The global chocolate industry is worth more US $ 150 billion. West African supplies 70% cocoa beans, but most of the value of a chocolate bar is generated in Europe and North America. West African economies receive less US $ 6 billion. This despite a growing demand for consumer chocolate in West Africa, part of which is satisfied thanks to imports.
This trend is typical of economies which depend mainly on the export of raw materials. They must choose between generating income from these commodity exports and adding value to the products locally. The trade-off comes from the fact that industries that add value take time to develop and tend to supply the domestic market before being able to compete internationally. The added value does not immediately generate currency. The choice is generally in favor of the export of basic products, since the foreign exchange earnings cannot be compromised.
In one recent study, my colleagues and I have shown how this dilemma plays out in the cocoa industry in Ghana. We also came up with a solution that preserves foreign exchange earnings while using Ghana’s existing marketing system to support a growing domestic chocolate industry.
Ghana risks being trapped
Raw cocoa beans exports are an essential source of foreign exchange for the central bank of Ghana. Ghana’s cocoa sector is regulated by the state-owned marketing board Cocobod. Cocobod has a monopoly, through its subsidiary Cocoa Marketing Company, on the marketing of Ghanaian cocoa beans.
Cocobod, through its marketing company, obtains cheap loans in US dollars in international markets, using cocoa contracts as collateral. With a few exceptions, only contracts with multinational buyers can be considered as collateral, as domestic buyers tend to have bad credit and small balance sheets. In this way, Cocobod has secured almost US $ 25 billion in the past 28 years. The Bank of Ghana needs these US dollars to maintain a foreign reserve and stabilize the local currency.
Ghana has increased its own cocoa processing in recent years, from 200,000 tons to 400,000 tons in 2019, but this remains mainly at the stage of semi-finished products. Most of the value of a chocolate bar is still generated abroad.
The reason for this is the importance of cocoa for Ghana’s foreign exchange earnings. Policies prioritize trade in cocoa for foreign exchange rather than adding value at the national level.
Cocoa processing companies in Ghana operate in an export zone called Ghana Free Zones which encourages companies that export at least 70% of their products. They can also benefit from tax exemptions on imports of raw materials and machinery. There is therefore support for national processing if the products are exported, but not if they are produced for the domestic market.
The production of chocolate for the domestic consumer market is further discouraged by an extreme tax rate of almost 60% on domestic sales chocolate and semi-finished cocoa products. For example, natural cocoa butter is currently sold to a export price about US $ 4,600 per tonne but sold locally for about US $ 7,300 per tonne.
Sales in the free zone are exempt from tax, but the tax applies to national chocolate makers operating outside the free zone. These small players have a double hurdle: they have to buy semi-finished cocoa products at an extreme tax rate and pay an additional tax on imports of sugar and milk. This means that their chocolate products cannot compete with the imported products.
There is also another hurdle: Ghana sells its cocoa beans in US dollars to national and multinational buyers. This puts domestic buyers at a disadvantage compared to their multinational competitors. Multinational companies access financing in US dollars through their parent companies abroad, and on a larger balance sheet. Domestic enterprises depend on the domestic banking sector and export development banks, which have limited capacity to extend credit in US dollars.
Ghana’s cocoa processing factories include the world’s leading cocoa processors Barry callebaut, Cargill and Olam. Only two Ghanaian factories, the state dominated Cocoa processing company (Golden Tree brand) and Cocoa niche, manufacture chocolate for the domestic consumer market. In addition and despite the tax burden, small-scale artisan chocolatiers, including 57 Chocolate, Midunu chocolates and Royal Omama chocolate have emerged.
The delay in their ability to add more value carries a risk. Ghana could fall into a trap where it cannot move beyond primary processing or low value added. To truly benefit from its wealth of resources in terms of income generation and job creation, Ghana needs to engage in higher value-added activities.
A way out of the trap
Ghana cocoa financing relies on offshore financing in US dollars and benefits the Bank of Ghana by providing foreign exchange reserves. It also benefits Cocobod by providing credit at lower interest rates than it could get in Ghana. We propose to use the existing system to promote national cocoa processing.
Instead of forcing Ghanaian cocoa factories to borrow expensive US dollars to purchase cocoa beans, Cocoa Marketing Company could market processed primary cocoa products to foreign buyers on behalf of domestic processors. Ensuring that the product is purchased ensures the income in US dollars needed to pay for the cocoa beans that go into the products.
A review of the export zone tax on chocolate and semi-finished cocoa products should allow small confectionery manufacturers to access cheaper semi-finished products. Niche Confectionery, for example, has shown how lower taxes can help develop a national chocolate industry. The chocolate producer sources its semi-finished cocoa products through its parent company Niche Cocoa, which benefits from tax exemptions from free zones.
A year ago, Ghanaian President Nana Addo Dankwa Akufo-Addo made a powerful statement during his state visit to Switzerland, one of the main trading partners. He announced that Ghana no longer wanted to be dependent on the export of basic products, including cocoa beans. It intends to process 50% of the annual cocoa at the national level and, by extension, to expand national chocolate production.
Ghana has made remarkable progress in expanding primary cocoa processing and chocolate production capacity. Now is the time to develop a dynamic national chocolate industry and benefit from a 1.3 billion strong market provided by the African Continental Free Trade Area.
This article was co-authored with Fuad Mohammed Abubakar, an independent researcher.