The dangers that lurk in land expropriation without compensation.

©budabar via 123RF

While the leadership race has stolen the limelight - with South Africa focused on who will emerge the new leader of the ruling political party as we move closer to the elective conference of the ruling party in December - one should not neglect the central policy issues postponed in July that are due to be decided at this conference. The land debate and whether to amend the Constitution to allow for expropriation without compensation is chief among these - and this may well have the most direct impact because ordinary citizens will feel the crunch where it hurts the most, in their wallet.

A tough and risky environment for South African agriculture

South African agriculture is competing in a tough environment against global competitors who receive considerable support from their governments in the form of subsidies and non-tariff measures. In addition, the sector has to import many of its inputs which places our producers at a disadvantage due to the fluctuating exchange rate. 

As a result, the sector has become very reliant on credit which usually takes the form of bond financing. It was recently estimated that South African farmers are indebted to the tune of roughly R160bn. This debt is shared between the Land Bank (25%), development finance institutions and agribusinesses (former cooperatives), but the lion’s share (70%) is held by commercial banks. 

In the risky environment of climate change and policy uncertainty, banks regularly register mortgage bonds to secure their loans. Stated differently, to reduce the risk in the event that a farmer cannot repay his loan, banks couple the loan to the value of the land by registering a bond that allows them to sell the land as a last resort to recover their losses if the farmer is unable to pay back the loan.

If one were to amend the Constitution to allow expropriation without compensation, it could endanger the faith banks place in the land as security and set into motion a chain-reaction that eventually leads to the ordinary consumer losing out. 

How will it affect ordinary citizens?

One can be forgiven for asking how it will affect ordinary citizens if the banks make a loss, especially for something like land reform that is in the public interest. The answer is actually quite simple. Banks use savings that the man on the street deposits in a bank account - and if expropriation without compensation takes place on a widespread basis, it could be lost if we go this route as a country. 

Let me explain: Banks raise the funds they need by using the money that ordinary people from all walks of life deposit into their bank accounts. People do so as banks keep their money safe, but also because banks pay them interest on their deposits to counteract the effect of inflation. Banks generate the funds used to pay interest by lending out depositor’s money and charging an interest rate on the loan. In order to minimise the chances of losing their depositor’s money, they regularly require security, which in this case is the land and the trust placed in the integrity of the land market. 

If the state can take land without paying for it, then the integrity of the land market will be compromised and banks will not be able to recover depositor’s money that was loaned to farmers. 

Full story at Biz Community.