Agricultural Sector Development: Problems and Issues

Inaugural address at the Financial Sector Conference

On Agriculture Organized by ADBP

at Karachi on 28th June, 2002

Agriculture is by far the most important sector for Pakistan’s economy.

The forward and backward linkages to the rest of the domestic economy, to the

international trade and with poverty alleviation are very strong. A bad year for

agriculture due to drought or other natural calamities has extremely adverse effect

on GDP growth, living standards of the population, price level, exportable surplus

and balance of payments. Thus the dichotomy of agriculture vs. industry or

services sectors is totally false as agriculture forms the backbone of the whole

economy.

We should be grateful to our uneducated and illiterate farmers who have

transformed this country of 140 million population from a deficit to a surplus

country. Very few developing countries have been able to achieve a sustained

growth rate of 4 percent for agriculture sector and Pakistan is one of them. No

doubt we have to further improve and enhance our productivity in this sector but

we should be proud of the contribution the farming community has made to the

country’s economy.

I would like to focus this morning on the measures the State of Pakistan

has taken to accelerate flows of credit to this sector.

First, unlike other sectors of the economy agriculture credit is regularly

supervised by the SBP. Targets are assigned to ADBP and to commercial banks

and those who fail to meet these targets are taken to task. Agriculture Credit

Advisory Committee meets every six months and carries out reviews and resolves
issues pertaining to agriculture credit delivery.

Second, ADBP was provided a special line of credit for agriculture by

SBP at a subsidized rate of 6% which it lent to farmers at the rate of 14% thus

earning differential of 8%. There has been gross misuse of this subsidized

financing and the loan portfolio of ADBP is full of stuck-up and non-performing

loans. It is not pricing but access to credit which is the constraint for the small

and medium farmers. Recently the lending rate to ADBP has been aligned with

the T-bill rate but in effect agriculture credit still receives a preferential rate

compared to other sectors.

Third, the end-use funding cost to farmers is still quite high despite this

lower interest rate credit provided to ADBP. This is due to inefficiencies, high

administrative costs and provisioning of bad debts. The administrative cost alone

is about 4% due to inadequate capital base, poor asset quality, weak internal

controls and infected loan portfolio. We are therefore embarked upon a major

restructuring of the ADBP. A new Board of Directors consisting of private sector

representatives well versed in farming from all the four provinces has been

formed recently and empowered to carry out the badly needed reforms. A

Portfolio audit is also underway to ascertain the current status of the ADBPs

portfolio and then take remedial measures.

Fourth, the private banks have also been encouraged to get involved in

extending credit to agriculture sector either directly or through syndication with

other banks or through on-lending to ADBP, Rural Support Organization and

UNGOs. I am pleased to report that at least Rs 2.5 billion has been disbursed by

these banks in the first year of their credit operations to support agriculture sector.

Fifth, commodity financing which was so far the exclusive domain of the
public sector has been opened up to the private sector. The same rate of financing

– 12% p.a. – which is available to the public sector is also allowed to the private

sector despite the higher risk inherent in the latter mode. But initially we have to

provide a level playing field to the private sector operators so that they can

penetrate into this market and compete with the public sector procurement

agencies. We hope that this competition will ensure remunerative prices to

producers.

Sixth, one of the main issues confronting the farmers today is that prices

of their commodities do plunge immediately after the harvest. There are no

facilities for on-farm or off-farm storage like other countries where the farmers

can deposit their produce and pay a rental. They will then withdraw and sell only

limited quantities at prices acceptable to them. This saves them from making

distress sale at lower than announced support prices in the post-harvest period.

For this purpose, the SBP has allowed private sector to obtain financing from

commercial banks at a preferred rate of interest i.e. 12 percent.

Seventh, the Export promotion policy has identified seven thrust areas of

development exports. Three of these areas are the output of agriculture sector i.e.

Fruits and Vegetables, Fisheries and Livestock products. Special incentives and

financing are available to the producers, processors and exporters of these

commodities.

Eighth, the SBP has established a regulatory and legal framework for

Micro Credit Sector development in the country. Khushali Bank has set up

branches in 30 cities and its recovery rate is 98 percent. The first private sector

bank in this sector – First Micro Finance Bank – has also started functioning

under the sponsorship of Aga Khan Development Network.

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Ninth, the SBP has advised the commercial banks to extend financing to

the newly emerging Corporate Farms I would like to clarify that these farms will

not displace the small and medium farmers but will make use of new technology,

best practices, economies of scale to boost productivity. We hope that these

practices will then be adopted by small and medium farmers enhancing the overall

productivity of agriculture sector.

Tenth, we still are not fully satisfied with access to credit by the rural

communities for all their needs – farming and non-farming. Cooperative banks

have ceased to be an effective instrument. The SBP has therefore appointed a

Committee on Rural Finance to come up with comprehensive recommendations to

improve the access and delivery of rural finances.

Finally and most important the SBP has expanded the scope and coverage

of agriculture credit to make it attractive for commercial banks to lend to the

farming community. I will dwell on these steps in some detail.

(a) The entire value chain of agriculture – from inputs, equipment,

machinery and implements, production, storage, marketing, transport,

processing to distribution, has become eligible under the supervised

agriculture credit scheme.

(b) All fresh credit lines to ADBP and Cooperatives are to be priced at the

minimum average rate on T-bills. The prime objective of marketbased

interest rates is to encourage commercial banks to lend their

funds to ADBP. In the long-run, greater competition amongst banks in

terms of lending to agriculture should bring down lending rates.

(c) In the past commercial banks were not allowed to lend outside their
narrow territorial area that was specified by SBP. In certain cases, this

provided banks with an excuse not to lend. The removal of this rule

should enable commercial banks to lend on purely commercial basis.

More importantly, this will also give farmers the option to choose the

bank of their choice.

(d) In order to improve credit flows to farmers, SBP has allowed them the

facility of revolving credit which means even if farmers are unable to

adjust their previous loans fully, they can still avail fresh credit.

Earlier, banks were only allowed to sanction credit to farmers who

repaid their previous loans fully and on time. It is hoped that will help

improve farmers’ ability to meet their credit needs.

(e) To facilitate commercial banks meeting their mandatory targets, they

are now allowed to count their equity stake in corporate farms as part

of their lending. They can also include lending to micro credit

institutions, recognized NGOs and Rural Support Organizations. Most

importantly, however, commercial banks can also use their lending to

ADBP as part of their mandatory targets.

(f) The limit on credit against personal securities has also been raised

from Rs 50,000 to Rs 100,000. This should help those farmers with

limited access to collateral.

(g) We have added 45 new items to the list of items eligible for agriculture

finance. For example, diesel oil for tractor, production loan for minor

crops, fixed capital for storage of raw agriculture / farm produce and

reclamation of land etc.

Apart from these measures, SBP has also revised the methodology
used for estimating agriculture credit needs by provinces. More than

45 items or activities have been added to this list.

In the end, I would like to wish the Conference the best of luck in your

deliberations and hope that you will come up with practicable and workable

recommendations. I can assure you, on my part, that the SBP will take these

recommendations seriously.

Food and Agriculture Sector in pakistan

The overall situation of Food during the year 1998-99 was satisfactory. In order to provide relief
to the consumers, the government has taken various measures to control the inflation in food
items. The agriculture sector, which is the largest sector of Pakistan's Economy, has registered a
marginal growth of 0.35 per cent as compared to 3.82 per cent during the year 1997-98. The
decline in the agricultural growth is mainly due to decline in cotton production, which suffered
heavy losses due to virus attack. Similarly the production of wheat is also decline due to long
spell of dry season at the time of sowing. The growth of major crops were 0.6 per cent in 1998-
99 as compare to 8.3 per cent during the same period last year. The minor crops registered a
growth of 0.6 per cent as it was 3.3 per cent in 1997-98. The Livestock Sector grewed by 1.5 per
cent over the negative growth of 0.7 per cent in 1997-98, Fisheries sector increased by 3.7 per
cent over 7.8 per cent in the year 1997-98. The production of sugar cane during the year is
estimated at 55190.7 thousand tonnes which shows an increase of 3.9 per cent over the last year.

Food Availability

The average food availability remained satisfactory during the year 1998-99. The per capita
availability of Rice, Pulses, Milk, Meat, Fruit and Vegetables increased by 1.86 per cent, 12.5
per cent, 1.99 per cent, 3.0 per cent and 0.33 per cent respectively as change over to 1997-98 to
1998-99. The per capita availability of wheat increased by 1.58 per cent as compare to last year.

RICE

Rice is very important food as well as the cash crop, which is grown on 10.5 per cent of the total
cropped area of the country, and it is main export item of Pakistan. During the year 1998-99
Pakistan exported 1.293 million tons of rice and earned $383.2 million foreign exchange as
compared to the export of 1.659 million tons during the year 1997-98. The area cultivated under
the rice crop during the current year is estimated at 2423.6 thousand hectares while it is
indicating 4.6 per cent growth to last year. The production of rice is estimated at 4673.8 thousand
tons as compared to 4333 thousand tons of last year, showing an increase of 7.9 per cent.

WHEAT
The Wheat is the main staple food of the population and the largest grain crop of Pakistan. The
total cultivated area during the year 1998-99 is estimated at 20,983 acres, as this area was 20,667
acres during the same period last year. The production of wheat during the year 1998-99 was
18054.5 thousand tons as compared to 18694 thousand tonnes in 1997-98 showing a decline of
3.4 per cent. From July-March 1998-99. 2.163 million tons of wheat was imported to supplement
domestic production as compared to 4.10 million tons during the same period of last year.
According to the officials of Ministry of Food, Agriculture and Livestock, the target for the
import of wheat has been reduced to 1.6 million tonnes, as it was projected 2 million tonnes
earlier by the EEC.

SUGARCANE

The sugarcane crop occupies 5 per cent of the total occupied area. The production and area under
sugarcane crop have dropped by 18-20 per cent during the 99-2000 season. The total production
of sugarcane during the year 1999-2000 year has been estimated at 43.18 million tons against
55.19 million tonnes in 1998-99 season. The area under sugarcane dropped by 12.1 per cent
during the year 1999-2000 as 1.015 hectares were bought under sugarcane cultivation in 98-99
against 11.5 hectares in 99-2000.

OIL SEED

The annual growth in consumption of Edible oil is 9 per cent. The country requirement for edible
oil for the current year is estimated at 1.7 millions tonnes as compared to 1.69 million tonnes of
the last year. The 32 per cent will complete the requirement with in the country and 68 per cent
will be imported as compared 30 per cent locally manufactured in the country and 70 per cent
were imported during the year 1997-98. The total cost for the import of edible oil will amount to
US$653 million as compared to last year's US$712 million is showing a decrease of 7.2 per cent.
The support prices of Sunflower, Canola, Soybean and safflower has increased 11.1 per cent,
11.1 per cent, 18.8 per cent and 16.7 per cent respectively.

PULSES

The Gram, (Lentil) Masoor, Moong and Mash are major pulse grown in Pakistan. These crops
are grown in the rained area on marginal lands. The total area for these pulses to grown was
1400.2 thousand hectares as compared to 1411.5 thousand hectares during the year 1997-98. The
total production all four pulses was 855.5 thousand tonnes as it was 918.9 thousand tonnes
during the year 1997-98.

POTATOES

The 70 per cent of potatoes crop is produced in autumn, while 15 per cent each in spring and
summer. The area under Potato crop in 1997-98 was 104.6 thousand hectares yielding production
of 1425.5 thousand tonnes. The production is expected to rise to 1611.4 thousand tonnes in 1998-
99 showing an increase of 13.0%. The domestic requirement of potatoes is 1300 thousand
tonnes.
ONIONS

The domestic requirement for onions 1998-99 is 1075 thousand tonnes and the area under onion
crop in 1997-98 was 81.4 thousand hectares having production of 1076.5 thousand tonnes. The
crop size for 1998-99 is expected at 1121.2 thousand tonnes, showing an increase of 4.15 per
cent.

CHILIES

The rains heavily damaged the crop and production is estimated to decline to 135 thousand
tonnes in 1998-99, while the chilies production during the year 1997-98 was 140.2 thousand
tonnes against an area of 90.4 thousand hectares.

LIVESTOCK

Livestock is regarded as an important part of food items and the main source of livelihood for the
nation, who lived both in the urban and rural areas. The contribution of livestock towards GDP is
9 per cent while its share in agriculture sector is 37 per cent. The total foreign exchange earning
of this vital sector was Rs.35 billion during the year 1998-99, while it was Rs.33.93 billion in the
year 1997-98 which shows the 10 per cent of the overall export earning of Pakistan. The
livestock Population includes Cattle's, Buffalo's, Sheep's, Goat, Camel, Horses, Asses and mules.
The livestock production has increased significantly.

The production from livestock sector includes Milk, Beef, Mutton, Poultry Meat, Wool, Hair,
Bones, Fats, Blood, Eggs, Hides and Skin.

POULTRY

Poultry is an important sub-sector of livestock. The every family in rural areas and every fifth
family in urban areas are associated with poultry production. Despite government efforts to give
incentives to the poultry sector, the best of this sector has yet to come so far as it is not
progressing rapidly.

The government is establishing a Cattle Feed Mills at total cost of Rs.18.5 million to start the
Productivity Enhancement Programmes (PEP). The GOP will provide funds for the machinery
and training to farmers on feed formulation programs. The government has also set up National
Dairy and Livestock Development Board with Rs.100 million to accelerate and promote the
livestock activities in the country. Pakistan has earned Rs.7-8 million though the livestock
export. The import duty on micro feed ingredients has been reduced to 10 per cent.