ROLE OF BANKS IN DEVELOPING FLOOD-HIT AGRICULTURE

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Dec 13 - 19, 20
10

Agriculture sector accounts for over 21 percent of GDP and employs 45 percent of the labor force in Pakistan. Agriculture growth, which was estimated at 4 percent of GDP out of 4.5 percent of total GDP growth for the current fiscal year 2010-11, could reduce to one half or one third depending upon the losses to the sector due to worst flood in country's history. Pakistani officials fear 30 to 40 percent decrease in cotton production and a fast looming crisis for the textile industry as cotton crop in most of the cotton growing areas have been washed away due to recent floods. Banks can play their crucial role in development of agriculture sector by ensuring higher flow of agriculture credit in the next two to three years.

Lower-than-target credit off-take by the private sector however reflects a disappointing situation. High interest rates are marginalising the private sector, which can play an important role in agriculture growth and development. The central bank's tight monetary policy is one of the key reasons behind the private sector's falling demand for credit.

Unfortunately, agriculture sector on which the country depends largely for its economic growth, including the largest export-oriented textile sector, absorbed much less credit than the target set by the central bank during last fiscal year 2009-10. The credit disbursement to agriculture sector during the eight months of last fiscal year remained at Rs144.7 billion, which was far behind the target set for the last fiscal year. Analysts believe that the one of the reasons for lower flow of agriculture credit is the scarcity of water, which would certainly hit the agriculture output. Surprisingly, though the prices of agriculture input have gone up, which means more liquidity should be absorbed by the sector.

Despite, being an agricultural country, Pakistan has been importing food items from other countries. The government paid no attention to the development of agriculture sector. The population has also increased 24 percent in the last ten years and agriculture product has increased only five percent. The country needs to use more barren land for cultivation to control the possible shortage of food.

Pakistan's worst floods in decades have damaged about 700,000 hectares of crops, mainly rice, maize, cotton, and sugarcane, jeopardising the country's main exports.

The floods reportedly damaged more than a million acres of sugarcane, cotton and rice fields and caused 250 billion rupees ($2.9 billion) of agricultural losses.

Presently, banks ought to play their key role of channeling funds to the flood-hit agriculture for its rehabilitation and development.

Floodwaters ravaged 700,000 acres of planted cotton, and 200,000 acres each of rice and cane, Bloomberg reported Mohammed Ibrahim Moghul, chairman of Agri Forum Pakistan as saying. "Rains also destroyed 500,000 metric tons of wheat, 300,000 acres of animal fodder, and 100,000 head of livestock."

"The rough estimate is that there is a billion dollars of losses of crops," Reuters reported Robert Zoellick, World Bank President as saying. "An early assessment is that the damages are more than in the earthquake in 2005."

"Dozens of districts have been totally flooded, which means crops have been damaged, strategic food stocks have been damaged, and the soil destroyed," Bloomberg reported Maria Kuusisto, an analyst at consultant Eurasia Group, as saying. "These floods have caused severe damage to agriculture in Khyber Pakhtunkhwa and in Punjab and south in Sindh. These are the agricultural hubs."

Cotton target for the 2010-11 season of over 15 million bales cannot be materialized as floods and rains have damaged around 2.3 million bales in the country. This crop year, the production estimate in the country was about 15 million bales but due to rains and floods several production patches have been affected.

'100 percent BT cotton variety was sown in Sindh and Punjab for better yield results but due to floods and rains, the production was severely affected,' according to Pakistan Cotton Ginners Association (PCGA). Cotton export during August to July 2010 stood at 908,100 bales while 320,000 cotton bales were imported during the same period. Around 65,710 cotton bales were exported from cotton crop season 2008-09 while 842,300 cotton bales were exported from cotton crop season 2009-10.

The government's tight monetary policy has disappointed the business community who contend that high discount rate would further increase the cost of production and destroy the industries, as it is already suffering from exorbitantly high business cost. Pakistan is on its way to becoming one of the most expensive countries of the world. The increased interest rate has made doing business increasingly expensive. In the last financial year, the private sector credit off-take from the schedule banks showed negative growth amid slowdown in the domestic economic activity.

The Non Performing Loans (NPLs) pose a challenge for the banking industry in the country. The NPLs of the banking industry witnessed a rapid increase since calendar year 2007. Commercial banks' lending to private sector during the Oct-Dec quarter of last fiscal year increased by 4.16 percent and unlike previous quarters the growth in credit off-take was widely shared by different leading sectors of the economy.

The credit disbursement to agriculture sector should be enhanced by the banks in the given situation. The small farmers' access to loan facility should be ensured in order to tap fruit export potential of Balochistan- the country's fruit basket. The government should extend rural credits to small farmers for horticulture development in the province. The lack of finance does not enable the cash-starved small farmers to harvest and market their fruit crop and they have to sell their orchards to pre-harvest contractors, who exploit them taking advantage of their weak financial position.

Analysts believe that cutting interest rates to single digit level will produce multiple benefits for all economic sectors particularly the agriculture, as it will lower the cost of doing agri-business, give a strong boost to production activities, provide easy credit and loaning facilities to farmers, promote better investment and exports and generate more tax revenue for the government. The expansion in private sector credit will only increase when the real economic activity gains momentum.