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BACKGROUND NOTE (distributed with the Terms of Reference)

1. The Last Decade in a Nutshell

Following the tabling of a Policy Framework Paper (PFP) at a donor round table in Paris, early in 1993, The Government of Southland received an Enhanced Structural Adjustment Facility (ESAF) from the International Monetary Fund (IMF), conditional on the implementation of an agenda of macroeconomic policies. The World Bank offered what was hoped to be the first of a series of sector-focused facilities, known as Sectoral Adjustment Loans (SECALs), conditional on the implementation of reforms at the sector level. The SECAL in 1993 was made available for industrial policy reform and it was envisaged that a subsequent SECAL would be concerned with the agricultural and food sectors. However, a shock in the form of drought in the 1994/1995 growing season, focussed the government on emergency food assistance, and the agricultural and rural reform agenda was put on hold.

In 1997, the government was again put under considerable pressure from the International Financial Institutions (IFIs) to engage in an economic reform programme which entailed major institutional changes. In particular, the FSB, Food Supply Board, was transformed in the FSA, Food Security Agency, opening the path to liberalization of the grain market.

By mid 1990s, the World Bank had moved away from the SECAL as a lending instrument and pursued support of sectoral reform through the instrument of Sector Investment Programmes (SIPs). Under SIPs, development assistance is provided through an integrated programme for the sector in question with all main donors participating in support of a commonly agreed strategy.

After a broad consultation process with development partners and national stakeholders the result of which was delayed because of the 1994/1995 drought, the Government of Southland formulated an Agriculture Sector Investment Programme (ASIP) to secure a loan for reform of the agriculture and food sectors. The programme was presented to a donor round-table in Geneva in 1998 who agreed for funding. Part of the funding would be provided as grant by some bilateral partners.

The essence of 1998 ASIP was a thrust towards increased efficiency, more competitive internal markets, greater inward investment, higher foreign exchange earnings and institutional change. High level objectives included:

(i) Large reductions in the budgetary costs to the government of agriculture sector interventions, necessitating the tapering out of subsidies to marketing institutions, inputs and credit already initiated in 1997 through the reform of the FSB;

(ii) Some privatization and outsourcing of service provision to farmers (with the exception of research for smallholder farmers);

(iii) Reforms in the marketing of agricultural inputs and outputs, to reduce the role of the state and increase competition;

(iv) Reforms in policy and systems for grain storage;

(v) Reforms in rural finance to establish a viable system able to support an increasing number of peasant farmers (to be achieved by removing subsidies and price control for rural banks, which it was hoped would stimulate competition to enter what it was hoped would become a profitable line of business);

(vi) Support for export agriculture;

(vii) Irrigation subsector reform, notably in the systems for managing areas of irrigation for small-scale farmers and the linkages between the irrigation, hydropower and mineral sectors;

(viii) Privatization of state farms;

(ix) Development of special agriculture-based programmes for poverty reduction in disadvantaged rural areas, including the possible deleterious impact of reduced government spending and of the other reforms, and building alliances with NGO service providers;

(x) Environmental protection and, where appropriate, environmental recovery; and

(xi) Decentralization which increased responsibility given to local governments and internal restructuring of the Ministry of Agriculture, Food and Natural Resources to adapt it to its new role.

By 2002 there was general agreement among observers within and outside Southland that the ASIP had not worked well, for reasons, which included:

(xii) A serious weakness in global commodity prices, which had affected the value of agricultural exports;

(xiii) Also, combined with external trade liberalization, lower world prices for foodstuffs had reduced prices which smallholder producers of staple food crops received when they had surpluses to sell in local markets for production in excess of subsistence needs, reducing the rewards available to these farmers in the market;

(xiv) There had been various failures in institutional reform, notably:

  1. The reforms in agricultural finance had effects contrary to those intended. The ending of subsidies and price caps resulted in very high interest rates, based on the Treasury bill rate plus 5 to 10 percent. (The government struggled unsuccessfully to control its budget deficit, which the IMF insisted must be fully funded by borrowing from the domestic private sector, which in turn necessitated a high Treasury bill rate). There was a sharp decline in agricultural borrowing and a commensurate decline in the purchase of agricultural inputs, which had been largely financed by agricultural credit.

  2. The ending of fertilizer subsidies had further dampened demand for farm inputs (although it was agreed that this had reduced smuggled exports to a neighbouring country which had eliminated fertilizer subsidies three years earlier than Southland).

  3. The reform of the FSB had been very difficult to achieve. In the event, the newly created FSA withdrew from local markets, except in remote areas where the government was concerned that alternative services would not be provided. The private sector was encouraged to take over the food marketing and distribution functions of the old FSB in all markets, but the government, despite its formal agreement with the IFIs, was unwilling to divest itself of the core of the FSB, for food security reasons. It was mindful of the very useful role that the FSB had played in managing the 1994/1995 drought, and aware of the political backlash from the removal of an agency which was seen by farmers as an essential part of the rural institutional landscape. After almost a total removal of subsidies to FSA, which strongly affected negatively its marketing activities in remote areas, consequent on its reduced function, subsidies resumed in 2000 and 2001 as FSA reverted to buying and selling activities as the government realized the slow take over by private sector of FSB marketing and distribution functions and as the 2000 elections were getting nearer.

  4. Slow progress in reforming the Ministry of Agriculture, Food and Natural Resources where, despite a broad consultative process of functional analysis involving staff and external stakeholders, very little changes have occurred and in particular only a small number of staff has been transferred from the centre to the districts and delegation of responsibilities to district level staff has met considerable resistance from central level directors. Prolonged uncertainty about individual staffs’ future also contributed to lower morale, initiative and productivity. Delay in the reform process is also put on the account of the difficulty to resolve certain fundamental issues (reform of salaries and incentives, creation of a new cadre, etc) which cannot be resolved by the Ministry of Agriculture, Food and Natural Resources alone. It is hoped that the overall reform of the Public Sector, launched by the President in July 2002 will facilitate the reform process, the Ministry of Agriculture, Food and Natural Resources having been identified as some kind of pilot ministry.

  5. Research and extension services for smallholders continued to deteriorate, largely due to inadequate funding which, in the latter case, reduced their mobility. NGO service provision directly funded by donors has rapidly grown in some regions and this has been a positive development for populations concerned. However, there was as yet little coordination between their and the government system and better financial and working conditions offered to staffs by NGOs has led to a depletion of the government system.

  6. Measures to increase water prices had been partially successful, in that revenue had risen and the subsidy cost had been controlled. However, poorer farmers, located at the tail end of irrigation schemes did not yet appear to have benefited from increased availability of water.

  7. General deterioration of government services to farmers and lack of anticipated private sector response; insufficient progress on rural poverty. (However, this was counter-balanced by some positive developments, e.g., the liberalization of higher-value smallholder cash crops had stimulated the development of inputs supply services and contract farming, and some banks were showing a cautious interest in lending to these input supplier or private contracting firms).

  8. Difficulties in implementing a sector programme managed in a rather centralized manner in a context of increased decentralization where District Development Councils are given a greater role in designing and implementing multisectoral development activities at their level.

There has been success in increased production of certain smallholder export cash crops, despite adverse price trends, and this is generally attributed to increased access to world markets and the development in high potential pocket areas of activities by a few private companies.

End of 2002, it was agreed among stakeholders that a successor ASIP was to be formulated in 2003 so as to ensure continuity of funding of the sector in 2004 and successive years. The exact approach to be adopted in this new programme however has not yet been agreed upon and would certainly require lengthy negotiations if a participatory approach was to be adopted. Some sides voiced concern that too many discussions may delay decisions too much and lead to a break in the already insufficient funding of essential services such as research and extension. Considerable pressure is also building up, particularly on the part of the National Small Farmers’ Union (NSFU) to implement more energetically the reform of the Ministry of Agriculture and Food and Natural Resources and revamp the FSA to ensure the provision of much needed services to small farmers, particularly in remote areas. Such services, said the NSFU Secretary-General, in a recent article in a national newspaper, were indispensable if poverty reduction targets were to be achieved.

Finally, an interesting experiment in Southland has been the FAO-inspired Special Programme for Food Security (SPFS). Since 1997, in selected high potential areas (NAs 2 & 3) farmers have been trained and provided with seeds, tools and the equipment that they need to enhance production by means of four complementary components: water control; intensification of crop production systems; diversification of production systems; and analysis and resolution of constraints. The initial phase was designed to be progressive, with activities over time broadened to cover a greater area and range of components. An early evaluation of Southland’s FAO-SPFS suggests that it has a number of positive characteristics: (i) it nurtures national consciousness about food security and encourages national ownership and responsibility for SPFS related initiatives; (ii) it focuses attention on agriculture, food and nutrition, which have often tended to be eclipsed in discussions concerning poverty; (iii) it recognizes that the most efficient approach to dealing with food security issues is using a participatory approach, facilitated by involving farmers’ organizations, groups and using the Farmer Field Schools (FFSs) approach; (iv) it gives priority to the fact that in many low productivity systems, water availability is the primary natural constraint to agricultural development; (v) it emphasizes the diversification activity to supplement household incomes during food insecure parts of the year which is particularly important in helping women, who often shoulder the major responsibility for raising the children and feeding all household members.

The evaluation critically noted that initially the SPFS had a rigid and inflexible design and initially required to be implemented in those areas where there was the potential for rapidly increasing production. These areas were characterized as being where there were irrigation possibilities. The initiating of SPFS activities in higher potential areas was likely to be better in addressing the issue of improving national food security rather than tackling the important issue of household food security in lower potential areas. Poverty, and hence individual household food insecurity, is likely to exist in such high potential areas but by the same token it could be less acute than in less promising agricultural areas. Systematic evidence of the degree of adoption/uptake of the technologies demonstrated by the SPFS was not available because the SPFS has not generally collected such information. The Evaluation Team therefore had to form impressions from interviews with stakeholders during its field visits on different sites. Although there was some evidence of adoption by farmers who had participated directly in the demonstration of the technologies or had attended FFSs, and to a lesser extent by non-participant farmers during project implementation, there was relatively little evidence of continued use of technologies after project demonstrations, or of adoption by farmers who had had no association with SPFS. The SPFS has made extensive use of subsidies to encourage technology adoption. This has taken two forms: ensuring the availability of inputs, providing them free to farmers and/or giving them at subsidized rates. This needs to be re-examined particularly since it does not bode well for the sustainability of the technologies after direct SPFS support ceases, as first inputs required may not be available any more, and, second, if available they would have to be purchased at non-subsidized market prices. Also, for sustainability reasons, credit should be administered by competent banks rather than being administered directly by the programme.

2. The Economic Situation in 2002

Performance indicators

The economic situation in 2002 is far from satisfactory. After three years of decline in GDP per caput at the beginning of the 1990s, there had been a slow recovery over 1993 to 1999, but the last two years have again seen decline (see diagram below). The present recession is associated with a burgeoning budget and trade deficit and high levels of external debt. It is notable that while growth of the value of imports accelerated from the early 1990s, growth of the value of exports had been much weaker, actually declining in the last two years. An important explanatory factor was a reassertion, from the mid-1990s, of a long-term trend towards decline in the international terms of trade, which had been reversed temporarily in the early 1990s. The decline in the terms of trade was particularly damaging to the value of agricultural exports.

A general indicator of welfare, estimated grain consumption per caput, peaked in the late 1980s, and since then has been in decline. Furthermore, an increasing proportion of grain requirements are met from imports. Although food marketing and consumption data are always approximate, this evidence, taken together with suggestions that the distribution of income has become more unequal, raises concerns about a possible deterioration in food security.


Source: National Bureau of Statistics

Exchange rate policy

The exchange rate had been liberalized in 1993, and the resulting boost in confidence induced a capital inflow, mainly from citizens who had been keeping funds outside the country, with the effect that the exchange rate strengthened. The exchange rate was based on an auction mechanism, and Forex-bureaus were allowed to open. However, from 1996 a process of continuing devaluation had set in, which played a major role in continuing inflation. The government has agreed that tough fiscal and monetary policies are needed to stabilize the exchange rate.

Fiscal policy

In the mid-1990s, the budget deficit had fallen from the much higher levels of the 1980s, but the IMF-agreed target of 3.5 percent had never been achieved. Instead the deficit had settled around 6 percent of GDP, and over the last three years for which there is data (1999 to 2001), it had begun to rise again, reaching 9 percent in 2001. Thus the aims of the PRGF are:

(a) A cut in the government deficit to 5 percent of GDP by the time of the Highly Indebted Poorer Country (HIPC) “completion point” in 2004;

(b) As the experience of the 1990s showed that there was little scope for increasing revenue, most of this cut in the budget deficit would have to fall on expenditure, which would need to fall by about a third in real terms, implying large cuts in government services;

(c) Gross government investment spending, which had fallen to dangerously low levels, should not be cut in aggregate, but it should be concentrated on maintenance and rehabilitation rather than on new projects.

Monetary policy

The government agrees to finance its deficit mainly by domestic borrowing, with the balance to be supplied by external aid grants and credits. Thus interest rates will be determined by the domestic supply and demand for funds. With the government presently representing a major and unpredictable source of demand for funds, the Treasury bill rate is high, pushing up lending rates for private sector borrowers, and dampening economic activity. It is planned that successful reduction of government spending will reduce interest rates, and thereby stimulate private investment.

Trade Issues

As a signatory to GATT, Southland ratified the Uruguay Round Agreement in 1994 and joined the World Trade Organization (WTO) as a founding member. All import licensing systems have been removed, including those in the agriculture and food sectors, and there has been substantial progress towards tariffication for some manufactures, in line with GATT/Uruguay Round trade rules as well as according to agreements signed in the framework of the SCC and the CCM. In respect of agricultural policy, there is debate within Southland as to the extent to which policy freedom is constrained by these agreements and there are conflicting views on the level of integration Southland should seek at the regional level. In particular, some oppose the idea that a Common Agricultural Policy should be designed and implemented within SCC, for fear of seeing unfavourable policies locked-in at the regional level and legally bound. There is also some fear that agricultural products from better endowed or more advanced countries in the groupings may flood the Southland market. The tariff bindings negotiated in the Uruguay Round still allows high levels of protection of the agriculture sector, higher than what is currently in place, notably the possibility of higher tariffs on imported grain. However, the government has resisted pressure from domestic food producers for more protection, as it is exposed to countervailing pressure from the World Bank and IMF, and from domestic constituencies worried about the effects of higher food prices on inflation and the welfare of some categories of poor people. Small farmers, member of the NSFU, fear that WTO and regional agreements will further marginalized them and render their possibility to take part in the market, particularly in export markets, more unlikely because of the increasingly stringent quality standards imposed on marketed products. They say that such quality can only be achieved by adopting technology which is quite inaccessible to them because of the training and investment required, while they have little access to extension and virtually no access to credit. Specific programmes, they say, should be funded to enable them to capture any opportunities that may be created by these agreements.

It is Southland’s hope that the outcome of the ongoing Doha Development Round of negotiations under the WTO will eventually lead to improved market access to OECD countries, and also that these countries will massively reduce their subsidies. Southland signed the motion in favour of establishing a “Development Box” in the WTO, although, at present, there seems to be little possibility of raising the resources that would be needed to implement the measures outlined in the proposal. It is accepted that even if favourable results are to emerge form the on-going negotiations, these will take at the very minimum half-a-dozen years to be translated into action. Thus Doha results cannot be factored into short term planning.

Industrial policy

In the 1990s there was considerable success in reducing protection by eliminating subsidies and import quota/licences and decreasing import taxes. It had been intended to achieve greater internal competition through the break-up and privatization of state firms and the encouragement of inward investment, but limited progress had been achieved in privatization.

A "foreign investment code" had been enacted to attract investment and provide guarantees against nationalization, but industrialists complained of unanticipated tax rises and licensing complications. These constraints to private investment are to be the focus of further reforms.


Finally, there is an increased concern about the spreading of HIV/AIDS in some parts of the country, particularly in certain pockets of zone NA2 (see Document 2). The disease has contributed to a rapid increase of poverty in the areas concerned, and some voices have advocated the creation of a special programme in support to HIV/AIDS stricken households to avoid the hardest hit communities to be taken in the spiral of poverty.

3. Trade Agreements

Southland was a signatory to the Cotonou Agreement signed in June 2000 with the European Union. This is an important relationship for Southland, as the EU is a major donor, and its aid is mainly on a grant basis. The principles of the Cotonou Agreement are coherent with the World Bank’s Comprehensive Development Framework (CDF), and the HIPC/PRSP process. There is a strong commitment to poverty eradication and integration into the global economy. The EU has signalled that its assistance (nearly all in grant form) will aim to foster the private sector and that it also favours very substantial roles for non-state actors in the development process, i.e., the private sector and civil society.

The EU has informed Southland that it will look favourably on proposals for assistance in:

Modernizing the financial sector, to stimulate and direct private savings into financing private enterprises;

Southland is also a member of two regional groupings. One is the Common Continental Market (CCM) a broad grouping of 18 countries from the continent, created in 1992, which aims at increasing intra-continental trade, particularly but not exclusively for agriculture. The CCM has established a Free Trade Agreement to which 9 members have already adhered. Southland has been one of the first to sign the Free Trade Agreement in 2000 and is currently reducing tariffs with other member countries (the objective is total removal of tariffs by 2005), despite the considerable pressure from farmers’ organizations and opposition parties. The agreement envisages the implementation of a rule of origin and of improved food quality standards defined by the grouping. Upgrading of the Southland Bureau of Standards is planned in order to strengthen its capacity to monitor standards in the country, but resources are few in helping smallholders to improve their skills and become able to produce according to these new standards. It is now intended to bring the CCM standards up to the international level in the years to come. Similarly, there is a plan to establish a Common External Tariff by the year 2008 and a common currency by 2015.

Southland is also member of the South Corner Community (SCC), a grouping of 8 countries from the subregion (5 of which are also members of the CCM), created in 1990, which aims at creating an economic community. A number of SCC programmes have been launched over the years which aim at enhancing cooperation among countries in the field of agricultural research and subregional food security, but these programmes are falling short of expectations due to lack of funding. Recently, the SCC was able to reach an agreement in principle with the EC who agreed to considerably increase its funding through the Regional Indicative Programme with the bulk of additional funding being allocated to activities in support to food security. The possibility of establishing some kind of financial facility for regional food security (including crop insurance) is being discussed among SCC member countries. A Trade Protocol has also been signed in 2002 that is being progressively implemented and the principle of adopting a Common Agricultural Policy for SCC has been approved by the SCC Summit held in February 2003.

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