How cashew export ban could cause $600 million forex ‘hole’

19Dec 2018
By Financial Times Reporter
DAR ES SALAAM
Financial Times
How cashew export ban could cause $600 million forex ‘hole’
  • RAW CASHEWS earn Tanzania more foreign exchange than tobacco, coffee, cotton, tea, cloves and sisal combined.
  • The government’s decision to halt raw cashew exports and opt for in-country processing of the crop could lead to a sharp fall in forex earnings until local processing capacity is developed and reliable export markets of cashew kernels are established

THE government’s decision to halt exports of raw cashew nuts could potentially result in an annual shortfall of up to $600 million in foreign exchange earnings from exports of cash crops and thus negatively affect the country's balance of payments, it has been revealed.

According to latest Bank of Tanzania (BoT) data, Tanzania fetched $575 million from exports of raw cashews in the year to October 2018, up from around $340 million a year ago.

Cashews earned the country more forex than all major cash crops put together – tobacco, coffee, cotton, tea, cloves and sisal ($539.5 million combined total).

“The value of traditional goods exports rose by 38.4 per cent to $1.115 billion following an increase in export values of all traditional crops, save for coffee and tea,” the BoT said in its monthly economic review for November 2018 issued yesterday.

“The increase in export value of cotton, sisal, tobacco and cloves was on account of volume, while for cashew nuts was due to both volume and export price. The decline in export value of coffee and tea was mostly due to a fall in export prices.”

This means that raw cashew exports accounted for more than half of all earnings from the country’s cash crops.

A potential annual deficit of between $300 million to $600 million in foreign exchange earnings from the halt of raw cashew exports could likely lead to a shortage of US dollars in the forex market and put pressure on the Tanzanian shilling, some forex traders warned.

The central bank said export earnings from cashew nuts rose substantially in the year to October 2018 largely thanks to a harvest boom and higher world market prices for the nuts.

Tanzania earned $2.4 billion from the tourism sector in the year to October 2018, followed by gold exports ($1.528 billion), cash crops ($1.115 billion) and manufactured goods exports $795.7 million.

Some bankers told the Financial Times that the Tanzanian shilling could come under pressure as a result of the halt in raw cashew exports.

Exports of cash crops, which are dominated by raw cashews, are the third biggest source of forex for Tanzania’s economy after tourism and gold.

“Exports of raw cashews between October and February are one of the biggest sources of foreign exchange to Tanzania,” a foreign exchange trader at a commercial bank in Dar es Salaam told the Financial Times.

“The fact that raw cashews have now been stopped means there will be a shortage of US dollars in the market and this will put a lot of pressure on the shilling."

‘Painfully slow process’

By last week, the government had purchased only 40,000 tonnes of raw cashew out of an estimated total harvest of 200,000 tonnes this season.

The Ministry of Agriculture says some 133.25 billion/- has been paid by the government to cashew growers thus far.

Some cashew growers in southern Tanzania are already complaining against the government’s slow pace of purchasing the crop.

A former cabinet minister, Nape Nnauye, recently criticised the government’s cashew nut buying plan, saying it was causing unnecessary suffering to innocent farmers.

Nnauye advised the government to review the cashew payment system by giving financial bailouts to cooperative societies to enable them to buy the crop from farmers.

President John Magufuli announced last month that the government has handed over Bucco Limited (Lindi cashew nut factory) to the Tanzania People's Defence Forces (TPDF) after the plant was repossessed by the Treasury Registrar due to the failure of the erstwhile privatised factory to develop the industry.

Magufuli ordered the army to process the entire raw cashew being purchased from farmers at the Bucco Ltd factory so Tanzania can add value to its raw materials and boost its export revenues.

However, an assessment of the factory with installed capacity of 10,000 tonnes a year recently revealed that it has obsolete technology, hence cannot process any raw cashew.

Faced with the setback, the government is now looking for ways of reviving the Bucco Ltd cashew processing plant by importing new machinery.

If the plan to process raw cashew at the now state-owned Bucco factory and other privately-owned plants in the country fails to materialise, the government will trigger the contingency plan of exporting the raw material to a processor abroad -- possibly in Vietnam, India or China -- to process the nuts for Tanzania to the country can sell the finished product, cashew kernels.

 

The Agriculture Ministry said it expects to conclude purchasing all the raw cashew from farmers by the end of this month, despite delays due to a verification exercise to block middle-men from taking advantage of higher prices offered by the government.

The state-run Cashewnut Board of Tanzania (CBT) initially announced indicative prices of 1,500/- per kilo for season, which was rejected by farmers.

Magufuli decided to sack the management of CBT and cancel all cashew nut auctions involving private buyers following a public outcry from farmers over low prices. The president instead ordered the government to buy the cashew from farmers at 3,300/- per kilo.

Analysts said although Tanzania produced less than 10 per cent of the world's total cashew output, it benefits from seasonality by being the biggest producer of the nut during the October-January period.

Other cashew producers from West Africa are expected to harvest their crop in February, which means that Tanzania now dominates supply to the global market until early next year.

This means that the government is running out of time to process and sell the country's cashew crop before other global cashew producers hit the market over the next two to three months.