A Barter Driven Future: Solid Minerals in Resource-Backed Loans and Tackling Economic Crisis
Discussing the rising preference for mineral resources as backing for foreign infrastructure funding.
Funding developmental projects in many African developing nations poses a significant challenge. Consequently, such countries are compelled to seek out upfront funding alternatives that lessen the financial burden on the government. Countries endowed with abundant natural resources will sometimes leverage their natural resources to fund developmental projects in hopes of propelling economic growth. This describes a kind of barter transaction, termed a resource-backed loan (RBL), with oil and minerals serving as the common commodities facilitating such transactions.
An RBL transaction is an established agreement between a borrowing country and an external lending entity. The deal is structured as repayment in kind with natural resources, a transfer of future proceeds generated from resource-related activities in the borrowing country to the lending entity.
A 2020 study conducted by the NRGI on 52 RBL transactions between 2004 and 2018 indicated that 30 out of the total number of transactions originated from sub-Saharan African countries (Sudan, Ghana, Guinea, Angola, Democratic Republic of Congo (DRC), and the Republic of Congo), with the remainder from countries in Latin America. Africa ranks among the top global producers of minerals such as cobalt, bauxite, copper, manganese, graphite, gold, tantalum, diamonds etc. With a wealth of untapped mineral deposits, RBLs in Africa will likely persist in the future. This is particularly due to growing attention from global mining industries, keen on securing access to critical minerals.
The popularity of RBLs in sub-Saharan Africa is often attributed to Angola, renowned for the “Angolan Mode”, an oil-backed loan deal with China as the lending party, allowing Angola to fund various infrastructure projects in the country. It appears that China has a monopoly on RBLs in Africa, having funded large-scale development projects in several African resource-rich countries. In 2019, direct trade with the continent exceeded $200 billion. According to the Economist Intelligence Unit (EIU), Chinese establishments have control of around 6-8% of African mine production, with a vested interest in base metals and bulk ores such as cobalt, iron ore, bauxite, zinc, gold etc.
In 2018, China and Ghana agreed to a commodity-financed loan deal. In this barter deal with the Sinohydro Corporation Limited (SINOH.UL) of China, various infrastructure projects in Ghana worth up to $2 billion would receive funding. In return, China would recoup its investment via proceeds generated from bauxite refining activities. More recently, Ghana has implemented a “Gold for Oil” policy, intending to stabilise its depreciating exchange rate and lower petroleum prices in Ghana.
The policy, deemed by some as innovative, would see Ghana trading gold to secure oil imports at favourable rates, which would then see the country mitigate the adverse effects of currency fluctuations on its economy. In 2006, a $200 million RBL deal, involving the purchase of agricultural equipment in exchange for platinum deposits, was established between China and Zimbabwe. The DRC also has a history of RBLs with China. Back in 2008, SINOH.UL struck a $6 billion RBL deal with the DRC government to construct roads and build hospitals through profits secured from DRC’s Sicomines cobalt and copper joint venture.
It is clear from these examples that RBLs present sizeable advantages for many developing African countries, especially in improving infrastructure. However, risks can arise due to the absence of transparency and accountability. The complex nature of RBL transactions may see challenges unfold regarding the effective utilisation of the funds provided for the benefit of citizens.
RBL terms and conditions may also raise concerns about governance, corruption, and the environmental impact associated with agreed-upon transactions. Debt traps may befall certain countries with no safeguards in place, and some partnerships may deplete natural resources if there is no proper monitoring system. The quality of projects and infrastructure may also be subpar due to poor planning and ineffective execution.
To curb potential RBL-associated disadvantages, governments of African countries need to assess their economic situation and be sure that securing an RBL justifies a debt bailout or infrastructure advancement. The right development projects should be selected in structuring such RBL deals and should not be a misplaced priority. Legal counsel and expertise must be sought in finalising the terms and conditions associated with RBLs. This will help government officials make informed decisions on proposals brought forward. Following guidelines such as these can help African countries maximise the merits that accompany RBLs and boost their economic sectors.