admin
Business Reporter
The International Monetary Fund (IMF) has strongly backed a call by the African Development Bank (AfDB) urging African countries to stop borrowing loans backed by natural resources.
For countries with limited access to credit and capital, resource-backed loans provide a means of raising funds for infrastructure and development projects. Many countries, especially the developing world, end up using what is readily available to secure new loans for various obligations given the challenges faced by multilateral lenders, which include lengthy and onerous approval processes and impediments posed by previous unpaid debt.
Also, resource-backed loans have serious challenges regarding the process of valuation, which may result in countries having to mortgage their resources for loans multiple times less than the actual value of the pledged mineral.
Resource-backed loans can take the form of prepayment or advance payment deals, where governments or state-owned enterprises (SOEs) receive funds in exchange for future resource production or delivery.
Some experts argue, however, that resource-backed loans come with certain risks. Without proper public oversight, unfavourable terms and conditions can significantly impact a country’s future public revenues and access to credit.
The structure of these loans, including their size, the terms and the repayment schedule, can have long-term economic implications for the country. The other disadvantage is that a country may not be able to develop its mortgaged resource until the debt is repaid, which means it automatically misses out on cycles of global price boom.
It is argued that in many cases, resource-backed loans involve higher interest rates compared to conventional market-based loans, lack transparency and are vulnerable to corruption.
Last week, IMF managing director Kristalina Georgieva met with the president of the AfDB, Dr Akinwumi Adesina, in Abidjan, Cote D’Ivoire, the first time an IMF head has visited the bank since its establishment in 1964.
Dr Adesina said: “The natural resource-backed loans are non-transparent, expensive and make debt resolution difficult.”
He warned that if the trend continues, “it will be a disaster for Africa.”
Ms Georgieva said the IMFs senior management team would carry out a thorough assessment and come with a “strong voice to tell countries not to create avenues for predatory and enslaving loans.”
She said the issue would also be discussed at the Global Sovereign Debt Roundtable comprised of bilateral creditors, private creditors and borrowing countries.
The roundtable is co-chaired by the IMF, World Bank and the presidency of the G20. The African Union joined the G20 in September as a permanent member. The IMF chief said she was visiting Africa at a time when the continent held much promise for more dynamic growth in the world.
“We often focus on the challenges that the continent is facing because it is here the impact of climate change is much more severe, where macro-economic and financial instability and debt are amplified. But we want to focus on opportunities in Africa for the simple fact that the capital is in the north and a young population is in the south, primarily here in Africa. Unless we build a bridge for capital to flow to where it is needed most, it could lead to a bigger problem.”
Dr Adesina applauded efforts by the IMF chief at the height of the Covid-19 pandemic in 2021, to shore up the global economy by allocating US$650 billion in Special Drawing Rights (SDRs). Africa, with a population of more than 1,2 billion, received about US$33 billion of SDRs, representing only 5 percent of the total allocation, the smallest portion among the different regions of the world
The African Development Bank continues to lead conversations and develop models that will allow SDRs to be re-channelled through multilateral development banks MDBs). The MDBs can leverage such resources three to four times their original values. Adesina thanked the IMF for working with the African Development Bank’s team on an initiative that could allow SDRs to be channelled through MDBs.
“Together with the Inter-American Development Bank we developed a model that meets the IMF’s reserve asset status. If you channel US$5 billion through the Bank, we will use our leveraging power and that could easily become US$20 billion of new financing for Africa,” said Dr Adesina.
The AfDB chief said the initiative would provide much-needed support to countries in Africa where post-pandemic debt remains a big challenge. “It’s more serious for low-income countries who constitute the Bank’s concessional lending window, the African Development Fund. They are also the most vulnerable in the world to climate change.”
Ms Georgieva, who has publicly supported the bank’s initiative on SDRs, said the two institutions would continue to work together to find ways for SDRs to be deployed as hybrid capital.
“I’m on record supporting the Blbank’s effort and if this succeeds, there will be a significant expansion of financial capacity for countries even beyond our years in office,” she said.
The AfDB’s SDR proposal is supported by African leaders as well as UN Secretary-General António Guterres.
The IMF chief also commended the bank’s initiative, in conjunction with the African Union, to establish an African Financial Safety Mechanism to cushion the continent against exogenous shocks such as the impact of Covid-19.
“Africa is the only region in the world that does not have a safety net against shocks. Europe has it. Asia has it. America has it. The Middle East has it,” said Dr Adesina.
The African Union endorsed the AfDB proposal for the mechanism during its summit in February 2022.
Online Reporter