Rice loses its flavour Business Page Stabroek News October 22, 2000 BUSINESS PAGE is dedicated to providing objective information an opinion on issued of interests to the business community and the public at large. The articles in Business page are prepared and contributed by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae, Chartered Accountants, Professional Services Firm. Introduction The crisis in the rice industry it would seem has appeared out of thin air. Successive Budget speeches going back to the beginning of the past decade spoke of the recovery of the rice sector for which policy was regularly given credit. In the 2000 Budget Speech, rice was expected to stabilise at the record level achieved in 1999. Despite their significant involvement in and exposure to the sector, none of the banks' annual reports for 1999 gave any indication of the serious problems which would soon hit them. How did we all miss any signs of trouble or is the problem new? Are the millers and the weather the real causes and the small farmer the victim? Did the policies of a free, unregulated market which appeared to have done wonders for the industry for several consecutive years have inherent weaknesses of near fatal proportion? How is the crisis to be addressed and what are its likely long-term effects? And is the debt crisis merely the transfer of massive assets abroad while the liabilities are centred in high interest Guyana? Rice has been a staple of the country's economy for over one hundred and fifty years. In certain areas of the country it provides most of the income and employment and life revolves around the industry. To the extent that there is crisis in the sector the entire economy is at risk and a national response is required. The response must seek to ameliorate the harsh immediate consequences while setting the stage for the sustainability of an efficient sector into the future. Discussions and debates based purely on logic and common sense are unusual in Guyana and in a pre-election period it is almost impossible to expect a long-term view to be taken on such a politically sensitive topic. Yet nothing else will do. Such a view has to recognise that rice will remain a major pillar of the Guyana economy into the indefinite future. It must recognise that the practices which were successful in the past may no longer be competitive and that the challenges of globalisation demand a completely new paradigm. For all of that due recognition and credit has to be given to the achievements in the sector over the past decade. Between 1992 and 1998 rice production doubled and export earnings increased by 109 % to US $70m. This period also witnessed the reorganisation of the industry which saw many controls removed and the participation of a number of investors whose only object was short-term profits through playing the markets and one player in the industry against another. Some of them were not Guyanese and had very little equity in the industry. They even managed to play one bank against another and made it very difficult for the banks to move against them. It would be both misleading and unfair to blame the problems on foreigners however. Everyone has to accept responsibility, even commentators and columnists including Business Page. The banks themselves appeared to have shed their conservativism and went out on a limb extending credit far in excess of what could be considered prudent. The rice sector now owes the commercial banks in excess of $11Bn representing over 20% of total banks' loans and advances much of which is currently non-performing and which will be irrecoverable regardless of any re-scheduling. The seed of the current crisis lies partly in the drying up of the higher prices available through the O.C.T. route under which paddy and rice were shipped to places like Curacao, reprocessed and exported to Europe at very lucrative prices. Everyone it seems assumed that the good time would roll but restrictions were soon imposed and prices have fallen dramatically even as costs including fuel have gone up. Borrowers also underestimated the cost of high-interest, short-term funds to finance long term investment. Overdraft is a silent killer and for farmers who do not keep proper financial records it is a hidden cost. Farmers do not manage overdrafts well and the banks should not encourage the practice. Peculiar and uneconomic practices The sector is still dominated by small farm sizes which offer no more than a modest income but in the present configuration of things there is little choice for the farmer. Alternative employment is not available and there is little or no capital for conversion from rice to other crops. Record-keeping is often rudimentary and is based strictly on cash flows which exclude such real and significant costs as family labour, depreciation and finance. To compound the problem, every farmer felt that he had to have his own machinery despite the fact that this is idle for most of the year. Unsophisticated practices including the inadequate/improper use of productivity enhancing inputs either kept down productivity or failed to provide real defence against weeds and pests. With small scale production there is little scope for expenditure on quality control and the need for cash encourages some element of unscrupulous behavior. While the buyers, exporters and millers are often painted as villains of the business the small farmer is certainly no angel and is not averse to taking advances from more than one miller for the same paddy. De-regulation The administration of the sector in the period preceding the Economic Recovery Programme was itself a disaster largely because of the dominance of political considerations in decision-making. No wonder then that the dismantling of the structures which had served the industry so well in the past was accepted without question. There have certainly been significant benefits but the cost has been enormous. There is no longer anything such as an unsophisticated consumer and one shipment of poor quality rice by any exporter will tarnish the reputation of the country. This alone suggests that stricter regulation needs to be re-introduced. Indeed the case of the commodities boards which still exist in several countries should be given serious consideration since they will operate in the interest of the industry as a whole. Such an entity often sees pricing as a medium term consideration and adopts policies designed to moderate the impact of price fluctuations by the creation of stabilisation funds. They may also take out crop insurance against natural and other eventualities again designed to provide that cushion which will prevent the pattern of entry and exits which follow price changes in an unregulated market. While insurance may appear expensive the cost of taking land out of and back into rice cultivation is considerable. Over-capitalisation It seems that in the rice sector symbols are everything. First it was the tractor and then the Combine. Now of course it is the mill and the bigger the better. Of course there is the 4x4 which anecdote puts as the first item procured on the way from the bank. The industry is massively over-capitalised with highly specialised plant and machinery which even in the peak season is under-utilised and for the rest of the year is totally idle. It is all the more difficult therefore to understand how the banking system could have increased its lending to the sector from G$2.8Bn. in 1995 to G$10.7bn. in 1996. This was out of all proportion to the growth in the sector over the same period and most likely to the injection of own funds by the borrowers. This is a regrettable but serious indictment of our banking system not all of which is attributable to the State-owned banks. Are banks not supposed to have sector policies and rules on debt to equity? Should banks now pay for such misjudgement by carrying the cost of the financial restructuring? Should depositors and shareholders be penalised for the decisions of the banks' management? The huge growth in bank indebtedness transformed farmers into entrepreneurs (albeit of someone else's money) and businessmen overnight. Without any training they became players in the international marketplace dealing in letters of credit and arbitration without the slightest idea of what those things are. They were easy prey for the experienced buyers whose only interest was to buy at the least possible price. The role of the Government Not unexpectedly, the Government has done what all governments are good at doing - set up a committee, talk and attribute blame to others. President Jagdeo has emphatically come down on the side of the small farmers and seems to have accepted that many of the millers who owe large sums locally own huge assets abroad. This is an extremely serious charge by the President who is also the Minister of Finance and under whose responsibility the Revenue Authority falls. Since five large millers owe more than $9Bn it ought not to be too difficult for the extent and location of those assets to be determined given the tax treaties and tax information exchange agreement in place. These assets constitute property to be included in the Property Tax returns and the persons are by extension guilty of serious tax evasion. The millers argue with justification that they were encouraged by the PPP/Civic Government to increase their involvement in rice and the bankers were earlier castigated for not supporting the sector. Some millers have been less than honest in their business conduct and provided incomplete, inaccurate or misleading information to the banks. While the banks were arguably gullible and careless if not irresponsible in their lending it is hard not to feel some sympathy for them as they were damned when they did not and are now damned for having done. One problem which the bankers face even as they consider their options is that they would have paid taxes at the rate of 45% on income which they will never receive and will have to pay the Minimum Corporation Tax of 2% of turnover even if they make losses by writing off the loans. The Government is right to intervene in this crisis. But it has to do more than tell the banks to reschedule the loans. In many cases that amounts to no more than delaying the inevitable and it would be instructive to learn how many rice loans rescheduled in 1997 can now be considered good. In permitting the rescheduling of credit under the Financial Institutions Act the Bank of Guyana has itself acted too liberally by removing the overriding consideration that in making the decision the financial institution must be satisfied that the debtor has the ability to repay the rescheduled loan. The mandate of the committee appointed by the government is too narrow and short-term. This is an opportunity to carry out a thorough review of the sector and to examine its viability given the present operating and regulatory structures. Infrastructure and extension services are still inadequate and farmers have to be assisted in increasing their profitability and not just yield per acre. Even those who should know better consider only yield and not the additional cost in achieving those higher yields. What is the point of increasing yield by 25% if cost goes up by 40%? The economy must seek to add value to the commodity and more of the revenue needs to remain in Guyana. For the sector to overcome the existing crisis the Government has to provide financial and fiscal support both to the industry and to the banking system. The longer-term solution lies in new financial arrangements, better infrastructure, regulations, and a reorganised industry. The government is familiar with debt relief and is now called upon to play the role of donor at home. It should consider relieving the banks of part of their portfolio by issuing to them interest-bearing paper in return for them agreeing, on a case by case basis, to write off some of the interest which is not on the books anyway, and extend the period of repayment on the balance. Borrowers must not be allowed to get off scotch-free and they must immediately undertake to grant full security to the lender. Conclusion President Jagdeo is right to be impatient with the unscrupulous players in the sector whether local or foreign. But he has to recognise that the industry is at the cross-roads. The industry that can emerge if no conscious effort is made by the Government is one that sees massive transfer of ownership from Guyanese to foreigners and from productive to idle land. Many Guyanese would consider this at best unfortunate. Like in sugar this is not only an economic matter : it is a social and political one as well. On the Essequibo Coast it is the sector around which life revolves. Even in the sugar belt rice plays a vital role and keeps the economy ticking over in the sugar out of crop. Without the foreign exchange from rice it is anyone's guess what the exchange rate will be if the industry is not assisted or if the ownership is transferred abroad. The banks may engage in unpopular interest policies but this is not the time or the occasion to chastise them. Most of them will survive without rice but not the other way round. They alone cannot carry the burden of adjustment. Follow the goings-on in Guyana in Guyana Today