SOUTHERN AFRICA: EU compensation to sugar producers "inadequate"

[ This report does not necessarily reflect the views of the United Nations]

JOHANNESBURG, 28 Sep 2004 (IRIN) - Development aid promised by the European Union (EU) following its proposal to cut sugar prices to African, Caribbean and Pacific (ACP) producers is unlikely to benefit Southern African countries, according to a sugar industry expert.

"Most of the aid is likely to make its way to ACP members like Fiji, whose entire economy is dependent on sugar," Anna Locke, economic advisor to the Mozambique-based National Institute for Sugar, told IRIN.

The Swaziland Sugar Association (SSA), the country's sugar regulatory body, questioned whether the European Development Fund (EDF), which had already committed resources to programmes underway in ACP countries, had adequate funds to compensate sugar industries.

The SSA also noted that the EU proposal to compensate for the price cuts had recommended a direct income support for EU sugar beet growers from its agricultural budget to cover almost 60 percent of their projected loss.

EU reforms Sugar Protocol

As part of ongoing reform, the EU has proposed reducing the price of sugar in its domestic market to international levels. Sugar is currently sold in EU countries at three times the international price, and the proposed reduction will affect the price at which Europe buys sugar from ACP countries.

According to a proposal by the European Commission, ACP countries will continue to enjoy duty-free access to the EU but the sugar purchase price will be reduced by one-third between 2005 and 2008. Regional sugar producers that stand to lose include Swaziland, Malawi, Mozambique and Mauritius.

Sugar trade between ACP countries and the EU has been regulated by two trade agreements: the ACP/EU Sugar Protocol, and the Agreement on Special Preferential Sugar. But the EU has been under pressure to revise its agri-policy regarding sugar quotas.

The Sugar Protocol is an agreement between governments in which the EU member states undertake to buy agreed quantities of sugar at guaranteed prices from ACP states.

However, Australia, Thailand and Brazil, which are excluded from the Sugar Protocol, recently lodged a petition with the World Trade Organisation over the agreement, and a tribunal ruled in their favour.

"Our reforms have not been influenced by the tribunal decision. Our regime had become unsustainable and we have been in the process of reforming it. We remain committed to providing support to the ACP countries, hence the commission has proposed a fund - the EDF - to help the sugar industry in these countries," Arancha Gonzalez, spokeswoman for EU Trade Commissioner Pascal Lamy, told IRIN.

Bad news for Swaziland

The EU proposal mentions funding programmes to help Sugar Protocol countries adapt to the "new market conditions". SSA's chief executive officer, Mike Matsebula, told IRIN that Swaziland would welcome better access to the EU market.

"Swaziland hopes that [a trade] component can allow for increased market access to compensate for the reduced price. Hopefully, total earnings will either be maintained or reduced at a lower rate. The Swaziland sugar industry has sufficient capacity to supply more sugar into the EU as compensation for the reduced price," he said.

Development agency Oxfam said the existing quotas allocated to the poorer African countries could have been bigger. Currently, "... a group of 49 of the world's poorest countries are allowed to supply Europe, one of the world's richest regions, with only three days' worth of sugar consumption," an Oxfam report said.

The EU's proposal is expected to have quite a severe impact on Swaziland, which has the largest EU quota among the southern African countries, Locke said.

According to Matsebula, Swaziland's sugar industry is expected to lose more than US $23 million in 2005/06 and more than $39 million in 2007/08 as a result of the price cut. "By any standard these are very huge losses over a very short period of time to enable any orderly adjustment to a new dispensation," he said.

Sugar is Swaziland's biggest industry, with an annual turnover of about US $1.5 billion and exports of more than $637 million.

The EU proposes a cut from the current almost US $645 per tonne to about $486 per tonne from 1 July 2005, and down to about $405 per tonne from 1 July 2007.

"This works out to a 37 percent price cut in just three years. Given the fact that the EU market is taking more than one-quarter of total Swazi sugar sales, this heavy reduction in the EU price will have a significant negative impact, not only on the sugar industry revenues, but the average price received by growers and millers," Matsebula said.

The SSA envisages a ripple effect throughout the Swazi economy. "New growers, still with high establishment costs and huge debt repayment obligations, will be put under severe pressure. Most of them are likely to shut down. This will, in turn, have a negative impact on the debt portfolios of those financial institutions heavily exposed towards the smallholder sugarcane-growing sector," Matsebula said.

The country's main commercial development bank, SwaziBank, announced last week that it would reduce lending to sugarcane-based businesses. "Besides drought, the bank's decision has been influenced by the EU's move to reduce the price of sugar by 37 percent," SwaziBank spokesperson Mphilo Dlamini told IRIN.

Locke pointed out that unlike Mauritius, which used its "windfall" from the EU market to diversify and invest in other industries such as tourism, Swaziland had used most of its revenue to expand sugar production.

Reacting to the impact on Mozambique, Locke said, "We are very disappointed and did not expect the prices to come down so early." While Mozambique's sugar exports to the EU are low - about 10,000 tonnes in 2003 - the revenue earned was equivalent to the sale of 30,000 tonnes elsewhere.

Malawi supplied 11,100 tonnes of sugar to the EU last year. The industry accounts for five percent of Malawi's GDP, according to the Oxford-based development agency, Oxfam, which has been advocating for a reform of the EU sugar regime.

[ENDS]