The COVID-19 pandemic and runaway inflation blamed on the Ukraine-Russia war has dealt a double blow to global economies and businesses.
Enterprises that rely heavily on imported raw materials such as palm oil, wheat, maize, pharmaceuticals, animal feeds, resin and plastics, iron and steel, veterinary drugs, rubber, capital machinery, motor vehicle parts, and petroleum products, among others, have been forced to pay more and wait for longer for deliveries as a result of the marked global appreciation of the value of the US dollar.
Supply chain disruptions and increases in freight, insurance, and logistic service charges mean a conveyor-belt kind of adverse price effect where manufacturers pass on the biting cost to distributors, distributors to wholesalers, and eventually to retailers whose only recompense is to increase retail prices for their goods.
According to the Kenya Association of Manufacturers, sea freight costs have risen by 37%, with delays in the supply of imported raw and intermediate materials used in local manufacturing. Rising costs call for an urgent review of contingent plans among stakeholders to ensure the smooth flow of goods and services is not disrupted.
How can banks chip in to reduce challenges arising from delayed deliveries, and rising transport and storage costs?
Given the importance of Russia and Ukraine in the global supply chain for fertilizer, cereals, and oil seeds, the Food and Agriculture Organisation (FAO) predicts that global prices will remain high in the coming months. As a result, more people will face severe food shortages as production declines due to reduced fertilizer use. Reduced local food supply means increased import demand for food items, causing prices to rise even further. FAO predicts that the Ukraine crisis will cause global food prices to rise by another 8 to 22 percent and this will likely put additional strain on the already scarce pool of individual and public resources.
According to the International Monetary Fund, sub-Saharan Africa is particularly susceptible to extreme climate events and the resulting volatility in food prices with roughly one-third of the world’s droughts occurring in the region. The situation gets worse from the fact that Africa heavily relies on imports to feed its people.
Ironically, FAO opines that Africa currently accounts for 20 percent of global arable land, and hence the duty to feed humankind will fall into this space as the effects of global warming continue to shrink arable land in other parts of the world.
This bleak outlook is especially troubling for a sector that is the bedrock of our country’s economic growth and a major contributor to jobs, foreign exchange, and local revenues to the exchequer, as highlighted by President William Ruto during his inaugural address to the United Nations General Assembly (UNGA) in New York. At UNGA, the President called for immediate actions to end the severe deficit in the availability, flow, and accessibility of fertilizer to farmers worldwide. This has seen the government disburse Sh3.6 billion to subsidize the cost of fertilizer as a way of cushioning farmers ahead of the short rainy season.
With the country currently suffering from a drought that has left more than 3.5 million people facing starvation, millions of heads of livestock dead, and massive crop failure, a call to action would entail the involvement of financial institutions to provide much-needed funds to fund immediate proactive measures to reverse the deteriorating situation.
Given the complex and multifaceted nature of Kenya’s agricultural sector, the best solution to Kenya’s food crisis is a home-grown solution in which all parties actively participate in enhancing efficiencies within their units while reaching out to other partners to enable them to fulfill their respective various tasks.
According to the World Bank, global food demand will increase by 70 percent by 2050, requiring at least $80 billion in annual investments across all value chains to meet this demand. The majority of these funds, which must come from the private sector due to limited public resources, need to go toward modernizing farming activities through mechanization, the adoption of climate-smart technologies, and increased processing to reduce post-harvest losses.
Agriculture loans and investment portfolios are currently disproportionately low in relation to the agricultural sector’s contribution to Gross Domestic Product (GDP). Banks, microfinance institutions, and institutional investors have traditionally provided the sector with very limited resources. Agriculture accounts for 3.3 percent of gross loans offered by local banks, amounting to nearly KES100.2 billion, according to the Central Bank of Kenya’s 2021 Supervision Annual Report.
Banks can help to strengthen agriculture finance markets by re-tooling themselves through continuous investment in agribusiness knowledge to better understand emerging risks and co-create solutions with sector players. This includes ensuring suitability and climate change aspects and risks are addressed and mitigated to drive responsible financing as the continent seeks to achieve agricultural transformation.
Absa Bank Kenya, on its part, has embedded agribusiness as one of the growth pillars in its overall business strategy and a dedicated Agribusiness team supported by an Agri-specialist to advise the bank and its customers on various aspects. The bank takes a value chain approach, actively providing solutions for input providers, primary producers, aggregators, and agro-industry players. Furthermore, the bank is always seeking ways to find solutions for challenges and actively works with the value chain and Agro-industry players and partners to co-create solutions that address their supply chain ecosystem financing and banking needs.
With Kenya’s agriculture sector projected to grow by 6.3% in 2022, efforts to increase lending to this critical segment of the economy will need to be enhanced. To stem runaway food losses and reduced production for a better Kenya, more players in the financial sector must propose solutions that speak directly to agri-aggregator challenges. More than ever, financial institutions must shift their investments to sustainable agriculture and agri-food industries.
By Simon Kinuthia, the Head of Agribusiness at Absa Bank Kenya PLC.