CROP INSURANCE CRUCIAL FOR FOOD SECURITY
SHABBIR H. KAZMI
Sep 26 - Oct 2, 2011
There cannot be two opinions that Pakistan has to achieve food security without any further delay. This requires boosting output of food crops, including edible oil. As the country faces shortage of irrigation water and limited area for cultivation, the prudent approach is to improve yield.
This requires use of certified seed, timely application of appropriate dosage of various fertilizers and spray of insecticides/pesticides and added advantages could be achieved through mechanized farming. However, to acquire all these farmers need adequate availability of credit to procure all these inputs.
Agriculture contributes nearly 25 per cent to Pakistan's GDP, two of its large-scale industries textiles and clothing and sugar are agro-driven and bulk of the export proceeds are earned from cotton based products, rice, leather and leather (derived from livestock). Though a variety of oilseeds are produced in the country, an average US$2 billion have to be spent on the import of edible oil. The country has achieved self-sufficiency in wheat and efforts are made to boost indigenous production of edible oil. State bank of Pakistan, with the help of commercial banks, has succeeded in boosting lending to farmers around Rs250 billion and still making efforts to remove impediments in the disbursement of credit to the farmers.
Since financial institutions have been used to 'collateral based' lending, they do not consider final output a tangible collateral, which is exposed to many uncontrollable factors i.e. drought, floods, pests, and virus attacks. After decades of efforts, the cover being utilized is 'credit insurance'. This hedges the risk of lenders but farmers are still not able to get the full losses recovered. Insulating the risk of lenders enables them to recover the losses from the insurance companies. However, even this cover is not acquired by all the lenders.
The prevailing situation can be attributed to two factors: 1) small farmers not willing to pay the premium and 2) the scheme only hedges the risk of lenders. The added problem is that crop insurance around the world has been made successful by the government, through active participation. It has taken India decades to offer comprehensive crop insurance but only because of the active participation of Indian government. Pakistan can also replicate the model.
The contentious issue in the lending to farmers is lack of 'clean title of the land'. Despite various land reforms, bulk of the cultivable land is still owned by the feudal lords and/or absentee land lords. Therefore, the banks are reluctant to lend money to those farmers, who actually work on these lands. On the other extreme, though the land is in the name of farmers, its papers are in the custody of the feudal lords, who avail the facility but pass on only a small fraction of the money to those who actually work on the land.
Another serious problem is that feudal lords get the money but hardly spend it on the procurement of inputs or implements. They get a large percentage of income from those who actually work on land, and in case of a natural calamity also get the compensation from the government. In other word, lending to the farmers can't be increased without computerization of the land holding record.
The feudal lords are also the biggest resistance in the computerization of the record. Hundred and thousands of most fertile lands owned by the government have been encroached by the feudal lords.
In case a comprehensive record of landholding is prepared, they will have to surrender this land to the government, which could render them powerless in the society.
Whatever success has been achieved in crop insurance is because of the joint work of 'big five' banks and major non-life insurance companies. The success achieved in the brief period may not be remarkable by international standard but certainly seems good under the prevailing infrastructure, poor landholding record, huge unbanked population, and above all high level of illiteracy.
Partly the blame of the dismal prevailing condition goes to the successive governments, who have remained split on which sector deserves priority: agriculture or manufacturing. Despite fully cognizant of the fact that agriculture is the backbone of the country, bulk of the lending has been going towards manufacturing sector, which also has the largest share in the non-performing loans (NPLs) of the banking sector.
It would not be wrong to say that it is still not too late and focusing on agriculture can help in achieve food security, containing import bill of food products and above all overcoming two of the most contentious issues of the country: high oil import bill and shortage of energy.
Sugarcane can boost production of E-10 (bio fuel) and sugar mills can become independent power producers. The beauty of this system is that molasses being exported at through-away price and baggase being burnt in kiln can give two value added products, which can reduce Pakistan's oil import bill to half.
Similarly, increasing production of oilseed can help in saving US$2 billion annually. In fact, experts are of the opinion that Pakistan can become a major exporter of edible simply by focusing on the production of sunflower, canola and corn. Interestingly, soil, nutrient, and water requirements of these crops are very nominal. The only incentive required by the farmers is fixing an attractive support price of these crops.