US$600M AfDB Loan Gives Respite For Cocoa Sector Restructuring

A US$600 million loan contract between the Government of Ghana and the African Development Bank (AfDB) is to be signed within the second quarter of this year to provide financial support for Ghana Cocoa Board’s (COCOBOD) ongoing efforts to reverse the stagnated production and declining financial fortunes of the cocoa sector.

The credit facility will focus on boosting cocoa production, fighting diseases affecting cocoa farms and financing the building of new warehouses to stockpile cocoa beans and protecting COCOBOD against cocoa price falls on the international market.

Currently, Ghana lacks the capacity to exert a major influence over world cocoa prices. Thus, building specialized warehouses is expected to preserve cocoa beans for long periods of time, thus creating buffer stocks for the country. This would in turn enable Ghana to have more control over global cocoa prices because the current practice of selling all stocks immediately after production would be curtailed.

The injection of the US$600 million loan financing would also be used towards increasing the production of cocoa beans from 880,000 tons targeted this year to 1.5 million tons per annum within the next three years. According to COCOBOD, this would be achieved by rehabilitating old, less productive farms, fighting diseases through continuous mass cocoa spraying and creating irrigation systems for cocoa farmers.

According to COCOBOD, the facility is also targeted at doubling local cocoa processing capacity to 450,000 metric tons per annum, up from the current national processing capacity of about 220,000 metric tons.

Currently, COCOBOD, Ghana’s state owned cocoa industry regulator and facilitator is experiencing major financial difficulties brought about by financing gaps which make it impossible for the company to undertake any key activities without having to resort to further borrowing.

This has largely been attributed to Ghana’s policies in the cocoa sector which represent a source of possible contingent liabilities. One of such policies is the guaranteed producer price COCOBOD pays to cocoa farmers. This has led to a sharp increase in the company’s short-term debt.

In order to maintain the “fair” producer price paid to cocoa farmers, the institution has incurred annual losses of over GHc 1 billion – in the form of the financial gap between what it spends on farmers and what it gets from cocoa sales – due to weakened international cocoa market prices. This gap represents 0.3 percent of the country’s Gross Domestic Product (GDP).

Against this background, COCOBOD’s management is currently implementing a series of cost saving operations which include searching for long term borrowing in order to refinance expensive short term cocoa bills issued through the Bank of Ghana, which it uses to finance its growing financial gap; improving procurement practices; strengthening internal audit controls; and replacing subsidies provided farmers on their production inputs with supply of fertilizer – and other inputs – on commercial terms, which cocoa farmers will be able to pay for from significantly improved yields per hectare.

These cost saving operations are expected to enable COCOBOD eventually pay off its growing long term debt which now stands at some GHc6 billion.

Currently, cocoa farmers are paid GHS7,600 per tonne or GH₵475 per bag of 64 Kilograms (KG).