Ghana’s decision to exclude international banks from funding cocoa production may have opened opportunities for its domestic financiers and traders to invest in the sector, but analysts fear that the move leaves the country’s currency, the Cedi, vulnerable to weakening.
Ghana is the world’s second-largest producer of the commodity key to the manufacture of chocolates; its Cocoa Board says the decision to wean the economy off a 32-year-old syndicated external borrowing arrangement will “create more value” for farmers. The decision was part of a broader strategy to diversify sources of funding for cocoa production in the West African country, which yielded 1.045 million metric tons in 2021.
Under the new arrangement, Ghana is seeking up to $500 million in funding from domestic investors, including traders and local banks, to bankroll the cocoa sector.
But the change poses problems for the Cedi, explains Leeuwner Esterhuysen, economist with Oxford Economics Africa, since Ghana imports fertilizers for the cocoa sector. It will now have to convert the local currency raised from domestic lenders to foreign exchange in order to buy these inputs.
“This means that there will be an initial outflow of forex to purchase inputs and an eventual inflow of forex when the cocoa is sold,” Esterhuysen says. “My main concerns regarding this are that it adds increased pressure on already relatively low foreign exchange reserves and adds to weakness in the Cedi due to a lesser scope to try and stabilize the local currency.”
“The switch to local banks had been positioned as a cost-saving measure,” notes Bright Simons, vice president at Imani Africa, a policy and education think-tank, although he believes the Cocoa Board took the step only after realizing that “it was not on track to close a deal with international banks before the cocoa harvesting season opens” next month.
“The banks insisted on extended due diligence since they had a serious fear of a potential default down the road,” he says, “given that the Cocoa Board has been failing to deliver on pledged cargos to trading counterparts. Pricing for the facility had to be set to accommodate the full risks, and as late as mid-August, the board had failed to align with the banks on pricing.” According to the Cocoa Board, it acknowledged that it still had “committed contracts that need to be fulfilled through the syndicated process,” despite the shift to domestic funders.