Countries rich in natural resources that borrow billions of dollars can end up with insurmountable amounts of debt, according to a new report of the Natural Resource Governance Institute (NRGI), a non-profit organization dedicated to improving resource management.
These “natural resource-backed loans” are granted by companies from developed countries, such as China, in order to gain access to the exploitation of these resources, which are fundamental for their businesses, usually in emerging countries that need the money for infrastructure development projects.
Jyhjong Hwang, one of the authors of the report, a doctoral candidate in political science at Ohio State University, stated that beyond the potential benefits they may provide, what these agreements establish from the outset is an imbalance of power.
“Natural resource-backed deals are high-risk bets against players who have the upper hand,” Hwang explains. “Chinese state-owned enterprises have strategic interests in securing natural resources and deploy all their expertise and negotiating skills to get a good deal,” he said.
The formula always seems to be the same: in the negotiation, an emerging country uses as collateral a specific volume of future production of a national resource -such as oil, a commodity that commonly serves as a backing for this type of agreement-. In return, it obtains advance funds with which it can invest in roads, power grids and water treatment facilities.
Researchers note that these loans sometimes do produce tangible benefits for the borrowing country. But in analyzing 52 such loans made between 2004 and 2018-whichcombined total $164 billion-theyfound that, by and large, the deals are unclear and risky for the borrowing countries. Only in one case were the details of the loan publicly known.
David Mihalyi, another of the report’s authors and an economist at NRGI, compared them to a quick or immediate loan. “They have short maturities, high interest rates and do not require specifics on how the money will be used. Governments should proceed with caution with these loans.”
Sometimes it happens that countries are unable to increase their resource production fast enough to start paying the interest and loan balance. The report indicates that the International Monetary Fund (IMF) warned that this could be the case in Ghana, whose government borrowed $2 billion from Sinohydro, a Chinese state-owned engineering company. The backing for the loan is bauxite, a sedimentary rock with a fairly high aluminum content. There are reports from Mongabay and other news portals showing that the country is doing its best to increase bauxite production, including in the Atewa Forest Reserve, habitat for a great many species of fauna and flora.
In 2017, the government of Guinea borrowed $20 billion, which is equivalent to nearly two years’ worth of that country’s GDP, according to the NRGI report. GDP is a measure of all the products and services a country generates per year. In addition, last year Mongabay reported thatbauxite mining was causing the destruction of West African chimpanzee (Pan troglodytes verus) habitat in the Boké region, and has even put at risk a national park established to protect the critically endangered species.
In addition to all the potential environmental problems, the authors of the report point out that communities are rarely consulted on loan terms even though they often bear the brunt of the impact of mining on forests.water quality and social conflicts.
Countries that take out such loans run the risk of losing control of their natural resources, which in the long run are likely to prove more valuable than the loan itself. And in return, what they get are crippling debts.
Venezuela’s $59 billion loan portfolio, for example, is backed by its oil reserves. The report argues that such loans threaten the country’s economic stability, as well as that of several African countries, including Angola, Chad, the Democratic Republic of Congo and South Sudan.
Transparency is imperative to address this issue. The researchers could not even find out the interest rate on almost two-thirds of the loans analyzed.
There are efforts to encourage more open processes, such as the Extractive Industry Transparency Initiative. Hwang and Mihalyi recommend involving legal experts in contract negotiations to achieve mutually agreeable terms. They also propose adopting a flexible payment schedule.
According to Mihalyi, both parties benefit from a fair loan. “We must learn from the mistakes made in the past,” he argues.
