clean transportation, green buildings, sustainable waste management, natural resources depletion, renewable energy, energy efficiency, prevention of loss of biodiversity, pollution prevention and control, terrestrial and aquatic biodiversity conservation, sustainable water and wastewater management,” said ZSE chief executive office, Justin Bgoni.

Despite delays in launching, the idea got a major booster when the Committee of SADC Stock Exchanges (CoSSE) secretariat emphasized on the need to enhance financial integration and developing the green bond market at its 58th bi-annual meeting earlier this year.

For Zimbabwe, such a bond will help enhance private sector participation and funding into the agriculture sector as opposed to the current status were cash-strapped government is the biggest financier of inputs, research, logistics and other facets of agriculture, albeit through printing money and borrowing.

The country’s total public debt stands at US$11.1 billion, translating to 53,9 percent of gross domestic product (GDP).

For perspective, government last year reincarnated the long forgotten smart agricultural practice dubbed Pfumvudza/Intwasa but at a huge cost to the national purse amid a costly COVID-19 pandemic.

Billions of Zimbabwean dollars were poured into the exercise which targeted 1.8 million households with free inputs, logistical expenses and training of the trainers (extension workers) among other costs.

About ZWL$ 118 million was spent on transportation of inputs alone- Lands, Agriculture, Water and Rural Resettlement Ministry said.

Nevertheless, with the recently adopted smart agriculture scheme/Pfumvudza, yields per hectare can be now evaluated in dollar value terms to establish the coupon rate for the green bond.

“Another key challenge we have is the lack of title deeds on land, which makes it difficult to crowd in private sector capital into agriculture production. The bond will also help in reducing the burden on the debt-ridden treasury in funding agriculture subsidies which is a very contentious issue considering the minute benefits the country got from command agriculture,” added Bhoroma.

Challenges Ahead…

The macro-economic environment remains shrouded in uncertainty, mainly due to currency inconsistencies and tight liquidity.

Political interferences on the capital markets as the case with the Old Mutual, PPC and Seedco shares suspension last year should be erased in the minds of investors only if Zimbabwean authorities make guarantees to protect investors.

“The only challenge I foresee is the bond uptake considering the tight liquidity in the market and the currency it will be floated in considering the currency inconsistencies we have had from the central bank. The bond market benefits all involved parties if inflation rates are at the lowest and if the issuer does not default,” said economic analyst, Pepukai Chivore.

Zimbabwe is struggling to contain price stability with annual inflation reaching 194 percent in April this year presenting a challenge for a stable green bond market.

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