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The government plays a dual role in ensuring that agricultural production remains profitable and consumers, especially those in urban areas, enjoy affordable prices. To attain these objectives, the government must balance policies that support farmers, other value chain actors as well as consumers.
Presently, the government is implementing an ambitious transformation strategy through the Big Four Agenda and the Agriculture Sector Growth and Transformation Strategy 2019-2029. The primary objective is to grow smallholder productivity and incomes as well as guarantee affordable prices. Enhancing farm level productivity, value addition and agro-processing are at the heart of these strategies.
In addition, the strategies also have measures aimed at increasing employment opportunities along agricultural value chains. When implemented successfully, these strategies will significantly enhance the economic contribution from agriculture and transform rural economies.
As such, the publication of the notice for the remission of excise duty amendment regulations, 2020 by the Treasury puzzles many stakeholders in the sector. The regulations seek to reduce excise duty remissions of beer made from locally grown sorghum, millet or cassava or any other agricultural produce from 80 percent to 60 percent.
The Treasury’s objective is to collect additional revenue to aid the government economic recovery strategy post-Covid-19. However, this specific measure will likely be counterproductive and the government will unlikely meet its revenue target or economic growth as planned.
In the 2015/2016 financial year, a similar proposal was implemented. The price of sorghum beer increased as the added tax was passed on to consumers. The demand for sorghum plummeted as the beer processors scaled down processed volumes and also cancelled contracts for famers. This had a negative impact not only for famers, but other value chain actors such as input sellers, grain aggregators, and transporters. Instead of the government raising revenue, it actually lost Sh2 billion in forgone tax due to losses accruing to the sorghum beer processors and other value chain actors.
The policy measure was rescinded after stakeholders presented this evidence to the government. It is not clear why the Treasury is optimistic that this time around the policy will be successful.
In Kenya, sorghum is grown in the Western, Lower Eastern and Coast regions, areas which are characterised by low rainfall and high temperatures by an estimated 240,000 farmers. In these areas, due to challenges of weather and lack of investment in irrigation, profitable farming is constrained. However, sorghum farming has provided smallholder farmers in these areas an opportunity for transforming their agriculture. These gains are shared across the entire value chain.
Before the establishment of sorghum brewing, yields were consistently low at about 0.7 tons per hectare. Farmers were unable to break-even. The entry of sorghum beer processing locally provided a local and stable market. First, researchers worked hard to double the number of improved varieties from 20 in 2012 to 40 in 2017.
The main sorghum beer processor, EABL, started contracting farmers which not only guaranteed farmers of a market, but stability of prices as well. Farmers responded by increasing their production, with some attaining up to 3.3 tons per hectare, which translated to about 220 percent increase in incomes.
This led to increased investments in the value chain by the private sector. Two years ago, the President opened a Sh14 billion plant in Kisumu County, amid the promise of growing employment opportunities in agriculture, manufacturing and retail, which is a key objective under his Big Four Agenda. The plant serves a primary market for farmers in the Western region. Another processing plant is being set up in Naivasha to produce sorghum beer.
These investments have been made against a backdrop of a stable and predictable policy environment that has existed in the past three years. Across the value chain various players have and continue to invest with the expectation that this environment will persist and guarantee them returns on their investments.
These actors include seed breeders working on sorghum varieties, seed companies, grain processors and investments in post-harvest storage and management. The prosed regulation will be a disincentive to such investments and possibly lead to capital flight.
Furthermore, this policy also contradicts other government policies and investments. The government, through support from development partners such as the World Bank and European Union has also invested heavily in the sorghum and millet value chains through the projects like the Kenya Climate Smart Agriculture Project, the National Agricultural and Rural Inclusive Growth Project and the Kenya Cereal Enhancement Project, with several counties having prioritised sorghum as an essential food and commercial crop.
The timing of this regulation is ill-timed. This year, the agriculture sector has suffered several shocks. The desert locust invasion and flooding have posed a significant threat to productivity. The Covid-19 pandemic has disrupted the economy in a way never experienced before.
The demand for sorghum beer was already depressed following the directive to close bars, restaurants and hotels in March. Social distancing rules and curfew rules have already impacted the plans of the sorghum beer processors, as well as other actors along the value chain. The current crop has already been established. Curtailing the industry during such economic shocks, can only lead to worse effects for the economy.
Njagi is a Research Fellow at Tegemeo Institute of Agricultural Policy and Development, Egerton University.