President Bharrat Jagdeo has been presented with a proposal to reschedule the debt in the rice industry which would see banks writing off $8B in debt (principal and interest) and the government assuming responsibility for the other $9B.

The scheme would be underpinned by a government-guaranteed bond offering investors a return of 10% over 10 years and is to be discussed this week by the President and key industry officials. The bail-out plan is premised on an optimistic outlook for the recovery of rice prices on the world market by next year and rising global consumption of the grain.

According to the White Paper presented to Jagdeo last week by senior rice industry officials, the Guyana Association of Bankers is willing to recommend to its members a write-off of the $4.6 billion in interest owed by the rice sector on a total outstanding principal of $12 billion, both of which bankers feel that they have little hope of recovering fully as their debtors are in no position to pay.

What the Bankers Association has proposed and has been adopted by the rice committee appointed by Jagdeo following the crisis in the rice industry is that the government take over 75% of the debt (principal), an amount of $9 billion for which the banks will turn over security valued at approximately $20 billion. The mechanisms for collecting the debt transferred to the government have not yet been worked out, though one option being considered is that the banks would do this as its agent.

However, the proposal to the government notes that in many particular cases, the security provided by farmers or millers is seriously insufficient to cover the outstanding balance of the loan plus accrued interest. As a result, the commercial banks have had to make loan loss provisions of $6 billion and are prevented by the Financial Institutions Act from recognising accrued interest in their accounts.

As such, the Bankers Association proposes that commercial banks be granted tax relief on the write back of bad debt provisions; that is the excess of recovery over the current provisions for bad debts. It is estimated that the excess recovery over provisions will be $3 billion once the government agrees to the $9 billion bail-out. This is because the banks after receiving $9 billion from the government will have recovered $3 billion of the provisions for bad debts of $6 billion.

The Bankers Association in its input on the plan says that detailed settlement is to be agreed individually by each bank. If accepted by all parties, the banks' contribution to the bail-out of the rice sector will be $8 billion as they would be forgoing $5 billion in interest and writing off $3 billion in principal. In return they will receive $9 billion from the government.

The government's contribution of $9 billion will be raised by the issue of bonds to finance this debt at an effective rate of 5.5% as it would be recovering 4.5% of its interest payments in the form of corporation taxes. The bonds will be purchased in the usual way by the financial sector, including the banks. Interest, the rice committee suggests, can be accommodated via the sterilization fund and partially recovered from the scheduled payment of the farmers debt taken over by the government.

In return, the government will get the full $12 billion of debt on its books and is expected to levy interest charges of 5.5% on this debt to the rice sector over a 10-year period compared to the 19% interest charged by commercial banks at one stage to the industry. The return on the extra $3 billion on the government's books is expected to cover the cost of the government managing the debt.

The rice committee also recommends that the government further consider a moratorium on principal payments until the second crop next year when the price of rice is expected to return to US$300 per tonne and farmers would be able to earn $1,200 per bag of paddy. It further recommends that the government provide short-term working capital for farmers so they could continue in operation until they can get $1,200 per bag of paddy from millers.

This is the latest proposal by the rice industry and the banking sector to reduce the indebtedness of the industry as the rice committee noted that the financial sector in Guyana will not be able to absorb the effect of a total debt write-off to the sector.

"Despite the assurances that the sector is sound and has made adequate provisions for loan losses, the extent of the debt and the limited provisions made (approximately 50%), tends to indicate otherwise," the committee said in the White Paper. This proposal is expected to be discussed with Jagdeo and the rice committee tomorrow when he returns from overseas.

Additionally, it is expected that a committee will be established to examine the outstanding loans on a case-by-case basis to determine the true principal balance after reconciliation with individual bank and loan records. Also it is expected that legal proceedings against defaulting producers would be suspended if the government approves the bail-out.

Assumptions

The government decision is expected to hinge on the viability of the rice industry given the trend of rice prices on the world market and the effects of fluctuating prices on the local industry. It was the one-time lucrative prices for rice which saw heavy investments in the domestic industry, that mired the industry in debt when a key route to Europe was cut off and prices slid.

The committee's proposal to Jagdeo is based on the prediction of a stable future for rice and possibilities of enlarged markets yet to be tapped into. It says that once Guyana can get US$300 per ton of whole grain white rice on the international market, which will allow farmers to get G$1,200 per bag of paddy from millers, the industry will become viable. It says that based on the Arkansas Rice Model, such prices should prevail by the second crop next year.

The committee says the Arkansas Rice Model sees consumption of rice increasing over the next 10 years as a result of the world population growth and the continued dependence on rice as a staple of the major rice growing regions. The committee said the model also sees rice prices rising and said this augurs well for the future of the industry as prices have been depressed over the past three years.

However, the model, seen by this newspaper on its website also said annual growth rates for global rice trade are expected to slow from the recent rate of 11% to only 1.8% and the growth in global rice consumption is expected to be smaller in the future as a result of shifts in Asian diets towards protein-based foods as income rises.

It added that relative prices, income and population growth and dietary changes are expected to continue to determine the demand for rice.

"While nominal world rice prices are projected to increase, real prices will continue to decline," the report said.

A study of the Arkansas Global Rice Model (AGRM) entitled International Rice Baseline Projections for 2000-2010 said while the AGRM projections can be used for policy, technology and structural market analysis, it is not a forecast.

"The actual market and policy conditions over the next 10 years are likely to be substantially different from the baseline. While the baseline is a plausible outlook, it is conditioned by the macroeconomic and policy assumptions used to generate it," the study says. One of the main assumptions of the baseline projections is that many national economies are expected to recover from the 1997-9 international financial crisis.

It says that changes in international and domestic agricultural and trade policies are increasingly shaping the future of the world rice economy. Recent agreements in the rice industry are making it more market-oriented and the major rice producing countries face an increasingly competitive global rice marketplace.

Recently, Thailand and Vietnam, two of the world's largest producers of rice announced their intention to co-ordinate rice exports.

The study on the ARGM said satisfying projected consumption levels until 2010 will come mainly from yield increases as has been the case for the past 20 years. The world average rice yield increased from 2.56 metric tons per hectare in 1997 to 2.59 metric tons in 1998 and is projected to increase to 2.89 metric tons per hectare. However, this is a lower rate compared with the 1.80 per cent increase observed in the past 20 years. Reacting to this, a spokesman for the committee stressed that the important thing is that growth is projected to continue even though the rate might drop.

Guyana has so far been selling her rice in preferential markets and its primary markets are the European Union and CARICOM.

However rice imports into the EU are controlled by the EU as it involves an import licensing system administered by the EU; a licence deposit of 120 Euros per metric ton and a three-tranche import system.

Additionally, the committee argues that Guyana can put forward a strong case for the investigation of the effects of the 35,000 metric-ton quota on the Other Countries and Territories (OCT) route to Europe. The committee said that the fall in prices from US$425 per ton to US$208 per ton - occasioned by the closure of the OCT route - is the single most important factor in the industry crisis. The paper to Jagdeo urges that a foreign trade initiative be launched to examine the role of the EU in the deterioration of the Guyana rice industry which it said was once being hailed in the EU as a model for countries wishing to move from reliance on aid to self-reliance.

Guyana's other major market is CARICOM but this was neglected during the more lucrative days of the European market. Rice exporters are now trying to regain their credibility and ability to meet that market.

"To protect and expand our access to the CARICOM market, we need to examine the operation of the PL 480 plan which uses US produced rice to support the Jamaican programme. This results in depressed prices and restricts the size of the market available to Guyana," the rice committee reiterated. The committee said there is need to operationalise the CARICOM Common External Tariff and closely monitor it as well as raise objections to safeguard Guyana's rights to the region's market. The report said that Guyana loses U$10.5 million and US$11.5 million per annum in market opportunities to Trinidad and Jamaica respectively.

The committee said the rice industry is seriously looking at the wider Caribbean as a prospective market capable of consuming in excess of 525,000 metric tons of rice annually. It cites Cuba, the Dominican Republic and Haiti as market possibilities.

Whilst markets need to be worked on, the committee said that the future of rice marketing in Guyana is not gloomy. It said the country has the resources to enable it to meet the requirements of the global rice markets. The committee believes that Guyana is in an advantageous position since it has a relatively stable population and enough land to develop, cultivate and produce more rice for the future.

Viability of rice

The committee further argued in the paper that the viability of rice in Guyana lies in increasing yields per acre; improving milling yields; improving post-harvest technologies such as drying, milling and storage; improving extension and education services; better management and use of fertilizers; lowering the cost of inputs such as fuel; fertilizers and insecticides and a more integrated approach in managing and using machinery. It suggests short-term relief in the form of tax concessions for fuel, fertilizers, chemicals and spares for the industry.

The paper said that Guyana has improved its rice yields from three to four tons per hectare over the past ten years and expects that in another two years, the national average will be five tons per hectare or 30 bags per acre. It also anticipates that milling yields will move from the current 66% to 70% in the near future.

The committee reminded Jagdeo that the industry is engaged in a number of other activities which will impact positively on its efficiency and these include the 10-year strategic plan being developed with assistance from the Inter-American Development Bank (IDB); the EU diagnostic study which is expected to release 100 million Euros to develop Guyana's and Suriname's rice sector; the IDB agri-sector financing that will facilitate improved drainage and irrigation infrastructure; and the development of a marketing consortium to improve and regularise market access to Jamaica and other countries. The paper posits that these activities will make the industry competitive by world standards and result in sustainability outside the various preferential markets. A spokesman for the rice industry also said that the possibility of cost-reimbursement for transportation and marketing expenses incurred by the industry would not offend World Trade Organisation protocols or international funding agency criteria.

The report posited that small farmers can sustain their activities with a minimum of 25 acres if paddy prices are stabilised at $1,200 per bag.

However, the burden of debt is seen as the single most important factor relating to the short-term viability of the rice industry.

Repercussions

If the debt question is not addressed, the committee said, there will be a far reaching impact on the socio-economic and geo-political landscape in Guyana.

It said in the short term, there would be a decrease in the production of rice and a main factor here is the unavailability of working capital from the banking sector. The committee said annual acreage cultivated has been reduced by 20% in the last three years. The report said a further reduction is expected as millers and farmers will have difficulty accessing working capital.

Such reductions in acreage cultivated will increase rural poverty and put additional strain on government resources, the committee argued.

It noted the inability of the financial sector to absorb a total debt write-off and Guyana's inability to meet its market obligations if there is no rescue plan.

Milling capacity in the industry will be reduced if mills are forced to close their doors, the committee noted, and pointed out that such capacity cannot be replaced without large capital outlays.

Additionally, the committee said that a decline in rice production will have implications for food security in Guyana as it is the only locally produced food staple; will reduce foreign exchange earnings for Guyana; will increase the price locally and hence affect the cost of living; cause economic instability and a further deterioration of the exchange rate and spark inflation.

The committee pointed out that during the past nine years the government spent $8 billion in drainage and irrigation and if not utilised efficiently, the effective rate of return will be wasted. The committee noted that there is a further US$51 million in a master plan for drainage and irrigation.

It further pointed out that the Guyana Rice Development Board would not be able to function as it is funded by levies charged on rice exports. Stabroek News understands that this levy has not been collected for some time.