Like many borrowers, the Republic of Congo would have preferred to keep its money problems quiet.
But as debt service payments began to take a toll on its finances in the wake of a 2014 oil price crash, Congo revealed that it had taken out billions in previously undisclosed loans. It needed a bailout, and, eventually, the International Monetary Fund (IMF) gave it one.
The episode illustrates why many sub-Saharan African countries now stand at the brink of what many observers warn could be another debt crisis: debt likes to stay in the dark — especially when the lenders are state-owned Chinese banks and private sector commodity firms.
Excluding high-income countries, sub-Saharan Africa’s total debt nearly doubled to $584 billion over 2010-2018, while public debt as a share of GDP has risen from 40 to 59 percent, according to the World Bank. These are not unmanageable levels, experts say, provided the proceeds of the loans are used to invest in badly needed infrastructure projects to lift economic growth. However, unlike in the sovereign debt crisis of the 1990s — which ended after Africa’s multilateral creditors forgave much of the debt — a large share of the new debt is owed to China, with billions more owed to commodity giants like Trafigura or Glencore. Neither is likely to be particularly lenient should borrowers fall into distress.
In a report published this week, the Natural Resources Governance Institute (NRGI), a non-profit, warns that many of the new loans extended by Chinese and private sector actors are not traditional loans that need to be paid back in cash, but instead are resource-backed loans that need to be paid back with a specified amount of some physical good, usually crude oil.
The terms of resource-backed loans vary widely and are often hidden, raising the risk that countries accountable only to themselves might continue to borrow heavily until they are forced — like the Republic of Congo — to seek help as debt servicing burdens climb.
“Resource-backed loan terms are seldom public and do not lend themselves to straightforward comparison due to their complexity,” according to the report — in contrast to “more established forms of lending” like sovereign bonds or loans from multilateral institutions, where key terms are widely disclosed and understood, it said.
One key reason why resource-backed loans often don’t show up in official data: in at least some cases, the borrower isn’t the government itself but one of its state-owned entities. When the Republic of Congo’s state-owned oil company, Société Nationale Des Pétroles du Congo (SNH), took out billions in new pre-financing contracts, it did so on behalf of the government, but the new loans didn’t show up in the government’s books.
This type of loan reporting issue may not be isolated: NRGI found that, for as many as 40% of the resource-backed loans it identified, the borrower was a state-owned enterprise. (The tally also included loans in Latin America, the other region covered in the report.)
In many of the oil-producing nations of sub-Saharan Africa, such as Nigeria or Gabon, the national oil company is the most important state-owned enterprise. But national oil companies are also among the most opaque. In December, the IMF said that only 62 percent of national oil companies in an index of such firms compiled by NRGI were “weak,” “poor,” or “failing” on measures of public transparency.
Compared to traditional loans, resource-backed loans may have some advantages. Brent crude oil prices have dived 17 percent in the last six market sessions as Covid-19, the coronavirus that emerged in Wuhan late last year, inflicts damage on economic sentiment, but countries that have taken out resource-backed loans can take comfort in the fact that they need not sell their oil on international markets to make good on their loans. In most cases, they will only need to ship a predetermined amount of product. (In other words, oil-backed loans mitigate foreign currency risk.)
But that sense of solace will only last so long. If oil prices fall further, more liabilities could still come to the surface.