100% cotton - EBRD funding targets rural cotton farmers in Tajikistan

By Claire Ricklefs

Cotton in Tajikistan

The EBRD-financed Tajik Agricultural Framework (TAFF) will allow small farmers in Tajikistan to purchase farming supplies. The Framework specifically targets rural poverty in Tajikistan and aims to raise cotton-reliant farmers' standards of living.

The financing of up to US$ 35 million will provide small farmers in Tajikistan with alternative sources of credit for the purchase of farming supplies, such as seeds, fertiliser and other inputs. The project is expected to free the farmers from historic ties with the cotton processing and marketing monopolies and thereby help improve the living standards of some of the poorest farmers. Many of these are women who are left with the management of household plots and small farms as male household members have left Tajikistan to seek employment in other countries.

With 70% of the population reliant on cotton for their livelihoods, what is known as "white gold" dominates life in Tajikistan. It is a vital source of export earnings and tax revenue for the country. Now, cotton-related indebtedness has virtually paralysed the Tajik cotton industry and debt resolution has become the focus of assistance programmes by international financial institutions in the country. It has also stimulated the Tajik government’s commitment to much-needed cotton sector reform.

The Tajik Agricultural Finance Framework (TAFF)

The high level of debt is reputed to be the result of producer exploitation by some of the cotton processing and marketing monopolies which traditionally controlled credit supply. To help relieve the situation, the EBRD launched recently the Tajik Agricultural Finance Framework (TAFF). The financing of up to US$ 35 million will provide small farmers in Tajikistan with alternative sources of credit for the purchase of farming supplies, such as seeds, fertiliser and other inputs. The project is expected to free the farmers from historic ties with the cotton processing and marketing monopolies and thereby help improve the living standards of some of the poorest farmers. Many of these are women who are left with the management of household plots and small farms as male household members have left Tajikistan to seek employment in other countries.

“This is a tailored revolving framework specifically for seasonal agricultural finance – something which is currently unavailable in Tajikistan,” says Senior Banker Sabina Dziurman from the EBRD's Group for Small Business; whereby the SNS Institutional Microfinance Fund, an investment fund managed by Developing World Markets (DWM) and Rabobank will syndicate loans to the local banks. To date, DWM has committed US$ 6 million to support TAFF syndicated loan facilities involving Agroinvestbank and Bank Eskhata – and other banks are looking to join this facility in the future.

EBRD financing attracts investors

What attracts investors? According to the EBRD's Deputy Head of Loan Syndications, Michael Delia, “They are attracted by the EBRD’s track record in providing microfinance loans in Tajikistan – to date our partner banks have extended over US$ 122 million in loans to the the micro and small business sector in Tajikistan with virtually no losses – and by the important social impacts associated with the new facility. And they are also attracted by the fact that TAFF is a groundbreaking facility.”

Murodali Alimardon, Governor of the National Bank of Tajikistan, said: “This is a very significant moment for Tajikistan, because not only are these the first syndicated loans in the country but the technical assistance provided alongside this finance will help our commercial banks to provide a real alternative for Tajik farmers and will support our Government’s new Freedom to Farm policy.”

Targeting assistance

TAFF is accompanied by extensive donor funding which will go towards training loan officers and agricultural advisers (agronomists) in the local bank branches but will also improve the farm business management skills and technical know-how of farmers who receive TAFF finance.

In the long run, farmers will need to diversify their crops to guarantee a more stable income says Marc Van Strydonck, from the EBRD's Agribusiness team. “But given that cotton is very much the main cash crop at the moment, and is likely to remain an important export crop for the foreseeable future, alternative forms of finance, as well as donor funding, are necessary to promote best farming practice.”

The uncertainty of crop yields and quality from one season to another, the price volatility and the varying management capabilities of farmers means that lending to individual farmers is a high-risk activity for banks, explains Mr Strydonck. To mitigate this risk, banks will encourage farmers to form joint-liability groups, which spreads the risk and ensures a self-selection process amongst farmers. Farmers within such a group would only accept liability for others with a reliable track-record and good farming practices as their business partners.

Donor funds will also be raised to establish a warehouse receipt programme (WHR) that will enhance farmers’ access to finance after harvest. Through this system food and agricultural stocks can be stored in reliable and safe conditions in a warehouse. The warehouse will issue an exchangeable receipt for the goods held in its safekeeping which can be used as collateral for finance from a bank. The system will be supported by an Indemnity Fund to compensate participants in case of losses, providing farmers, traders and processors with an additional means to secure financing for food and agricultural stocks without the need for immediate sale.

Addressing rural poverty

The reform of the cotton industry is a key transition objective for the Bank says Mark Hughes from the Environment and Sustainability Department. “Cotton has had a bad press in recent years due to its harmful environmental impact (through, for example, the heavy use of pesticides) and child labour claims,” he admits. “But rural micro-lending accompanied by targeted technical cooperation as proposed in this project should help improve the situation of continued rural poverty and, in time, change the structural economic circumstances which can lead to child labour.”

According to the 2004 IOM report, children harvest up to 40 per cent of cotton in Tajikistan. The United Nations International Labour Organization (ILO) says that while it is common and useful for children in rural communities to gain work experience in local industries, preventing access to an education through full-time work only continues the cycle of poverty.

“We hope that the provision of access to finance will result in improved profitability ensuring that there is no need to rely on children in the work force in future,” says Ms Dziurman. She explains that in the past local authorities used their power to both dictate how much cotton should be planted but also to marshal school children during cotton harvesting periods for the large collective farms.

Greener, cleaner cotton

To help promote better labour standards within the cotton industry, the EBRD’s assistance for farmers will draw on existing initiatives in Tajikistan and neighbouring countries by other institutions such as ILO, United Nations Development Programme (UNDP) and the UN's Food and Agriculture Organization.

The EBRD is also in discussions with The Better Cotton Initiative (BCI), which assists farmers to grow crops, including cotton, in a way that is more economical, thereby improving profitability and health both for the farming communities and the environment. As Mr Hughes explains, “Under this initiative large international companies such as GAP and IKEA commit to buying the cotton from the participating local farmer, providing them with a vital new market for their crops.” This could secure local Tajik farmers with a stable income for the longer term, benefiting both the environment and local communities.”