By Dr. Louis Kasekende
The modernization of agriculture requires support from the Government budget for the supply of public goods and services needed by farmers. However, budgetary resources are scarce and hence it is essential that they are allocated only to areas of expenditure which can generate the highest social rates of return.
As evidenced in the 2015 Agricultural Finance Yearbook, on fiscal issues, the provision of tax exemptions for agriculture and agricultural lending, of various kinds, has delivered few, if any, tangible benefits for farmers in this country. Any benefits accruing from these tax exemptions were mostly captured by non-farm sectors, such as importers and banks, and most passed on to farmers.
This finding is consistent with what is generally known about tax exemptions in countries all over the world, they are rarely effective and very difficult to target accurately and they entail substantial losses of public revenues.
The scope of some these tax exemptions was curtailed in the 2014/15 budget, which is a step in the right direction. Given these findings, the remaining tax exemptions should be abolished quickly so that public resources can be focused on areas which can really deliver benefits for farmers.
Public expenditure can contribute to agricultural development, but to maximize the benefits from a highly constrained budget resource envelope, spending must be allocated efficiently.
The priority for public spending on agriculture should be goods and services which clearly have characteristics for public goods, in that they cannot be supplied by the market in an optimal manner.
In addition, these goods should benefit the smaller holder farmers who constitute the vast majority of farmers in Uganda. Examples of these goods and services are agricultural extension services and research and development.
The modernization of agriculture requires comprehensive, countrywide, agricultural extension services. Such a service will have to be funded predominantly with public resources.
In addition, budget resources are needed to ensure that rural infrastructure, such as rural feeder roads, is adequate to support commercial agriculture throughout the country. Scarce budget resources should not be misallocated to the provision and subsidy of marketable inputs, especially those with benefit mainly larger farmers.
The Yearbook presents some interesting findings on projects run by the One Acre Fund which aim to support smallholders in East Africa, the findings which are consistent with those of similar projects and of research in the region.
The support which smallholder farmers need to enable them to increase their yields and raise their incomes is holistic. It includes technical advice and training in the use of improved agricultural techniques, the provision of improved seeds and fertilizers together with credit to purchase these inputs, with repayment of the credit aligned with the sale of farm output, the training and support for post harvest handling and storage.
With such a holistic support package, substantial increases in farm output and incomes can be realized. The provision of finance alone will do little help smallholder farmers overcome the constraints that they face in raising farm yields and marketing more of their output.
Unfortunately, only a small minority of the country’s more than three million smallholder farm households currently receive the type of holistic support provided by the One Acre Fund and similar projects, which addresses all of the constraints that they face.
To modernize agriculture, this approach must be applied much widely, so that all smallholders can benefit. Both the public sector and non government organizations can contribute to this objective, but it is self evident that substantial public resources will be required to fund it, which emphasises the importance of properly prioritising public spending on agriculture.
Modernizing agriculture is one of the most difficult challenges facing Uganda, but given that more than 60 percent of the labour forces relies on agriculture as their primary source of income, it is a challenge which is central to socio-economic development and poverty reduction.
Despite the country’s abundant natural resources, Uganda’s agricultural performance has been poor, real output growth has failed to even match population growth rates over the last two decades and labour productivity in the sector is very low.
Modernizing agriculture should be integral to Uganda’s development plans, but for that objective to be realized, we need well thought out feasible strategies, which focus on supporting smallholder farmers.
By highlighting the constraints facing farmers in different sub sector in Uganda and initiatives which have helped to alleviate them, the Agricultural Finance Yearbook, can contribute to the strengthening of our agricultural policies.
A slightly edited speech By Dr. Louis Kasekende, Deputy Governor Bank of Uganda at the launch of 2015 Agricultural Finance Yearbook at Speke Resort Munyonyo on December 01, 2015.