An Action Plan for Developing Agricultural Input Markets in Ghana

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I. Introduction The agricultural sector in Ghana employs about 70% of the labor force, contributes about 36% of the GDP, and accounts for 57% of the country’s foreign exchange earnings. Thus, the sector is an important engine for economic growth in Ghana. Despite its critical importance the sector has not performed to its potential, primarily because of the general lack of support for agriculture and the unfavorable macroeconomic conditions, particularly the high rate of inflation, high interest rates, and the rapid depreciation of the Cedi (¢). To reverse the declining trends in agricultural productivity and to increase the sector’s contribution to economic development, the Government of Ghana (GOG) set targets under its Vision 2020 program in the early 1990s; these targets were recently revised during the National Economic Forum in May 2001. The agricultural sector is once again challenged to drive the economy towards ensuring food security, reducing poverty, and protecting the environment. In fulfilling these goals, improved seeds and planting material, fertilizers, and crop protection products (CPPs) are critical, and the private sector now has the primary responsibility for procuring and distributing these inputs through sustainable agricultural input markets (AIMs). II. An Assessment of AIMs Ghana has made considerable progress toward deregulation and liberalization of the agricultural input supply systems, and in recent years the private sector has played a dominant role in supplying various inputs. Nevertheless, agricultural input markets are not operating efficiently, and farmers do not have easy access to inputs at affordable prices. Several factors continue to constrain the development of efficient AIMs. These factors can be divided into two broad groups, namely, macropolicy issues and market development issues. In the macropolicy group, devaluation of the Ghanaian Cedi, limited availability of foreign exchange, high interest rates, and poor rural roads constrain the development of input markets. The devaluation of the Cedi not only increases the prices of imported seeds, fertilizers, and CPPs, but it also discourages investments in business development due to associated risks. Limited availability of foreign exchange constrains the import of inputs. Poor infrastructure in rural areas makes the transportation of goods and services difficult and costly and thereby limits the supply of much-needed inputs. These factors have contributed to the concentration of suppliers in urban and peri-urban areas, consequently forcing farmers to travel 10-50 km to purchase inputs. The market development issues consist of policy-induced uncertainty, inadequate human capital and market information, lack of affordable finance, and poor enforcement or absence of regulatory frameworks for inputs marketing. The unresolved issues associated with well-intentioned government-supported programs such as tendering for supplying inputs by the Agricultural Development Bank (ADB) and the zoning of cotton production areas in northern Ghana create uncertainty in the marketplace. Consequently, these programs tend to discourage private-sector investment in the input business.1 Inadequate human capital (technical and business skills) and market information restrict the supply of products in the marketplace and result in high prices. There is generally a lack of input dealers in the rural areas. The seed and fertilizer markets are largely concentrated in towns and cities and are served by a limited number of enterprises. High interest rates and stringent collateral requirements, coupled with the lack of financial service providers in rural areas, severely limits the availability of finance for business development. Although Ghana has laws on seed and fertilizers, the implementation of these laws has been far from satisfactory, largely because important amendments have not yet been enacted into law and the regulatory agencies are constrained by limited human and financial resources. III. An Action Plan for Developing AIMs In developing the Action Plan, the team assessed various options available to improve the supply of inputs and concluded that a free market system should be used to supply inputs to the farmers because this approach is relatively more efficient and sustainable and does not strain the fiscal resources of the country. The team recognized that although AIMs have been liberalized in Ghana they are not operating efficiently. The team recommends that, to develop sustainable agri-input supply systems in Ghana, the liberalized markets must be strengthened by undertaking activities in the areas of policy reform and human capital development and by improving financial services, market information systems, and regulatory frameworks. The team also recommends that these activities be undertaken in a holistic manner so that the synergies of various activities can be captured. Furthermore, the team assessed the potential of the private sector in undertaking marketing activities in a competitive market environment. The private sector has latent potential to assume the responsibility of marketing agricultural inputs in an efficient and sustainable manner. However, for this potential to be realized, constraints affecting their activities need to be removed. In developing the Action Plan, special attention was paid to the alleviation of these constraints. The main activities proposed in the Action Plan are identified in the Action Plan Matrix 1 and are briefly summarized below. Macropolicy Reform Overall, the macropolicy environment should be conducive to the market development process. Macroeconomic stability and sufficient supply of foreign exchange are essential. It is recommended that the Bank of Ghana (BOG), the Ministry of Finance (MOF), and their international partners implement appropriate monetary, fiscal, and exchange rate policies. Similarly, foreign exchange availability should be ensured in that Ghana will require approximately US $45 million/year to import the necessary inputs during the 2001-2005 period. Because the poor quality of rural roads adds cost to inputs and discourages traders from penetrating rural markets, the Ministry of Roads and Highways (MRH) and the District Assemblies are encouraged to develop long-term programs for constructing and maintaining rural roads. Market Development Skills, knowledge, and information (human capital) needed to make input markets efficient are inadequate at all levels of the marketing chain. Importers do not have adequate knowledge about the conditions prevailing in the global input markets; wholesalers and retailers lack the necessary skills for enterprise management and business development; and most importantly, there are few independent dealers involved in marketing inputs in rural areas. Even the bankers are not fully equipped to effectively play their role in financing the import and marketing of inputs. Developing the human capital necessary for making input markets perform efficiently constitutes the core of the activities under this Action Plan and will be accomplished by focusing on the following activities: 1. Training programs for dealers (wholesalers and retailers), importers, and bankers. 2. Technical assistance in enterprise development to newly trained dealers. 3. Study tours for dealers, importers, and bankers. 4. Policy workshop and study tours for policymakers. 5. Access to market information. To make dealers a dynamic force in the economy, various associations of input traders will be encouraged. Training and technical assistance for associations will be essential. In addition to developing human resources for competitive markets, training and technical assistance will be needed for building technical capacity in the seed sector—training for seed growers, capacity for inspection and quality control, and enterprise development. Financial Support Services Finance is the lifeblood of any business activity. Without adequate access to and availability of finance, competitive markets cannot function efficiently. At the present time, difficulties in obtaining adequate foreign exchange to cover procurements from overseas currently estimated at about US $31.9 million/year are constraining established and new-entrant importers alike. Currently, foreign exchange available (mostly from ADB) for the importation of agricultural inputs has been maintained at a level equivalent to only 19% of the annual requirements. To make funds available, and factoring in market expansion, it is recommended that the African Development Bank (AfDB) Group, USAID, Department for International Development (DFID), International Fund for Agricultural Development (IFAD), Agence Française de Développement (AFD), and GOG (using indirect receipts from the Heavily Indebted Poor Country [HIPC]) constitute a US $45 million Agricultural Inputs Importation Fund (AIIF) over a period of 5 years for importers to supplement and generate available foreign exchange needed in establishing Letters of Credit (LCs) with foreign banks. BOG should manage the fund lodged in a foreign bank. The borrower should contribute 30% of the cost of the inputs paid in foreign exchange Cedis equivalent. Commercial banks would provide LCs for 100% financing of the cost of the inputs under a risksharing mechanism between the lender (40%) and the fund (30%). A number of stakeholders at the workshop noted that a requirement of 30% contribution from the borrower is likely to be a constraint. However, the assessment team feels that a 30% contribution from the borrower is essential to make this arrangement successful and sustainable. The fund should provide guaranteed foreign exchange support up to a maximum of US $1.5 million per importer per year. Input wholesalers and retailers similarly face financial constraints in their operations, and potential market participants without adequate financial resources are unable to enter the market. To alleviate this constraint, the District Assembly Common Fund (Poverty Alleviation Fund), BOG, and the African Development Bank Facility are to be used to constitute a ¢70 billion Agricultural Inputs Business Development Fund (AIBDF) to cover commercial bank lending to local agricultural inputs wholesaler and retailers. BOG should manage the fund. Commercial banks would provide 70% financing of the cost of the inputs with 30% guaranteed from the fund. In addition, it is recommended that training programs be organized for borrowers and lenders to minimize the risks of default, and databases for borrowers should be created at a Credit Reference Bureau. As in the case of the AIIF, a number of stakeholders at the validation workshop noted that a requirement of 30% contribution from the borrower is likely to be a constraint. As a result, the use of warehouse collateral (bonded warehouse) should also be considered during the implementation to reduce the burden of liquidity on the borrower. Market Information System (MIS) Information is crucial for the functioning of the market. Dealers and importers need information about local, regional, and global markets. Because every stakeholder will need the information about prices, stocks, and availability of inputs in various markets, MOFA’s present MIS should be strengthened and linked with other regional web-based agricultural input information systems. Other Input-Specific Issues Seed and Planting Material Apart from seed of cereals and some other food crops, most of the improved seeds, particularly vegetable seeds, are imported. Ghana can benefit from stronger linkages to the international market and access to new varieties of seeds. The seed market is thin, and it lacks the presence of large seed companies and adequate dealer outlets. Recommendations are made in the Action Plan to address these issues. In particular, efforts should be made to help potential entrepreneurs (scientists, seed farmers, seed growers’ association, and others) to establish viable seed enterprises—buying seed from farmers, packaging it with a brand name, and distributing or selling it to retail outlets for farmers to buy. Fertilizers Almost all the fertilizer used in Ghana is imported; hence, a primary bottleneck in the subsector is that of financing at the level of importers, wholesalers, and retailers. The Action Plan has therefore proposed the establishment of the AIIF and AIBDF to cater to importers and dealers, respectively. A major problem constraining the use of fertilizers is the small effective demand due to unfavorable fertilizer/output ratios arising from high fertilizer costs and low product prices. Actions have been recommended to improve the effective demand for fertilizers. CPPs With the uncontrolled status of the Ghana CPP market, a substantial quantity of obsolete and dangerous materials can be found in Ghana. Furthermore, serious adulteration and abuse of truth in labeling are common at the retail level. Consequently, a safe and environmentally sound disposal of the obsolete stock of pesticides and enforcement of laws and regulations have received top priority in the Action Plan, which also calls for proper monitoring, research, and education to avoid harm to human health and the environment. Additionally, efforts should be made to (1) strengthen the capacity of the Environmental Protection Agency (EPA) and the Plant Protection and Regulatory Services Directorate (PPRSD) to accelerate product registration and enforcement of the pesticide legislation, (2) design training programs to educate extension agents and end users about the products and their safe use, (3) conduct residue testing on food products, (4) initiate negotiations for a regional harmonization of the testing and registration of pesticides, (5) strengthen the capacity of the health services to deal with cases of pesticide poisoning, and (6) support research and extension on biocontrol and integrated pest management (IPM). IV. Potential Benefits of the Action Plan The implementation of the Action Plan will generate several socioeconomic benefits for the Ghanaian society. It will promote food security and environmental protection by lowering the prices of inputs, making inputs easily accessible to farmers in rural areas, and improving access to new production technologies. In addition, it will encourage economic activity at microenterprise level, improve smallholder incomes, and expand bank sector activity to include input markets. The contribution of the Action Plan to foreign exchange earnings will also be significant through crop diversification and increased food production. Because it focuses on the development of AIMs, the present Action Plan is an important component of Ghana’s strategy for improving food security while protecting the environment. In this regard, this Action Plan supports and complements (a) the 1998 National Soil Fertility Management Action Plan (NSFMAP), (b) the 2001 Accelerated Agricultural Growth and Development Strategy (AAGDS), and (c) the targets set for agricultural development in the national economic dialogue of May 2001. V. Implementation Arrangements In implementing the Action Plan, care must be taken to preserve the holistic nature of the proposed measures. It is recommended that core activities dealing with policy reform, dealer development, and financial services be implemented as a project. Other activities could be implemented as subproject activities. The project activities should be implemented by an autonomous project entity reporting to the Chief Director, MOFA. To facilitate the implementation of the Action Plan, an Advisory Committee consisting of stakeholders from the private sector (including farmers), donor community, and the government should be created. The Advisory Committee will provide broad policy and program guidance about the project to the Chief Director, MOFA. MOFA will make the necessary arrangements for the Advisory Committee meetings and stakeholders’ workshops.
Public-Private Partnerships, Agricultural Inputs