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Mortgaging the future: Report details risks of resource-backed loans

Bauxite mining by Emirati company Guinea Alumina Corporation (GAC) has stripped the land of all tree cover. Image by Jennifer O’Mahony for Mongabay.

  • A recent report by the Natural Resource Governance Institute finds that billions of dollars in loans backed by the value of a country’s natural resources may be putting these often-developing economies at risk.
  • China is a major player in providing such “resource-backed loans,” which can help countries finance critical infrastructure projects.
  • But the terms of these loans are frequently unclear, potentially saddling the borrowing countries with untenable debt levels.
  • The hasty push to extract resources could also sideline the input of local communities, and it may lead to harming the environment.

Billions of dollars in loans issued to resource-rich countries could saddle them with insurmountable debt, according to a new report from the Natural Resource Governance Institute (NRGI), a nonprofit organization focused on improving resource management.

Businesses in wealthier countries, like China, negotiate these “resource-backed loans” to tap into a supply of resources critical to their economies, often with developing nations that need the cash for projects such as infrastructure development. Along with the potential benefits, these deals also set up a power imbalance from the beginning, Jyhjong Hwang, one of the report’s authors and a doctoral student in political science at Ohio State University, said in a statement.

“Resource-backed loans are high-stakes gambles against a sophisticated opponent,” Hwang said. “Chinese state-owned companies have strategic interests in securing natural resources and will throw all their experience and capacity into negotiating a good deal.”

A dirt road for bauxite mining in Ghana’s Atewa Forest Reserve. Image courtesy of A Rocha Ghana.

The formula might seem straightforward: An emerging nation may use as collateral some of its future production of a resource such as oil — a commodity on which many resource-backed loans are based. With that advance payment on hand, governments can invest in roads, electrical grids and water treatment facilities. The authors note that these loans sometimes do result in tangible benefits for the borrowing country.

But in their probe of 52 such loans made between 2004 and 2018 and worth a combined $164 billion, the team found that the deals are often opaque and put the borrowing countries at risk. They found only one for which the details were made public.

Co-author and NRGI economist David Mihalyi likened them to “pay-day loans.”

“[T]hey have short maturities, high interest rates, and no commitments on how the money will be used,” Mihalyi said in the statement. “Countries should be particularly cautious of such advances.”

At times, countries might not be able to scale up their resource production quickly enough to begin paying down the loan interest and balance. The International Monetary Fund, the report authors write, warns that this may be the case in Ghana, where the country’s leaders took out a $2 billion loan from Sinohydro, a Chinese state-owned engineering company. The foundation of that loan is a resource called bauxite, a significant source of aluminum. But reports by Mongabay and other outlets show that the country may be moving to hastily ramp up its bauxite production, possibly in the species-rich Atewa Forest Reserve.

China is a major player in resource-backed loans, according to the NRGI report, with two Chinese banks putting up more than three-quarters of the value of the loans the NRGI examined.

Western chimpanzees at the Tacugama Chimp Sanctuary in Freetown, Sierra Leone. Image by BigMikeSndTech via Flickr (CC BY 2.0).

The government of Guinea borrowed $20 billion in 2017. NRGI points out that that’s nearly two years’ worth of Guinea’s gross domestic product, a measure of all goods and services it produces every year. What’s more, bauxite mining in the West African country destroyed western chimpanzee (Pan troglodytes verus) habitat in the Boké region, Mongabay reported last year. And recently, the pursuit of the resource has threatened the national park set up to protect the critically endangered species.

Along with the potential environmental problems, the report’s authors said that communities — which often bear the brunt of mining impacts on local forests, water quality and social conflict — have typically had no say in the terms of the loans.

A borrower country as a whole runs the risk of losing control of its resources, which in the long run may be more valuable than the amount of the loan itself. Staggering debts can result. Venezuela’s $59 billion portfolio of resource-backed loans, for instance, rests on the value of the country’s oil reserves. Such loans have threatened the economic stability of Venezuela, as well as the African countries of Angola, Chad, the Republic of Congo and South Sudan, according to the report.

To address these issues, the report team said that transparency must improve. They weren’t able to find even the interest rates for around two-thirds of the loans. Groups such as the Extractive Industries Transparency Initiative have pushed for a more open process. Hwang and Mihalyi also recommend that legal experts be involved in negotiating contracts, and that the process should be competitive to get the best terms. Stipulations could include a flexible repayment schedule, they say.

Mihalyi said that both parties benefit from fair loans.

“We must learn from the mistakes made in the past,” Mihalyi said.

Banner image of bauxite mining in Guinea by Jennifer O’Mahony for Mongabay. 

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