African Countries Should Put And to Natural Resource-Backed Loans – AfDB

In an interview with the Associated Press, the head of the African Development Bank encouraged African countries to discontinue natural resource-backed loans.

Akinwumi Adesina criticized the deals and referred to a bank initiative that assists countries in renegotiating them.

“The risk with natural resource-backed loans, in my opinion, is that they are all terrible. First and foremost, since you cannot accurately price the asset. If you have minerals, oil, metals, and gas under the ground that are not being marketed, how do you calculate a long-term contract price? It is a challenge.

“Second, the negotiation is highly asymmetrical. Most countries who want to make asset-natural resource-backed loans are likely interacting with larger countries and commercial banks that want to offer them a loan and say, ‘Well, look, it’s urgent, we need it. But this is what you must sign.’ However, those who want to give the loan have more influence than the person or country who wants to receive it.”

Linking future revenue from natural resource exports to loan paydowns is frequently promoted as a way for recipients to obtain finance for infrastructure projects and lenders to lessen the risk of not receiving their money back.

The transition to renewable energy and electric vehicles has increased demand for essential minerals, fueling these types of loans.

Litany of problems

Adesina, whose Abidjan, Ivory Coast-based institution assists African governments in financing development, stated that these agreements are fraught with challenges.

He emphasized the lopsided nature of the negotiations, in which lenders often have the upper hand and dictate terms to cash-strapped African states.

According to Adesina, this power imbalance, combined with a lack of openness and the possibility of corruption, provides fertile ground for exploitation.

“Africa should end natural resource-backed loans,” he said, citing a bank project that helps governments restructure loans that are asymmetric, not transparent, and incorrectly priced.

According to the former Nigerian Minister of Agriculture, debts backed by natural resources provide a difficulty for development banks such as his and the International Monetary Fund, which advocate sustainable debt management.

Countries may struggle to get or repay loans from these institutions because they must utilize the income from their natural resources, which are often critical to their economies, to pay off resource-related debts, he stated.

At least 11 African countries

Adesina explicitly referenced Chad’s devastating financial problem, which resulted from an oil-backed loan from commodity trader Glencore, forcing the central African country to use the majority of its oil profits to repay its debt.

A Glencore spokeswoman did not immediately return a request for comment.

After Chad, Angola, and the Republic of Congo sought the IMF for assistance, the global lender insisted on renegotiating their natural resource-backed debts.

Since the 2000s, at least 11 African countries have taken out scores of billions of dollars in loans secured by their natural resources, with China serving as the primary source of funding through policy banks and state-linked corporations.

Western commodities traders and banks, including Glencore, Trafigura, and Standard Chartered, have also funded oil-for-cash transactions, particularly with the Republic of Congo, Chad, and Angola.

Standard Chartered did not immediately respond to an email seeking comment, while Trafigura cited its 2020 report “Prepayments Demystified,” which states that “trading firms are enabling production that would otherwise be impossible — thus underpinning economic growth, job creation, and the generation of fiscal revenues in the countries concerned.”

Adesina stated that there was no “fixation” on a certain country as the source of these loans.

Written by PH

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