Finding the balance between agricultural and trade policy : Rwanda coffee policy in flux

Over the years, the predominant coffee policy has been to remunerate coffee producers highly to ensure sufficient production and foreign exchange receipts. Along with high producer prices have come restrictions on stopping coffee production. Recently however, this policy has proven costly to the national treasury as well as overly restricting to farmers. It may also have contributed, ironically, to reduced production, by prohibiting entry by would-be coffee growers. The current policy debate focuses on whether the government can remove or modify coffee laws in existence since 1978 in such a way as to reduce the burden of the State and return crop choice to farmers without bringing about a catastrophic collapse in foreign exchange inflows. The Division of Agricultural Statistics (DSA) of the Rwanda Ministry of Agriculture and Livestock manages a database that can shed light on the debate. Analysis of these data suggests that at the current nominal producer price of 115 Rwanda francs per kilogram of parchment coffee very few coffee growers would uproot their coffee trees. The impact on production would be even smaller. The worrisome prediction, however, is that if the price fell to 80 francs, as it would if the explicit subsidies were removed, one-third of coffee growers would remove their coffee trees regardless of the law. Further analysis of data suggests that the internal and external conditions of the coffee market need to be given particular attention if the problems of coffee farmers are to be understood. These conditions could combine to produce massive treasury deficits, which would make coffee policy suddenly become the focus of government (and donor) attention. The real producer price of coffee has fallen, at least since the coffee boom of the mid- to late 1970s, but so have producer prices of other crops that would compete with coffee for land. The terms of trade have tended to favor non-agriculture over agriculture. But coffee prices have not significantly deteriorated in comparison to other key crops. Hence, one would not necessarily expect to see coffee growers switching crops in droves. The real problem with coffee over the years has been the relative instability of its purchasing power. The amount of other crops that can be purchased from the sale of one kilogram of coffee has varied greatly. Rather than focusing on price levels, perhaps we should further analyze price quality stability. Deficit payments to finance subsidization of coffee production, and thereby foreign exchange inflows, grew astronomically to a high of 4 billion Rwanda francs by the end of 1990, the year the currency suffered its first large devaluation. Because of continuing low world prices, and a relatively inflexible and high producer price, the deficit began to grow quickly, even after the devaluation, suggesting the need for more substantive medicine. (Author abstract)