Friday, September 29, 2023

EITI warns against resource-backed loans

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Entering into resource backed loan arrangements could devastate the economies of developing resource rich countries. However, it has been recognized that mechanisms such as the Extractive Industries Transparency Initiative (EITI) can play a role in equipping citizens to be more vigilant about the deals that their governments make.

This was revealed on Thursday during an EITI webinar on ‘Sustainable debt or pending threat? Why transparency matters for resource-backed loans’. The webinar was moderated by Neil Hume, the Natural Resources Editor of the Financial Times.

“Public indebtedness in resource rich developing countries are already at extraordinary levels before the COVID-19 crisis and the current crisis has aggravated these preexisting debt issues. Among those most exposed to this debt crisis are Africa’s oil rich states,” said webinar panelist Anne Fishman, a policy analyst at Public Eye, a Swiss-based NGO.

“Oversight is certainly needed for several reasons. The first reason is that resource backed loan repayments constitute a significant part of overall debt servicing in the countries which contract them. They can also exacerbate the debt burden of countries,” she noted, adding that changes in oil prices can increase the weight of the debt. “That is to say that many more barrels may have to be provided to repay the same sum of money. And these deals are expensive for countries mostly because they feature very high interest rates,” said Fishman. She cited Chad as an example, saying that the country’s debt to Glencore almost doubled in 2017 due to fees and interest rates.

Fishman also spoke of South Sudan where 73 percent of all revenues went towards debt repayment in 2018. “These repayments are very expensive and so they obviously deprive the population of these countries of previous revenues for other projects such as education and healthcare,” said Fishman.

“These deals put the countries which contract them in a situation of dependency towards traders as some countries may pledge assets including their resource reserves as collateral and that can further exacerbate the dependency to the creditor as access to their resource will be guaranteed,” she said.

Noting that so little is known about this form of lending that not only civil society organisations but also economists from international financial institutions have pointed to the need for transparency and accountability in this regard.

Here, she said that the EITI would be instrumental in preparing guidance on disclosure and other related issues. Fishman said that the more these guidelines are utilized the more likely they are to become the norm.

A member of the EITI, Guyana, whose economy is supported by mineral resources in addition to oil and gas, is up for validation in October 2020 even as it is in the process of compiling the 2nd EITI Report due by December 31st 2020.

Fishman joined Public Eye in 2019 in the finance and commodity trading team. Her work focusses on illicit financial practices. Previously, she worked in the banking sector as a compliance officer and as a consultant for PwC in Switzerland and in the UK, working on anti-money laundering and anti-corruption investigations.

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