Fringilla Lodge, October 2009 A PRESENTATION AT THE MULTI STAKEHOLDER MEETING BY ZANACO FOOD AND AGRI FINANCING

2 Contents  Introduction  Financial Sector and Agriculture  Zanaco Overview  Zanaco and Agriculture  Recommendation  Conclusion

Introduction

Food and Agriculture  Key economic sector  Under performed in the last 3 years; sector contracted by an average of 1.2% p.a. between ; 4% contraction in 2008 alone due to a 7% reduction in crop production  Crop production reduction was mainly due to; –Extreme whether patterns; floods, drought etc –High cost of inputs –Limitation to credit facilities, inputs, and extension services –Inadequate infrastructure –Poor livestock management –Weaknesses in the FSP and; –Failure to attract private investment in the sector  This is despite MACO having a medium term target of attaining 30% GDP contribution by 2015 4 MACO NAP

Food and Agriculture (cont’d)  Good water availability but untapped; over 1.7 trillion cubic meters of under ground water resources, and about 40% of surface water resources in the SADC region  Ineffective water rights and regulatory/demand management mechanisms  Inadequate attention to research and extension needs of the irrigation sector  Estimated 10.5 million hectares of land currently being used for agri production, despite 42 million hectares of land classified medium to high potential for agro production (14% utilisation) 5 MACO NIP

Financial sector and Agriculture

Banking Sector Overview  Low banking penetration with a ratio of deposits to GDP of approximately 20-25%  High historic growth rates of deposits (25-30% p.a.) and loans & advances (30-35% p.a.)  Focus on primary agriculture  20% loan assets to agriculture sector  50% of provisions to agriculture sector; root causes; –Tenor of financing does not match investments/capex need –Currency mismatch –Short term views by banks on agriculture borrowers and assimilated at normal corporate borrowers –Lack of long term view to address cyclicality issues 7

Challenges of financing food and Agric  Inconsistency and/or lack of continuity in policies (volatility in government policies)  Distorting subsidies and spur of the moment import/export bans that decimate farmers and that discourages banks from lending to the sector due to resulting price volatilities  Lack of value chain infrastructure support i.e. feeder road network, land tenure and administration, energy, communication etc, which creates linkages between supply side and demand side of the sector  Lack of warehouse financing legislation  Lack of silos in the country forcing crops to be sold after harvest; too much power with millers/traders  Weak commodities market to provide risk management solutions (hedging)  High energy costs  Lack of long term funds for irrigation  Outsourcing mechanization with risk of non-availability of harvesters etc versus underutilized assets if owned by farmers 8

Challenges of financing food and Agric (cont’d)  Some banks exiting the business, leaving farmers in a lurch for their seasonal requirements;  Limited availability of long term funding; need to explore other long term funding options i.e. bond issuance, Notes etc  Privatize extension services; improve efficiency and investment availability  Opportunity for guarantee schemes (CEEC, DBZ etc)  Insufficient skills and information resources for the successful development and operation of irrigation system 9

Zanaco and Agriculture

11  Strategic relationship with ZNFU (4% shareholding, 1 Director on the Board)  Dedicated Agri business team  On-going initiatives; –Facilities for Commercial farmers –IFC; Emerging farmers –ZNFU; Lima scheme –NAPSSF; Munda Scheme –ADB; Zampip  Relationships with and funds distributed to 5,900 small scale, subsistence and emerging farmers  Between 20% and 30% of the loans and advances portfolio is in Agriculture loans (depending on seasonality)  Improved credit turnaround times

Recommendation

Food and Agriculture sector sustainability  Top 6 issues from Zanaco’s perspective; –refurbish or build silos/warehouses –Enact warehousing finance legislation –Need for consistent and predictable government policies (no policy shifts); no spur of the moment import/export bans –Professionalize/privatize extension services –Focus on yields!!! –Strengthen Regional Commodity markets  Strengthen value chain support infrastructure; land tenure and administration, road network, energy, etc  Incentivize creation of long term funding mechanism for the agric sector (fiscal and/or monetary)  Minimize distorting subsidies and spur of the moment import/export bans  Financial institutions initiatives to create hedging solutions for farmers  Finalize CEEC, DBZ guarantee schemes  Promote bilateral long term funding for irrigation  Work closely with Banks on managing the FSP program 13

Conclusion

Zambia should be a bread basket  Lots of land  Fertile Soils  Good water resources and availability if irrigated  Reasonable rains nation wide  Good banks  Good farmers 15