Liquidity and credit as constraints to small coffee farmers in the highlands of Papua New Guinea

Abstract

Coffee is Papua New Guinea's (PNG's) second largest export crop and the main source of income for over 50 per cent of the country's households. It is estimated that PNG has more than 2.5 million small coffee growers However, small grower coffee sales have been declining since 1998. This research examined the importance of cash flow (liquidity) problems relative to other constraints confronting small coffee farmers in the Highlands region, which accounts for more than 90 per cent of PNG's coffee production. The purpose of the research was to offer policy recommendations that would alleviate the most binding of these constraints. Data gathered in a multistage sample of 150 small coffee growers in two council wards of Daulo District in the Eastern Highlands Province were used to estimate a logit model of investment in seasonal inputs applied to coffee. Liquidity was found to be the most important determinant of investment, followed by family farm labour, transaction costs, formal education and informal taxes imposed by the wantok system. Agricultural extension did not have a significant impact on investment. It was concluded that small coffee growers in the study area were unable to finance farm inputs purchased in formal markets because they could not access formal credit. Although almost a quarter of the sample farmers had bank accounts, only two had used formal credit. Descriptive statistics suggested that access to formal loans was constrained by inadequate supply of development finance and stringent lending criteria stipulated by formal lenders, including development finance institutions (DFI‟s). It was recommended that government should improve the physical and legal infrastructure in rural PNG in order to reduce high transaction costs that constrain markets, including the rural finance market. In addition, the government should improve education, health and social protection programmes to encourage farmer investment in new technology.