Loans and Natural Resources: dangers of collaterization and the threat of HIPC
“Economics 101 for every Ghanaian student. To be a good student of economics, you must be patient to unravel the plot at the end of the essay. Its long, but it has invaluable lessons.”
Ghana’s historical evidence with regard to loans is not a positive one. The dramatic collapse of world market price for cocoa, the main source of foreign exchange for Ghana, plunged the most ambitious industrialization program ever witnessed on the continent, in the exception of South Africa, into a debt crisis in the mid- 60s, resulting into debts totaling US$700 million. By the time Nkrumah was overthrown, Ghana’s once substantial foreign exchange reserves (US 550 million) were exhausted and it had debts totaling US$700 million. The foremost preoccupation for the incoming junta that ousted Nkrumah – the National Liberation Council (NLC) – was how to deal with its short-term debts. Over US$100 million in repayments were due in 1966, and some suppliers were already beginning to refuse to take Ghanaian orders because of overdue liabilities.
Anxious to get the country out of its economic catastrophe but lacking any economic expertise of its own, the pro-Western junta was unhesitant in entrusting Ghana’s economic fate to the economic directives of the IMF. Only nine weeks after the coup a standby arrangement was ready to be signed, in which the new government accepted all the International Monetary Fund (IMF) demands which the Nkrumah government had previously rejected. This included the promise to honor all the country’s debts and restore her credit worthiness to reestablish a collapse of imports which could have posed serious danger to the government. This was before there could be a careful analysis of the amount of debt contracted and the conditions under which they were contracted. The haste was to restore the confidence of the West in the country and its credit worthiness. It was later found out that most projects financed with medium-term loans were over-priced; services and goods supplied were frequently inadequate and in many cases corruption was involved.
To avoid jeopardizing the country’s credit worthiness, the new government expressly acknowledged all debts, regardless of how they were contracted. But the new government consistently failed to honor the debt obligation even after payment was reschedule many times. In response to the failures to honor her debt obligations, the IMF chief remarked (Financial Times (FT). May 26, 1966): “Even if Ghana stops contracting new supplier’s credit and inflationary budget financing, restricts imports and opens the door to private capital, Ghana’s balance of payments is such that there will not be enough foreign exchange to allow maintenance of contractual payments and to keep the economy running at a satisfactory rate. A rescheduling of Ghana’s debts is essential to a reasonable rate of economic development of the country in the next few years (Quoted from the Economist, August 6, 1966 p. 551)
After rescheduling payment for the umpteenth time and the granting of moratoriums which all fail to produce any meaningful results towards the repayment of the overdue loans, an IMF report was issued to creditors warning them of Ghana’s debt-service obligations which were strangling the economy and her inability to contract further loans. During the reign of the junta, the country was unable to meet her financial obligations to its creditors.
After the parliamentary elections of 1969, the military government handed over power to a civilian government under the leadership of K.A. Busia. By then, the cumulative effects of unpaid loans, interests, and efforts to restore economic order through the adoption of austere economic policies, to be able to service the loans while at the same time meeting internal economic obligations to citizens meant further “tightening of the belt.” This did not go down well with the people, who after many years of economic sacrifice wanted some economic relief.
The only solution was the renegotiation of payment on terms that would give the people the much needed reprieve they sought. The creditors showed little inclination towards further concessions to Ghana. Busia warned Ghana would not be able to meet its debt obligations, which reached record level in 1972, and began thinking of repudiating the loans altogether. This prompted another renegotiation of Ghana’s debt, repayable over 40years with 10 years free of repayments and maximum interest of 2%.
Just as in the case of Nkrumah, a slump in the price exports worsened the already precarious balance-of-payment difficulties and Ghana had to submit to Great Britain’s inflexible attitude towards loan repayments. Between 1970 and 1972, the result was high moratorium interest rates and refinancing loans, meaning Ghana contracted new loans to offset existing loans with interest. The end result of all this was a 48% devaluation of the country’s currency.
As expected, the devaluation led to astronomical increases in price of goods and services across the country, engendering a fertile ground for a military takeover as was the case in many African countries. The new military strongman, Colonel Ignatius Kutu Acheampong repudiated one-third of the country’s medium-term debts and asked creditors to prove the loans were granted in the proper fashion and were used to finance viable projects. He was rightly credited for the “yen tua” slogan, a slogan in his native Akan language meaning “we won’t pay,” or “we won’t honor our indebtedness.”
The creditors promptly reacted by withdrawing their export insurance guarantees and reduced development aid to a minimum. Thanks to rising cocoa prices on the world markets and an initial cautious, domestically-oriented development policy, the expected economic disaster was averted. Stabilization did take place, without the International Monetary Fund’s (IMF’s) stamp of approval and without financial aid from the industrialized West. The lesson here that loans are not always the panacea to mitigating economic difficulties. With prudent economic policies and favorable market prices for the country’s export, the country should be able to stand on its feet.
Although Ghana was able to obtain more favorable rescheduling terms by refusing to pay its debts, it is doubtful whether this particular move paid off for the country in the long term. Ghana’s creditworthiness was lastingly damaged by its violation of an almost sacrosanct principle of international financial relations. Ghana remained cut off from large foreign loans and direct investments.
By 1979, the economic situation in Ghana had worsened, precipitating another military intervention. The incoming military regime cited economic stagnation in the face of high levels of corruption as the reasons for the takeover. The regime effectively steered the country away from the western economic influence by turning largely to the Soviet Union and other socialist oriented economies such as Libya and Cuba for all forms of support. But by the end of 1984, the government began to consider ways to woo back western assistance into the national economy.
Although the regime had managed to restore some sanity in the financial administration of the country, its 19 years in office remains a contested era in Ghanaian political and economic history, both in academia and by the ordinary man in the street. While some academics and observers think the administration injected some level of sanity into national affairs and restored Ghana’s economy to a sustainable path, others think it was just one of those rogue government that had led the small West African state for a long spell, squandering its opportunities for sustainable economic development reforms.
Cancelling debt and replacing it with new aid does not help either. In 2005, after the Live 8 concert directed more attention to the debt crisis, Ghana’s debt burden was reduced by 50 per cent. It was a great relief to Ghanaians, as Ghana, before opting for the Highly Indented Poor Country (HIPC) initiative spent 40 per cent of her GDP on debt servicing – an arrangement that was clearly unsustainable. But within 3 years of debt cancellation, Ghana was back at the 2005 debt levels. And with a 2010 Ghana government loan agreement with the Chinese to the tune of US$16 billion, almost half her GDP (Purchasing Power Parity of US$38 billion), the red flags are up that Ghana may be heading for another debt crisis in the near future or is almost there. Is Ghana heading for the Dutch disease? It is economics, not the goodwill or the good intention of the leaders, that when aid reaches 16 percent of GDP it more or less ceases to be effective. There is already a growing evidence that aid has not only failed to stimulate economic growth on the continent, but the life-support mechanism has consigned the continent to an “economic vegetative state” at which point economies on the continent have become unresponsive to aid or are worse off with further dose of it. And with aid, loans and natural resource rents beginning to override the Ghanaian economy, the dangers of diversifying the economic portfolio of the country lurks.
Western countries have conducted experiments in Africa for years without success, trying to assist the continent get on its feet. Examples of some of the Western prescriptions are the Economic Recovery Program, Structural Adjustment Program and, recently, the Highly Indebted Poor Country initiative.
Turning to all the things that are wrong with aid, Moyo provides a comprehensive list among which are -: a culture of aid-dependency, conditionalities attached to aid, politicization of aid, aid as impetus to inflation, diminishing exports, difficulty in absorbing large inflows of cash by African economies, and reduction in domestic savings and investment, among others, all of which are interconnected and with chain reactions or ripple effects driving nations into greater poverty.
The recent oil finds in commercial quantities in Ghana has raised hopes of majority of Ghanaians for a new economic beginning. It is not uncommon for people in developing countries to have high economic expectations upon the discovery of natural resources in their soils as the Nigerian example shows. The discovery of oil in commercial quantities in that country in the 1970s led to a boom in that economy, attracting investments in the oil industry from all over the world.
This raised hopes among its citizenry to the extent that subsistence agriculture, the then mainstay of most of its rural communities was abandoned for the “black diamond.” This is irrespective of the large tracts of land absorbed by the oil industry in Ogoni land, depriving their owners of livelihoods. While it may be argued that some form of compensations were paid to owners of these lands, obviously, they might not have been introduced to alternative sources of livelihood. And once the lump sum paid in compensation was depleted on daily exigencies, some extravagant, the result was that in no time the financial compensations were exhausted and owners of these lands started attacking oil firms for money. At the national level, too, Nigeria had failed to diversify her economic portfolios, banking its economic and financial hopes on oil alone. Even in the face of high windfalls from the sales of the “black diamond” in recent years, millions of Nigerians remain poor and live in desperate and deplorable economic conditions. Corruption in the industry and income inequalities imply that many Nigerians do not benefit from the oil resources.
While Ghana may have escaped the conflict trap, one of four economic traps characteristic of the so-called bottom billion countries, the traps of natural resource, the trap of bad governance, and the trap of bad neighbors are real and ever present. On the natural resources trap, we may refer to Ghana’s history with gold to understand what the future portends for her oil industry if appropriate measures are not taken to institute anti-corruption mechanisms within the industry. As the second largest producer of gold on the African continent – with more reserves more than s Peru and Papua New Guinea - that does not translate into being the second strongest economy on the African continent.
The recent history of the once mighty Ashanti Goldfields (AGC) illustrate the point and attest to why natural resources do not necessarily help the economies of poor countries. By 1998, AGC was reputed to be the third largest gold mining company in the world. It had concessions in Geita mines in Tanzania, Freda Rebecca Mines in Zimbabwe, Suiguri Mines in Guinea and a host of concessions scattered around the world. It was the first African company to be listed on the New York Stock Exchange. Yet in May 1999, the Treasury of the United Kingdom decided to offload 415 tons of its gold reserves. With all that gold flooding the world market, the price of gold tumbled to US$252 an ounce, the lowest in 20 years.
Ashanti’s Financial Advisors – Goldman Sachs – recommended that the company hedged its gold against further price depreciation. Goldman Sachs’ role as a financial advisor cannot be described as an honest one in this case. Goldman Sachs was more than just an advisor to Ashanti. The company also traded in hedge contracts, dealt in gold itself, and had professional relations with European banks who also traded in gold. Interestingly, a few weeks after AGC executed Goldman Sachs advice, the European Banks with who Goldman Sachs had professional relationships turned around and made a unanimous surprise announcement that all 15 would stop selling gold on the world market for five years. As expected, the announcement immediately drove the price of gold up to US$307 an ounce before rising to US$362 an ounce within a month (between September and October 1999).
Ashanti now had to buy gold at a high world price and sell it at the low contract prices to make good on the contracts. As a result, Ashanti found itself with 570 million dollars’ worth of losses and had to beg the 17 banks not to force the execution of the contracts.
“Ashanti’s bankruptcy drove its stock price from an all-time high of $25 per share to a paltry $4.62 per share. Thousands of investors lost their investments almost overnight when Ashanti was declared insolvent,” according to Tully.
In the end (2003), Ashanti was bought by their largest African competitor, AngloGold, a British company headquartered in South Africa, for a pittance. To all intents and purposes, the leadership of Ashanti, just like the current political leadership entrusted with Ghana’s oil, had all the good intentions for Ghana. But as to why they could not figure out the conflict of interest which surrounded the whole deal with Goldman is what beats the imagination of many industry observers. Why contract a company with multiple roles including advising both you and your creditors, while at the same time trading in the product you traded in, for advice and could not spot the conflict of interest which may result in insider trading information to other parties?
In a recent move, the Ghana Government, without parliamentary approval, went ahead to even shed its shares in AngloGold to the tune of US$5 million, exhibiting yet another sign of bad faith in the management of the public resources. Could this be the final trigger that made the politician cum clergyman, Mensah Otabil, to make known his private thoughts about how he prayed ardently that Ghana never found oil, as he believes “that won’t help the country to develop the work ethics required to develop a productive society.”
Sadly, that is the African situation. Instead of helping safeguard the continent’s resources, our intellectuals who manage the continent’s resources become complicit in their reckless disposition. This is similar to what Frantz Fanon, the Martiniquan revolutionary described in the “Wretched of the Earth” as the combined interest of both the elites in the new independent African countries who are now serving their own interest and the interest of the former colonial masters or the metropolitan interest. In 2003, Ghana earned a paltry US$46.7 million, being 5% out of US$893.6 million’ worth of minerals exported in that year according to the United Nations Conference on Trade and Development (UNCTAD) Report.
Both on the score of loans and gold, the past should determine the future. Ghana had failed on countless occasions to honor her debt repayments. The debt crisis of the 1960s and the 1970s, and the HIPC initiatives are pointers. For gold, it had been sold out for a pittance. Based on these hard facts, it is illogical to argue for collaterization of her oil resource for loans. In lending agreements, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as protection for a lender against a borrower’s default – should the borrower fails to repay the principal and interest under the terms of a loan agreement due to insolvency, in which case the borrower forfeits the property pledged to the lender as collateral.
If we even assume that the current President John Evans Atta-Mills is the cleanest Ghana has ever had in terms of the fight against corruption, statecraft demands that the president delegates some of his powers to his subordinates. Like the so-called “father of all,” not all his children or subordinates would obey his orders. Some are self-seekers looking for opportunities for personal gains, while others, mindful of the next election cycle, look for ways to instill political advantage in whatever they do and by whatever means. This is why the supremacy of the law must be strengthened rather than the reliance on the discretion of an individual ruler with the power of the purse who is perceived to be clean and religious. I believe all the leaders Ghana has had - from Nkrumah to Mills - have all depicted religious tendencies and goodwill in one way or the other. Yet, these are the same men who entered bad deals in the name of their country, defaulted in the repayment of loans they contracted and watched their resources carted away for a pittance.
What about the current government losing power at the next elections? With its holier than thou attitude, especially when its appointees persistently try to portray the current opposition as the most corrupt politicians to ever rule Ghana, what happens then? The current opposition, once in power, would have unfettered access to the money that would flow from the collaterization of the oil. Please refer to the chapter on corruption about how the majority has mostly applied its strength in self-aggrandizement and how whatever edicts guiding the funds from collaterization may be repealed with the strength of the majority.
With the Goldman Sachs manipulations in the Ashanti case, what is the guarantee that those dangers no longer lurk around in waiting for Ghana’s shortsighted politicians who hardly consider the repercussions and weigh their actions carefully before taking them?
Regional examples in the management of oil resources do not also point to a future of accountability and prudent management. “There is quite a bit of institutional variation among resource-rich societies. Although institutions are affected by resource endowments, usually countries that built and strengthened their anti-corruption institutions before they discovered natural resources are able to manage these resources in a much prudent manner, while their management in countries with weak anti-corruption institutions are bedeviled by corruption. Therefore, it is possible to tease out statistically how political institutions interact with resource wealth,” pointed out by Collier. Obviously, Norway, with well-built democratic and anti-corruption institutions before the discovery of its oil resources has been a shining example of a country that put the resources to good use. Indeed, Norway has maintained a clean sheet of economic performance constantly over the years and has consistently been the best country on the planet earth based on UN Human Development Index. On the contrary, Nigeria, Equatorial Guinea, and Angola, Africa’s oil giants have been plagued with the resource curse. In Equatorial Guinea, for instance, although seen as the star performer among the economies tagged as the bottom billion economies, offshore oil revenues now dominate income, but these do not accrue to its small population. Rather the revenues accrue to the very few at the top and of particular concern has been the son of the president alone commandeering US$38 million for a yacht to be built for his pleasure while more than half of the population of that country lives on less than one dollar a day.
With high levels of corruption in Ghana, as a result of weak democratic institutions, the results of the oil find are apparent. I have sufficiently suggested in the chapter on corruption that the two political parties which would alternatively lead Ghana in the foreseeable future both have elements within their ranks who indulge in high levels of corruption. This does not preclude any decent leadership that would reverse the trend, even in the future. The solution, therefore, is strong anti-corruption institutions and not the goodwill of the leader. It is for this reason that the call by the current government for the collaterazition of Ghana’s oil for infrastructure development is inimical to the security of the oil for the collective good or benefit of the Ghanaian now and for future generations. Government has no business spending what it does not have using natural resources as a guarantee? Elsewhere, I see present generations try ardently to ensure that their current lifestyles do not endanger the opportunities of the future generation, which is not the case for Ghana.
Obviously countries with enough natural resources can afford to forget about normal economic activity. The whole society can live as rentiers, that is, on unearned income from wealth. This is the situation in Saudi Arabia and Persian Gulf states such as Kuwait, which have enormous oil revenues. But these wealthy rentier states are rare. A much larger group of resource-rich countries have enough income from resources to take them to middle-income status, but not beyond. To fully develop they would need to harness the resource wealth for growth.
Turning to the democratic process itself, it is believed that at the heart of the resource curse is that rents make democracy malfunction. There are consistent patterns to prove that surpluses from natural resources are particularly unsuited to the pressure generated by electoral competition. Without natural resource surpluses, democracies outgrow autocracies. For the example of a country with resource rent worth 20 percent of national income, the switch from autocracy to intense electoral competition would lower the growth rate by nearly 3 percent. The implication is that with countries that are already on the democratic trajectory, wealth resulting from access to abundant resources wealth has the potential to turn the democratic process into a plutocracy, where money influence becomes widespread with elections tilting in favor of the highest bidder, not the man with the commitment and better policy alternatives toward the improvement of the democratic process. This is applicable to governments as well. They become so fixated on winning the next election that they disregard what might happen afterward. If no mean person than the former first lady of the Republic of Ghana is accusing her own government of using money, let us say the taxpayers’ money, to influence delegates for a vote, then Ghana must have already been inching toward that slippery slope.
Even if one does care about one’s money being wasted as long as one can buy the natural resources, one need to worry about resource curse. It is a common place knowledge that the rich world wants to shift its dependence on oil away from the Middle East. That is where Africa and Central Asia come in. Yet it is also an open secret that one reason why the Middle East is in such difficulties is that it has had such large oil revenue inflows. Shifting our resource supply simply will not work as a security measure if the resource curse shifts with it. For now we can only hope and pray that Ghana does not become another Nigeria, Equatorial Guinea, and Angola, or Saudi Arabia.
Take that bold step. Select just 10 Ghanaian intellectuals from your email list, forward this article to them, and start a discussion about our gold, diamond, loans and, recently, oil. Is there any hope?
Keep tuned in…
The above-title is serialized into 30 articles covering issues of politics, corruption, education, immigration, the economy (Ghanaian economy), unemployment, land tenure, dearth of policy innovation, and stories from the frontlines – Cote d’Ivoire, Kenya, ECOWAS and the AU. The series are syndicated and media houses/outlets interested in enriching the national debates in Ghana for the 2012 are free to publish all the series.
By: Prosper Yao Tsikata