bittersweet: ivorian cocoa reform

reform of the cocoa sector is one of the major hurdles for côte d’ivoire to achieve debt relief, an important step that will let the ivorian government begin crafting a plan to pay the three missed coupon payments (~$89 million dollars) on its $2.3 billion dollar eurobond. well-managed reform could see new forms of commodity financing emerge in côte d’ivoire, similar to what was seen in ghana this season after its state-run marketing board, cocobod, issued a $2 billion dollar bond.

the most difficult aspect of reform has been securing farmgate prices (prix bord champ in french) for farmers. those involved in the reform process have touted that farmgate prices—the amount the government pays to farmers—will be set at 60% of the export price, which is largely based on the international cocoa price. this proposed farmgate price is in contrast to the 40% guaranteed under the gbagbo regime, and is more in line with the 60-70% received by ghanaian farmers. although côte d’ivoire has said it would purchase one kilogram of cocoa from farmers at 1,000 CFA ($2.08), the government has been unable to guarantee this payment to farmers, and has purchased beans for as low as 500 CFA. ivorian farmers often smuggle their beans in to neighboring ghana, where they fetch higher for their crop, and occasionally hoard beans if they think they can manipulate global prices by decreasing global supply.

collateralization, which would be done through pre-export financing, makes it easier for governments to create a stable pool of revenue, which facilitates the establishment of a farmgate price that can be maintained throughout the season. it would also lay the groundwork for a more stable fiscal management. before the current round of cocoa reforms, ivory coast had been unable to collateralize—or guaranteeing the worth of the season’s harvest by estimating the quality of the cocoa bean—its crop because the country has based the price of beans on the global spot market instead of purchasing them forward. when the ivorian government guaranteed the price of beans as a percentage of international spot prices (as it was in the past), farmers were subject to extreme global price swings, as the cfa franc wildly fluctuates against western currencies. currency yo-yoing increases the incentive to smuggle cocoa beans in to neighboring ghana, which makes it harder for the government to confidently say that there are ‘x’ metric tons of beans available this season at ‘y’ quality. this is probably why participation was weak in ivory coast’s first forward cocoa sale.

for example, if the spot price of cocoa were to be at $2800 one day, $3400 five months later, and falls back down to $3100 three months after—like it was in the 2010/2011 season—it would be difficult for the government to promise farmers a set price for their beans. an ivorian farmer on a 4 hectare plot producing 2000 kg a season could make as low as $832 (if the global price were $2800) and as high as $1,664 (if the price were $3400), depending on when they sold their crop. subtract from this number the cost of seeds and bags the ivorian government sells to farmers to certify that cocoa beans came from ivory coast, and profits are even less. of course, prices were this high for the first time in 33 years, and is unlikely to reach this level again for a long time. getting the farmgate pricing mechanism right is key to the country reducing poverty, an important step in reaching HIPC completion status—a program set by the IMF for debt relief.

the government may continue to trip up working toward cocoa reform and poverty reduction. aging ivorian trees produce half of the cocoa as ghana, and to compete with increasing output from ghana, indonesia, and caribbean/latin american producers, farmers will need to buy more fertilizer to increase their output (the average yield in côte d’ivoire is 500 kg/hectare), or the government will need to buy fast growing, high yielding trees. fertilizer is expensive—which costs on average the equivalent of 50kg of cocoa —and many farmers find themselves indebted to those who own the land. without new trees, farmers will sink further in to debt.

how closely the body in charge of managing the cocoa (and also coffee) sector, the ARCC resembles the now defunct state marketing board (caistab), established by houphouët-boigny and used as his personal bank account, remains in doubt. the ARCC has the overarching mandate to keep statistics on cocoa production and sales, grant export licenses, prevent monopolies from forming, and arbitrating disputes. ivorian politicians have used the cocoa sector to form strong patronage networks with farmers, distributing bags, seeds, and fertilizer at a discount to those that supported their campaigns. in the long-run, it remains yet to be seen whether the centralized coffee and cocoa regulator authorty (ARCC), will become a slushfund for ouattara to distribute political patronage.

it’s not surprising that the violence of the 2010/11 electoral crisis was so relatively low-intensity (in relation to violence seen in liberia, sierra leone, etc.), yet so prolonged. farmers, who had established deep networks with politicians with links to gbagbo and bedie, enjoyed the freebies (agricultural inputs) often distributed in exchange for political support. the possibility of a ouattara presidency was an uncertain prospect for them, an economic gamble many did not want to take because it was unsure that a muslim northerner (“foreigner” in some circles) could guarantee the same access to subsidized inputs like gbagbo or bedie had over the past decade.

although there is certainly no threat to stability like that seen in 2011 or 2002/4, it is when it’s time for côte d’ivoire to choose its next president, the same structures that produced violence, will create a situation we see each decade when ivorian presidents are elected. ouattara has replaced key officials in charge of managing the cocoa sector with some of his closest supporters, like massandjé touré-listé. more interestingly, he has drummed up support among the grand barons, or the traditionally baulé, wealthy PDCI supporters (the party of henri konan bedie), to his camp. absent any fallout in the near term over ouattara’s inability to find a compromise between current prime minister guillaume soro (gbagbo’s #2) and the pdci’s bedie, it is likely that the coalition between the two men could isolate the former supporters of gbagbo. it is possible that disgruntled supporters of gbagbo—if and when they are able to regroup—could express their frustration at the ballot box, just like the supporters of bedie and ouattara have done in the past.

things aren’t falling apart yet: jonathan & boko haram

boko haram—nigeria’s homegrown terrorist group—launched its deadliest attack last friday in kano, the country’s second largest city after lagos. they certainly hit the government  at a point of extreme weakness, as president goodluck jonathan and his economic team are rebuilding their credibility after scaling back ambitions plans on repealing costly fuel subsidies (which cost the government $7.5 billion/year).

the jonathan administration has and will continue struggling to come up with strategies to curb the boko haram threat. although it is clear that boko haram gets training from AQIM (it has been rumored that algerian AQIM members have trained nigerians in bomb making), the group’s small numbers (greater than 200 but less than 1,000) and the growing sophistication of its attacks make it hard for security forces to pursue effective counterterrorism. better cooperation with its neighbors–niger and chad specifically–would be a positive step in sharing intelligence (many rank and file members aren’t actually nigerian), as policy responses such as closing borders of nigerian states under states of emergency have privately incensed nigeria’s neighbors who are generally poorer and rely on cross-border migration to find jobs.

further, despite boko haram’s ties with foreign jihadis, it is important to remember that the group’s grievances are aimed at the nigerian government. although boko haram draws from contemporary salafist ideology, the group’s concerns are protests against legacies of colonial rule. historically, when britain colonized nigeria, they used muslim elites from the north to act as political and economic middlemen, as they sought to legitimize and consolidate their rule across what would become modern-day nigeria. the gradual loss of power in the post-colonial era—seen in the decline of military rule—and the advent of democracy, gave rise to the ruling people’s democratic party (pdp)’s idea of  “zoning,” or the idea that the party’s presidential nominee would rotate between a christian southerner and a muslim northerner. many northerners saw jonathan’s candidacy in 2011 as violating this unwritten rule.

amidst this backdrop, a number of intelligence officials—most of whom are northerners (aliyu gusau for example) and who unsuccessfully sought the pdp nomination in january 2011—see the escalating boko haram crisis as a strategy of weakening the president jonathan and his administration. although jonathan has accused some in his government of collaborating with boko haram (mostly true), the collusion among some in the pdp and boko haram is a political strategy. with each boko haram attack, these pdp officials look to de-legitimize jonathan as much as possible without tarnishing the reputation of the pdp, or leading the nation in to civil war. there has been much debate over the “internationalization of boko haram,” but given collective historical grievances and how the group operates today, it seems as if boko haram will limit its attacks to nigeria. reaching outside of its borders would discredit the party, and ultimately threaten the small cabal of pdp northerners working in security jockeying for key leadership positions in the party’s 2015 presidential bid.

as they have previously done following previous attacks, many in the security establishment will in the short-term argue that nigeria should devote more resources to fighting boko haram. given the partial repeal of fuel subsidies, which represented approximately 25% of nigeria’s budget, raiding the security sector instead of the downstream energy sector is a new, sure-fire way to raid the state’s resources. much has been said about how fuel subsidies are the main point of fiscal slippage in nigeria, but defense and intelligence spending, which also account for a quarter of state spending, is an area where nigeria could slip as much—or even more—than previously seen with fuel subsidies.

in the medium- and long-run, i still remain excited about the potential of nigeria for investors. the country debuted a $500 million dollar eurobond that was heavily oversubscribed in 2011, pointing to investor appetite in the country. nigeria’s strong growth prospects are due to trends in its expanding middle class. despite the growing reach of boko haram, their threats have yet to alter the patterns of demographic and social change, a story which is currently playing out in the south and middle-belts. until boko haram launches a series of high-profile, well-coordinated attacks like the one seen on sunday, i remain a nigeria bull.