Financial Instruments in Slovak Agriculture: Estimating Potential Multiplier Effect of Guarantees

Abstract

The main objective of this paper is to estimate the multiplier effect of financial instruments in Slovak agriculture. Slovakia intends to implement guarantee schemes as one type of financial instruments (FIs) in the CAP programming period 2023-2027. FIs are modern, transparent and efficient form of support to cover investment needs of farmers. They combine the experience of commercial banks with the CAP subsidies, which are limited. FIs should cover the financing gap, which arose in Slovakia due to suboptimal financing conditions for some types of farms. FIs can offer advantages for small and medium enterprises (SMEs), and farms, because they have similar difficulties with access to finance. In the first part of the paper, we evaluate the development of bank loans in Slovak agriculture over the period 2014-2020. Bank loans to farmers increased from 477,1 mil. EUR in 2014 to 900 mil. EUR in 2020. In the second part we describe the leverage effect of guarantees. Leverage effect is determined by multiplier, which depends on the guaranteed rate and guarantee cap rate. Based on these rates it is possible to determinate bank and guarantor’s shares on default risk. With a proposed allocation of 150 mil. EUR of FIs in form guarantees in Slovakia in 2023-2027(from CAP) and a multiplier of 5 it is possible to provide 750 mil. EUR in loans to farmers. Another 1 250 mil. EUR of bank loans could be provided to support agri-food sector. These loans will be supported by guarantees from Slovak state budget in volume 250 mil EUR. Use of guarantees is way, how to contribute to sustainability of farms and agri-food industry.