A major financial factor in all agricultural economies is the time gap between delivery of harvest, when farmers want to be paid, and the final payments made by consumers or export customers for the produce, when the last of the money flows in.
So welcome to merchant banking.
At one stage, Zimbabwe had more merchant banks than commercial banks, precisely because in colonial days, with a fairly unsophisticated economy, this was the big financial operation each year.
The old commercial farmers needed some borrowing to grow the crops, although they never got 100 percent since there was always the possibility of drought, but once the harvest of tobacco, maize and other crops started coming in, the merchant banks could really swing into action.
There was an underlying asset, the actual physical crops with quality and quantity precisely measured. The borrowers were a moderately small group, the buyers, who in any case had some of their own capital.
So the merchant banking system rotated the money to the farmers and then to the buyers and then collected it, with their interest, as consumers and foreign customers paid their bills.
Much of the merchant banking sector has now been absorbed into the commercial banks, with the change in licensing policy, but the theory still holds with the really big peak being the harvest season, although even at that stage there is quite a lot of payback, with farmers liquidating their loans as they are paid out for the crops they deliver.
Tobacco is still done through the banking sector and this works well. Maize now largely sees the Reserve Bank of Zimbabwe acting as a merchant banker, funding the Grain Marketing Board, which does not have cash reserves, and then getting the money back as millers buy the grain as they need it.
Millers are supposed to have their own working capital, but probably only enough to maintain enough stocks for one or two months at a time. So the GMB has to act as the reserve stock holder.
This has led to speculation that the Reserve Bank will have to dramatically increase the money supply to find the $60 billion that all those grain farmers are going to want when they deliver the substantial harvest this year.
Governor Dr John Mangudya addressed the issue recently and pointed out quite correctly that taking a single number is not giving the right picture.
For a start, the harvest comes in over around two months, so there is some spread. Secondly, the RBZ has its own cash reserves, around $13 billion. Thirdly, the farmers do not pack that $60 billion into their bank accounts; the GMB chops off a significant slice to repay the inputs that the farmers received, either through a Government input scheme or, for larger growers, funded through the banks with the Government as guarantor.
At this stage we need to note that the Second Republic has gone to some lengths to ensure it gets the farmer loans back. A lot of trouble was taken this year to ensure that the farmers lent inputs, and the word is “lent” not “given”. We need to remember that the smallholders, the farmers who have so much trouble accessing the banking system, had to undergo training in conservation farming first, to both show their seriousness and to ensure they could use the inputs productively.
This should go a long way to prevent what was a major deficiency and serious problem in the past, whereby a high fraction of the loans just vanished into private pockets.
This time, with contract enforcement, the money comes back and the RBZ, as the ultimate Government banker, is not stuck with the bill.
The millers will be buying their first shipments as the harvest comes in. They have been forced to import, directly or indirectly, but will find life a lot easier if they can send the trucks around to the GMB.
Admittedly they are not going to buy a year’s supply of grain in May, although those will good storage might well have the grain on the premises, in bond as it were.
So with minimal leakage to cheats, and the first six months of miller purchases, the cash to fund the next round of inputs, for the next season, will be available. And meanwhile the rest of us, buying our monthly groceries, are feeding in our cash to keep the money rotating.
The one complication will be the surplus still in stock when next year’s harvest comes in, probably around 300 000 to 500 000 tonnes.
Some may be exported if there is a customer nearby, probably in East Africa which, rather conveniently, tends to have less good seasons when Southern African farmers are getting good rains and good harvests when El Ninos hit and dry up the south.
But the capital for that reserve stock can be found, and since it is backed by a real asset, grain in a silo, is not necessarily going to lead to an increase in money supply, so long as financial management is of a high order.
But this sort of ad hoc arrangement is not necessarily the best way of funding harvests, or even inputs. There appears to be a very good case for a stand-alone merchant banking operation, under the Reserve Bank if necessary, to keep the accounts very transparent.
The RBZ already has what amounts to one such operation, Fidelity Printers and Refiners, which no one ever complains about. Fidelity buys all the gold on offer, and by law all Zimbabwean gold is supposed to be sold to Fidelity although there is leakage, especially from the informal sector and small-scale miners. Fidelity pays cash up front, but the gold is exported later.
This does not hit the books because we still regard gold as part of the foreign currency reserves held by the Reserve Bank, a holdover from older days when there was a gold standard.
So although Zimbabwe’s gold business is not very different from other mining operations, in that we mine and refine the metal and then export it, our holdings are regarded as cash rather than stocks that have to be financed.
But even here, the Reserve Bank is looking at making Fidelity more independent and bringing in other investors. That would take account of the new reality, that gold mining is not very different from nickel or platinum mining.
So, a stand-alone merchant banking operation for grains and other non-tobacco crops, which could now include private shareholders, probably other banks, would ensure that we had a very clear set of books where the underlying assets, the delivered crops in storage, and the financing for those stocks appeared on their own balance sheet for everyone to see.
Basically, so long as the value of the stocks exceeded the value of the loans, preferably with at least a modest margin, a lot of uninformed comment would vanish and the more responsible would stop having heart palpitations or shallow breathing.
Such accounts would also reassure those who worry about corruption, from the input suppliers and the farmers onwards.
The Second Republic reforms are now so established that this would be a positive move, showing that we have fixed the underlying problem and that we are ready, willing and able to take action against anyone who thinks that a bit of cheating will be a good idea.
The move would help ensure that the GMB itself was a professional, efficient and competent organisation. Again, along with other inherited organisations, this has not always been the case and there has been a tendency to regard it still as a home of placemen and an operation that is not the best managed in Zimbabwe.
Second Republic reforms have already made a major difference, but having very clear monthly accounts and balance sheets will keep the pressure on, allow immediate remedial action if anyone starts slipping, and provide a lot of reassurance to those who still worry.
But those monthly accounts need to include the financing balance sheets as well as the operational accounts.
As a public entity, the GMB must expect to be held to a higher standard than a private company, and any State financing has to be very clearly spelt out and accounted for precisely, and that includes potential subsidies, set out in the budget, for storing what are known as strategic reserves.