Cocoa bonds and the risk transfer dilemma: Is gov’t trading fx dependence for domestic fragility?

By Joshua Worlasi AMLANU,  [email protected]

Ghana’s cocoa sector is undergoing its most significant financing overhaul in more than three decades after a production shock and contract rollover generated losses exceeding US$1 billion and exposed structural weaknesses in the Ghana Cocoa Board’s funding model.

In the 2023–2024 crop season, COCOBOD projected output of 800,000 metric tonnes but harvested 432,145 tonnes. The deviation of more than 45 percent forced the rollover of 333,767 tonnes at an average price of US$2,661 per tonne, well below market levels. The gap translated into losses of over US$1 billion. At the same time, global prices retreated from highs near US$7,200 per tonne to about US$4,100 per tonne, narrowing margins further.

Finance Minister Cassiel Ato Baah Forson said in a policy announcement the episode revealed that the stopgap buyer-financing model adopted after the failure of the annual syndicated loan in 2023 was unsustainable. The syndicated facility, which had been secured annually for over 30 years to pre-finance cocoa purchases, was delayed for the first time in decades. The first tranche arrived four months into the season. COCOBOD later defaulted on some obligations, including facilities owed to the Ministry of Finance.

“The current financing model was invented as a necessity after the syndicated loan failed after 32 years of successful implementation and it was proven not to be sustainable,” Dr. Forson said. “It is entirely dependent on a buyer’s willingness to pre-finance purchases. Once that incentive disappears, the model collapses.”

The government now plans to replace reliance on offshore syndicated loans with recurring domestic cocoa bonds beginning in the 2026–2027 season. The proceeds will fund a revolving mechanism to purchase beans within each crop year. At the same time, Cabinet has directed that at least 50 percent of cocoa beans be processed locally, and authorities intend to revive the state-owned Cocoa Processing Company (CPC), as well as the Produce Buying Company (PBC)

The shift raises a broader question. Is Ghana reducing external vulnerability, or merely transferring commodity risk from foreign banks to domestic investors?

The Syndicated Era

For more than three decades, COCOBOD’s financing model was anchored on syndicated pre-export facilities ranging from US$1 billion to US$1.5 billion annually. The loans were backed by cocoa receivables and repaid within 7–12 months from export proceeds.

Between 2016 and 2020, borrowing costs were relatively low. In the 2016/17 season, pricing hovered near 1.5 percent. The 2018/19 facility of about US$1.3 billion priced at roughly 2.5 percent and was oversubscribed. Even during the COVID-19 period, the 2020/21 loan of US$1.3 billion carried a margin of LIBOR plus 1.75 percent.

By 2023/24, however, the cost had climbed to roughly 8 percent in dollar terms as global rates rose and Ghana’s sovereign risk profile deteriorated. The amount also fell to US$800 million, well below previous levels. In 2024/25, authorities partially shifted to local funding after failing to secure US$1.5 billion offshore.

Over the same period, cocoa production fluctuated sharply. Output peaked at 1,040,000 metric tonnes in 2020/21 before falling to around 531,000 metric tonnes in 2023/24. It is estimated at roughly 700,000 metric tonnes for 2024/25.

Rising financing costs combined with volatile production placed strain on COCOBOD’s cash flows, amid other mismanagement. The syndicated loan model, once predictable and disciplined, became more expensive and harder to secure.

Domestic Absorption Capacity

The proposed cocoa bond could be equivalent to about US$1 billion, or roughly GH¢11 billion to GH¢12 billion at current exchange rates. The central issue is whether Ghana’s domestic market can absorb recurring issuance of that scale without distorting liquidity conditions.

A senior market analyst at one of Ghana’s largest brokerage firms said current liquidity conditions appear supportive. Recent Treasury bill auctions have seen significant oversubscription, with billions of cedis rejected. Coupon payments on restructured government bonds and liquidity injections in the interbank market have also added to available funds.

“In terms of funds availability, the market conditions currently seem favourable or supportive to absorb cocoa bond issuance,” he said.

However, he cautioned that liquidity at a point in time does not equate to structural depth. Competition for funds between the Treasury, the Bank of Ghana and COCOBOD could emerge, particularly if issuance overlaps.

Currently, Ghana’s capital market remains concentrated in commercial banks, pension funds, insurance firms and a small number of asset managers. A recurring, large-scale cocoa bond programme could crowd out Treasury securities and exert upward pressure on yields, especially along the 1–5-year segment of the curve, upon the resumption of local bond issuances by GoG, expected later in 2026.

Market analysts are if the view that if issuance is staggered and aligned with seasonal inflows, the market could digest it. If volumes are aggressive, liquidity could tighten. This is not just a COCOBOD issue once it becomes a macro-financial stability issue.

Kwadwo Acheampong, another market analyst, argued that the market is not yet sufficiently deep to handle the entire funding need domestically. He suggested a gradual transition over five to eight years to reduce currency exposure without overwhelming local investors.

Pricing and Cost of Funds

Pricing remains the central variable.

Investors are expected to demand a spread over Government of Ghana securities to compensate for production risk, price volatility, governance concerns and liquidity risk.

If 2–3-year government bonds trade around 18 percent, analysts say cocoa bonds could price at 200–400 basis points above that level, potentially in the 20 percent –22 percent range depending on sentiment.

The senior brokerage analyst emphasized that investors would assess credit risk, liquidity risk and market conditions at issuance. Balance sheet repair must precede market entry to restore credibility.

The comparison with syndicated loans is not straightforward. While dollar loans priced near 8 percent, exchange rate depreciation must be factored into cedi-equivalent cost. If depreciation averages below 8 percent, the effective cedi cost could approximate 16 percent.

Under that benchmark, cocoa bonds priced above 16 percent may not represent a clear cost advantage.

“If cocoa bond comes onto the market, it must do better than 16 percent,” the analyst said. “Otherwise, you might start to question the cost of the funding.”

COCOBOD’s margin depends on global prices, producer price commitments, operational efficiency and exchange rate dynamics. If global prices retreat to US$3,500–US$4,000 per tonne and domestic yields remain elevated above 20 percent, financing costs could compress margins significantly.

The risk is cyclical compression. In high-price years, domestic bonds are manageable. In weaker years, they could strain profitability.

Currency Mismatch Risk

The shift alters COCOBOD’s currency exposure.

Under the syndicated model, borrowing and repayment were largely matched in dollars. Export proceeds serviced dollar liabilities. Currency risk was limited to timing and hedging gaps.

With domestic cocoa bonds, liabilities would be denominated in cedis while revenues remain predominantly in U.S. dollars. This creates a structural currency mismatch.

Most analysis focuses on depreciation risk. A weaker cedi raises the local currency value of dollar export receipts, improving debt service capacity. But under a cedi-denominated liability structure, appreciation becomes equally relevant.

If the cedi strengthens materially, each dollar earned converts into fewer cedis. Interest payments, however, remain fixed in local currency. The result is margin compression. In simple terms: stronger cedi, lower cedi revenue per tonne, tighter operating cushion.

One market analyst argues that the sharp appreciation in 2025 largely corrected excessive depreciation recorded between 2022 and 2024 and may not persist. He expects more moderate depreciation over the medium term.

Even so, the exposure cannot be ignored. Hedging strategy, disciplined forward sales and active reserve management become central to the bond framework. The currency risk does not vanish under domestic borrowing. It changes form and migrates onto the balance sheet in a different way.

Systemic Exposure

If banks and pension funds become primary buyers, commodity risk migrates into the domestic financial system, possibly resulting in concentration risk. Financial institutions would gain exposure to a single issuer and a climate-sensitive commodity sector. In the event of another production shortfall or global price downturn, mark-to-market losses could hit portfolios. Banks could face capital adequacy strain. Pension funds could experience valuation declines.

Some market analysts say shifting exposure away from foreign lenders should not result in concentrating commodity-related vulnerabilities within the domestic financial system.

Mr. Acheampong, however, downplayed systemic risk at current projected sizes, especially if multinational processors such as Cargill, Olam and Barry Callebaut continue to advance funds for purchases. He acknowledged liquidity and interest rate risk but did not foresee system-wide instability under moderate scenarios.

The structuring of the bond will matter. Analysts suggest escrow mechanisms and minimum debt service coverage ratios to reassure investors. A threshold such as 1.25 times coverage could mitigate default risk and improve pricing.

Unlike syndicated loans, cocoa bonds would be marketable debt. Investors could exit through secondary trading rather than hold to maturity. That improves flexibility but also introduces mark-to-market volatility.

Balance Sheet Repair and the Bank of Ghana

The government plans to convert about GH¢5.8 billion in legacy debt owed to the Ministry of Finance and the Bank of Ghana into longer-term instruments. Road liabilities of GH¢4.35 billion will be transferred to the Finance and Roads ministries.

The objective is to restore COCOBOD’s balance sheet before market entry. However, the Bank of Ghana itself has reported negative equity following sovereign debt restructuring. The proposed debt-to-equity conversion raises accounting and governance questions.

Analysts noted that debt owed to the central bank is currently an asset on its books. Conversion into equity in COCOBOD would maintain asset recognition. A forced write-off, by contrast, would deepen negative equity. No write-off has been announced. But the circular ownership structure — Government of Ghana owning both entities — complicates optics.

Investors will scrutinise whether the restructuring represents genuine recapitalisation or balance sheet reclassification.

Industrial Policy and Processing Mandate

Cabinet’s directive that at least 50 percent of beans be processed locally from 2026–2027 adds an industrial policy dimension.

Processing could increase value addition and potentially raise export earnings per tonne. However, execution risks are significant. Several large processors operating in Ghana are foreign owned. The treatment of foreign exchange flows, repatriation policies and profit retention will influence net FX impact.

If processing increases export value per unit, the 50 percent local allocation could raise earnings. At the same time, reduced raw bean exports could constrain supply in external markets and influence pricing dynamics over time.

EcoCapital argued that financing reform must move alongside structural reforms in productivity, disease control and farm rehabilitation. Without agricultural reform, financial innovation alone will not stabilise cash flows.

Mr. Acheampong emphasized the importance of producer pricing. The significant increase in producer price in 2024 likely supported higher production in 2025. Exchange rate management and fair farmer compensation remain central to output stability.

The processing mandate could enhance value capture, but immediate gains are uncertain. Infrastructure, capital investment and export logistics will determine effectiveness.

External Vulnerability Versus Domestic Fragility

Does the shift reduce Ghana’s external vulnerability?

Domestic bonds reduce reliance on foreign banks and lower exposure to global liquidity tightening. They also limit refinancing risk from offshore markets and may reduce pressure on external debt metrics.

However, commodity risk persists. Analysts note that the shift increases domestic exposure. When foreign lenders provided funds, they carried the commodity risk. Under domestic bonds, local investors assume it.

The issue is more structural. The key question is whether the cocoa sector can generate predictable cash flows under moderate price cycles. If yes, domestic bonds deepen financial sovereignty. If not, volatility becomes embedded in the domestic financial system.

The difference between risk reduction and risk transfer is central.

The Forward Path

The government’s cocoa bond initiative represents both financing reform and a test of institutional resilience.

Short-term liquidity conditions appear supportive. Pricing remains uncertain and contingent on credibility, balance sheet repair and market perception. Currency dynamics introduce new challenges. Systemic risk depends on scale, structuring and diversification.

A gradual transition, as some analysts suggest, may mitigate shocks. Escrow mechanisms, conservative price assumptions and transparent governance could strengthen investor confidence.

The government’s broader reform package includes forensic audits and criminal investigations into past operations, signalling an effort to restore trust. The stakes are significant. Cocoa remains a critical source of export earnings and rural livelihoods. Financing stability influences farmer payments, production incentives and macroeconomic balance.

If structured carefully, cocoa bonds could deepen Ghana’s capital market and reduce dependence on foreign lenders. If miscalibrated, they could crowd out liquidity, strain margins and embed commodity volatility within the financial system.

The reform is not merely about replacing one funding instrument with another. It is about redefining how the nation distributes risk across its economy.

The coming seasons will determine whether the country has traded one vulnerability for another or laid the foundation for a more resilient cocoa economy.

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