The head of the African Development Bank has called for an end to loans given in exchange for the continent’s rich supplies of oil or critical minerals used in smartphones and electric car batteries.
“They are just bad, first and foremost, because you can’t price the assets properly,” Akinwumi Adesina said in Lagos, Nigeria, last week.
“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.”
Linking future revenue from natural resource exports to loan paydowns is often touted as a way for recipients to get financing for infrastructure projects and for lenders to reduce the risk of not getting their money back.
But the deals have also helped countries like China gain control over mineral mining in places like Congo and have left some African countries in financial crisis.
The shift to renewable energy and electric vehicles has caused a spike in the demand for critical minerals, driving these kind of loans.
That includes a China-Congo deal that strengthens Beijing’s position in the global supply chain for EVs and other products as it taps into the world’s largest reserves of cobalt in the impoverished central African country.
This power imbalance, coupled with a lack of transparency and the potential for corruption, creates fertile ground for exploitation, Adesina said.
He highlighted the uneven nature of the negotiations, with lenders typically holding the upper hand and dictating terms to cash-strapped African nations.
Adesina, whose Abidjan, Ivory Coast-based institution helps finance development in African countries, said these arrangements come with a litany of problems.
He highlighted 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.
In addition, 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.
Adesina specifically mentioned Chad’s crippling financial crisis after an oil-backed loan from commodity trader Glencore left the central African nation using most of its oil proceeds to pay off its debt.
After Chad, Angola and the Republic of Congo approached the IMF for support, the multilateral lender insisted on the renegotiation of their natural resource-backed loans.
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.
However, Adesina said, “it is not about one country or the other; any country can exploit when you don’t know what you are doing.”