Challenges to the farmers after calamities
Cyclone Komen flooded 1.4 million acres of farmland, 972 acres of which were rice paddies. The devastation was widespread. There was concern about possible shortage in the supply of rice in the country. The situation prompted the Myanmar Rice Federation to suspend rice exports until the situation became stabilized. This reflects the extent of damage the cyclone wrought on the farmers. Months after the floods, another reality dawned on the farmers – inability to pay for the production loans taken out before the floods. Pact Global Microfinance Fund (PGMF), the biggest microfinance institution in the country declared it was reviewing the impact of the floods on the 39,810 clients in flood-affected areas. Meanwhile, the Ministry of Cooperatives stated that there will be no write-offs on the loans it has provided these funds originally with loans from the China ExIm Bank.
Affected farmers are now faced with destroyed farms, some are still flooded, no harvest to expect, unpaid loans, and inability to replant to catch up with the season. Rehabilitation is the forgotten part of disaster management. Many people take part in therelief operations, but forget what happens after relief activities end. Life is harder for the farmers who were expected to have recovered after the calamity. Now they have to think of means to survive, look for resources to plant again and additional resources to repay for the unpaid loan.
The need for appropriate safety nets
The opening of the country’s economy increased the number of financial institutions like banks and microfinance institutions providing access to borrowers in the rural areas. However, there were no safety nets to absorb the economic shock when calamities strike, destroy the crops and disable the farmers’ capacity to pay. Without safety nets for both the lenders and the borrowers, we may end up in a situation where financial institutions shy away from lending to farmers because of the inherent risks, or farmers are again financially excluded and cannot access financial services because of previous debts unpaid due to natural calamities.
Safety nets to address damages of natural calamities can be developed using the lessons learned by neighboring countries. One of the most applicable is the case of the Philippines which is along the typhoon belt receiving not less than 20 cyclones a year. To respond to the perennial challenge of recovering after calamity, the Philippine government established two institutions to address the concerns of the borrowers and the lenders.
Crop insurance to benefit the farmers
Corn, rice, high value crops, fisheries and livestock are covered by crop insurance in the Philippines. The Philippine Crop Insurance Corporation (PCIC) provides insurance for the farmers affected by natural calamities life cyclones, plant diseases and pest infestations. Other than corps, assets used in agricultural production like machineries, equipment, transport facilities and other related infrastructures are also covered by the PCIC.
Established in 1978, PCIC has been serving the agriculture sector for more than 4 decades, enabling the farmers to recover immediately after a calamity. The insurance is required for all farmers accessing loans from financial institutions, allowing also the financial institution to recover loans they have extended before the calamity.
Guarantee fund to enable financial service providers to lend again
Financial institutions consider agriculture as a high risk industry that has to be avoided. But in the Philippines, the Agri-Agra Law provides certain percentage of a bank’sportfolio be allocated to agriculture and agrarian reform beneficiaries. When borrowers cannot repay due to natural calamities, banks often blacklist the borrower until the loan is repaid. Even if the borrowers have crop insurance, there is a possibility that the insurance proceeds will be spent to household expenses first before being used to pay the bank.
To give incentive to banks to the bank to relend, a guarantee mechanism was established to cover the risks of the lending institution. The Agricultural Guarantee Fund Pool (AGFP) is an attached agency of the Department of Agriculture and managed by the Land Bank of the Philippines (LANDBANK). It guarantees all risks except fraud on the part of the lending institution up to 85% of the outstanding principal loan.
The guarantee mechanism is not complicated. Financial institution pays a guarantee fee for all agricultural production loans it provides. When calamity strike and the borrowers are affected and cannot pay, the financial institution can immediately claim for guarantee. Within 60 days upon submission of claims, the financial institution will be paid, without prejudice to the collection of the past due account. This means cash available to the financial institution even when clients fail to pay. It will also enable the financial institution to release again loans for the farmers to recover.
Market-driven response
These are not subsidies but market-oriented schemes where the farmers paid for the crop insurance and the financial institution pays for the guarantee which makes the two facilities sustainable. Insurance may be a nascent industry in Myanmar, but it is also the best time, because the right policies can be set at the start. The same with the guarantee facility for the financial institutions.
These facilities should be given priority by the government considering the number of people it will benefit. The role of the government is to facilitate the establishment of institutions and allow these institutions to run efficiently as private companies. These should be designed and function as a market-driven enterprises to be sustainable. The image of being a government agency should be limited or these institutions may be considered as a dole-out facility and its clients may always invoke government subsidy.
Forewarned
Force majeure are unexpected events but the monsoon season, a predictable event, brings with it strong winds, flood waters and landslides. The certainty of the season and the probability of disaster allows us to mitigate, if not prevent the losses when it happens, and the reverse may happen with the El Nino phenomenon where dry season is extended, parching the land and limiting the areas that can be planted. Adverse weather are expected to aggravate due to climate change.
The government doesn’t have to wait when most of the farmers are mired in debt before it start working on the solution. As the country is the enjoying preferential status from rich countries, request for assistance to develop safety nets for the agriculture sector will not be left unheeded. As the saying goes, ‘strike while the iron is hot.’