Growing resource-backed loans seen threatening oil economy

Nigeria’s oil-dependent economy faces a growing threat from resource-backed loans, which offer tempting sources of quick cash but come with significant risks, experts engaged by BusinessDay have said.

A resource-backed loan is a borrowing mechanism by which a country accesses finance in exchange for, or collateralised by future streams of income from its natural resources, such as oil or minerals.

Linking future revenue from natural resource exports to loan paydowns is often touted as a way for developing countries to get financing for infrastructure projects and for lenders to reduce the risk of not getting their money back, yet there are hidden dangers, according to the experts.

“Resource-backed loans are bad because you can’t price the assets properly,” Akinwumi Adesina, president of the African Development Bank Group (AfDB) said in a recent interview with Associated Press.

He added, “If you have minerals or oil under the ground, how do you come up with a price for a long-term contract? It’s a challenge.”

Adesina, whose Abidjan, Ivory Coast-based institution assists African countries in financing development projects, said these arrangements come with a litany of problems.

He pinpointed to the uneven nature of the negotiations, with lenders typically holding the upper hand and dictating terms to cash-strapped African nations.

“This power imbalance, coupled with a lack of transparency and the potential for corruption, creates fertile ground for exploitation”, Adesina said.

“These are the reasons I say Africa should put an end to natural resource-backed loans,” Adesina said.

He pointed to a bank initiative that helps “countries renegotiate those loans that are asymmetric, not transparent and wrongly priced.”

Adesina said loans secured with natural resources pose a challenge for development banks like his and the International Monetary Fund, which promote sustainable debt management.

“Countries may struggle to get or repay loans from these institutions because they have to use the income from their natural resources, typically crucial to their economies, to pay off resource-tied debts, he said.

Nigeria is the largest producer of crude in Africa with proven reserves of 36.97 billion barrels, yet the International Trade Administration, healthcare infrastructure said the country is still underdeveloped and lacks modern medical facilities.

Medical professionals are in short supply, with only about 35,000 doctors despite needing 237,000, according to World Health Organisation figures, partially due to the massive migration of healthcare workers overseas.

For Kelvin Emmanuel, a Lagos-based economist, the fundamental reason why resource-backed loans are not ideal is that the process of accurately pricing the value of assets over the shelf life of the facility is always going to favour the lender over the borrower.

“The Project Gazelle Deal that was structured as a forward sale agreement by NNPC Ltd is a cautionary tale on why the Nigerian Parliament needs to oppose resource-backed loans as though our lives depended on it,” Emmanuel said.

Last year, the Nigerian National Petroleum Company Limited’s (NNPC) $3.3 billion crude-for-cash loan from the African Export-Import Bank (Afreximbank) sparked debate and raised questions about its long-term implications for the nation’s economy.

To make the repayment, the NNPC said it would carry out a forward sale of 90,000 barrels per day of Nigeria’s share of offshore crude oil under the production sharing contract (PSCs) with the oil companies.

Giving details on the benchmark oil price, the NNPC said the facility uses a conservative crude price of $65 per barrel to calculate the allocated crude to be produced and sold in the future. Brent crude price traded at $78 on Monday.

“This provides a safety margin for price fluctuations in the future,” the NNPC said in a document signed by Olufemi Soneye, its chief corporate communications officer.

A senior energy expert who pleaded anonymity, said Project Gazelle’s interest rate, tenor and facilitation costs are a high burden for Nigeria’s economy.

“Interest rate at six percent; Secured Overnight Financing Rate at 11.85 percent pa tenor; five years facilitation cost and two percent to loan facilitators ($66m) are very expensive for taxpayers. The Nigerian government needs to be more transparent,” he added.

Another energy expert questioned NNPC’s decision to securitise $3.4 billion to stabilise the economy and pay back more than $8 billion to Afreximbank.

“To the best of my knowledge, the whole thing is not transparent enough for analysts and the public to scrutinise the deal which in retrospect, is not a good look for the parties involved,” he added.

Evelyne Tsague, a co-director at Natural Resource Governance Institute Africa (NRGI), said African leaders have often taken out these loans to help with their short-term political ambitions, but their countries have ended up severely indebted and with the risk of losing collateral worth more than the value of the loan itself.

“They should stop agreeing to such perilous deals, which are often negotiated by poorly managed state-owned enterprises that often bypass parliaments and national budgets,” Tsague said in a report titled Resource-Backed Loans: Pitfalls and Potential.

David Mihalyi, a co-author of the report and senior economic analyst with NRGI, said: “These deals, sometimes labelled as oil advances, often resemble pay-day loans: they have short maturities, high interest rates and fees, and no commitments on how the money will be used. Countries should stay away from oil advances containing such harmful terms.”

Apart from Nigeria, BusinessDay’s findings showed four African countries where resource-backed loans have contributed significantly to severe debt problems, including Angola, Chad, Republic of Congo and South Sudan.

At least 11 African countries have taken dozens of loans worth billions of dollars secured with their natural resources since the 2000s, and China is by far the top source of funding through policy banks and state-linked companies.

For instance, Chad faces challenges in restructuring its debt, as commercial lenders holding its oil-backed loans have minimal incentive to offer concessions while Zimbabwe recently initiated negotiations with a commodity trader to allocate revenues from its profitable gold and nickel mines toward settling its debts with the company.

Western commodity traders and banks, such as Glencore, Trafigura and Standard Chartered, also have funded oil-for-cash deals, notably with the Republic of Congo, Chad and Angola.

According to a 2022 research study by the World Bank, titled “Resource-Backed Loans in Sub-Saharan Africa,” these loans pose a threat to the countries when they do not spend them on assets that can be used to repay the loan.

“The IMF-WB (2020) concludes that collateralised transactions can be beneficial to a developing country borrower under a range of circumstances, but also points to risks and discourages this practice when the proceeds are not spent on assets that can be used to repay the loans when loans are excessively large, and when the details of such borrowings are opaque,” the study read.

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