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Feature Article of Thursday, 5 January 2012

Columnist: Idun-Arkhurst, Kobina

Response: IMANI Alert on Chinese Loans in Ghana

In response to concerns recently raised by IMANI on the disbursement of the US$3-billion loan from the China Development Bank (CDB), the Information Ministry put out what I believe was a well-argued response, quite different from the vagueness that characterised the NDC administration’s bungled responses to criticism of the STX affair. The difference in tone and depth suggests that the government is probably more certain of the Chinese deal than it was of the embarrassingly botched Korean deal.

In coming to the debate on the Chinese loan, IMANI seeks to build its credibility on having predicted that the STX deal would fail. Indeed, IMANI gets it right on a number of issues and I personally think they are one of the more serious think tanks in Ghana, although I was taken aback to realise IMANI’s report report drew generously on Erica Downs’s study on the CDB’s energy-backed deals without as much as mentioning her once. Let me also hasten to add that I am neither a fun of President Mills nor of the ruling party! However, I think in this particular case it is IMANI that appears to be causing needless confusion, not because the issue it raises has no merit, but because it deviates from the core relevant issue, which is whether government can and should meet the agreed conditions to trigger disbursement, and focuses rather on tangential issues. First, IMANI claims that government is giving the public the impression that all or most of the CDB loan will come in 2012. But as far as I am aware nowhere has government stated that this is the case. Even if we assume that government officials are so naïve as to believe this, they should be guided by experience on disbursement of China EXIM Bank loans for the Bui Dam, the completion of which is likely to be delayed because along the way the government failed to meet triggering conditions, causing disbursement to temporarily cease. Such challenges not only delay the early completion of projects to benefit Ghanaians; they also eventually end up increasing the cost of the project, either through inflation or surcharges. This is an important issue that must be addressed: that is, getting the government to negotiate better terms for Ghana and meet agreed triggering conditions to avoid disbursement being delayed, or worse, being suspended in the middle of a project.

Secondly, IMANI claims that after more than a 10-year overseas drive only less than around 17.5% of the CDB's loan commitments are designated in foreign currency, suggesting equivalent proportion of foreign loan commitments. This is about correct, but IMANI puts a spin on the figure and arrives at conclusions not supported by the evidence on the ground. According to IMANI, this suggests that the CDB is much more concerned with supporting domestic development than lending abroad, so that the expectations about the CDB loan may not be realised after all. Now, here is the problem.

As the example of even the United States shows, banks operating in large internal markets tend to have a large proportion of their loan portfolios at home. This does not mean that when they spot opportunities abroad they won't seize them. In fact, in spite of the cautious approach IMANI refers to, the CDB and the China EXIM Bank have already overtaken the World Bank as the largest source of development finance to developing countries within the same decade. According to estimates the UK-based Financial Times, over a two-year period between 2009 and 2010, the two Chinese state banks committed US$110 billion in loans to governments and companies in developing countries.

In contrast, over a similar two-year period between mid-June 2008 and mid-June 2010, the World Bank gave US$100.3 billion in loan commitments, in spite of record lending due to the global crisis. In estimating the foreign loan commitments of Chinese banks one should not also overlook the fact that Chinese banks are increasingly providing Yuan-denominated loans. Whereas in the past, only grants and interest-free loans were denominated as such, Beijing has been encouraging currency swaps and Yuan-denominated commercial loans with some of its major trading partners as part of measures to make the Yuan a globally-convertible currency.

Another plausible interpretation of the evidence adduced by IMANI is that there is a greater imperative for CDB and other major Chinese banks to diversify abroad. While it is true that the CDB is funding Beijing's westward expansion in China, it is also true that the "go-west" strategy also depends on increasing access to resources and markets. Thus, while Beijing is trying to reduce dependence on developed markets by generating internal demand, it is also diversifying its overseas expansion targeting developing countries to access further resources and markets. The CDB and the China EXIM Bank have a major role in financing this ambition. It is not for nothing that the CDB has just recently established an office in Ghana to co-ordinate its investments in West Africa. That CDB focuses more or less on internal development has no merit in the specific issue at hand and in the current geopolitical context. That it's taken more than 3 years for Liberia to crack a deal with China has nothing to do with the ratio of foreign to domestic loans of Chinese banks, but everything to do with meeting agreed and triggering conditions. If the point IMANI is trying to make is that like Western banks CDB also has stringent conditions, which is true although the conditions are not necessarily the same, they should focus on examining those conditions to provide insights on how government can meet those conditions and in ways that benefit Ghana.

Thirdly, in contrast to what IMANI says it is actually true that Chinese loans are easier to access, so long as recipient governments do their homework well and on time. This is so for one important reason. Chinese lending conditions are limited to the technical issues relating to the specific projects and to respecting local laws. In contrast, it takes much more time to do the sort of social engineering required of recipients by Western donors, not to mention that such social engineering may not be in the long-term interest of the recipient society. The disadvantage in the Chinese approach is that it creates opportunities for Chinese actors to arbitrage on weak state capacity, which is often evident during negotiations with the Chinese on contracts and in the enforcement of local regulations to limit the adverse impact of Chinese and other foreign business expansion.

But the political implication of the Western approach to conditionality is also to violate the independence of the recipients and virtually turn them into peons, while taking advantage of the same weaknesses the Chinese are likely to benefit from. The case of Angola’s relations with China also shows that even a country with weak institutions can, given policy autonomy and a genuine national desire to develop, build strong institutions on its own terms. China’s approach, that is, provides developing countries a pathway to much-desired policy autonomy.

Also important, Chinese lending practices and conditions are shaped as much by global learning as by specific local conditions. In Ghana, the Chinese have learned lessons from the about US$18-million loan for the CALF Cocoa project and insist on bi-partisan (or parliamentary) approval of all loans as consistent with local laws. A significant departure from what happened in Angola and the Democratic Republic of Congo, the Chinese also insist that their loan agreements not breach Ghana’s existing agreements with the multilateral development agencies. This is why Ghana had to either get an IMF waiver on the US$3-billion Chinese loan or wean itself off the IMF to be able to access the Chinese loan. All of these demands, including the need for parliament to ensure legality and good value for money, may contribute to delays in approvals both in Accra and Beijing. But so would needless partisan and ideological politicking that focuses on side shows rather than on the real issues at hand.

Here, I have in mind a group like the Danquah Institute (DI) which gave us the impression that it was opposed to the Chinese loan due to the implications for debt sustainability, something independents like me easily appreciated on the basis of principle, only for DI to turn around and suggest that in lieu of the Chinese loan the US EXIM Bank was willing to give Ghana US$3 billion! If the scale of the loan is bad for debt sustainability does it matter whence it comes? All that having been said I share the view that Ghana must watch its growing dependence on China. Just as the Chinese are diversifying at home and abroad, Ghana must find ways of diversifying its sources of development finance. In this context, we must also look beyond expanding our tax base to having a developmental mindset in restructuring the banking sector to enhance the capacity of local banks to finance large-scale projects. The implication of such a shift will be a concomitant shift in emphasis to financing local companies as builders of projects. Second, we must seize on the current geopolitical climate to build the capacity of local industry through selective industrial policies. Unfortunately groups like IMANI are ideologically opposed to industrial policy as an instrument of economic development.

Incidentally, IMANI complains of the government rushing to sign a contract with Sinopec to build the gas project, apparently unaware that it is one of the triggering conditions. Under the MFA on the CDB loan a minimum of 60% of all contracts is also reserved for Chinese companies. In fact, given the weaknesses of domestic industry, Ghana may end up getting much less than 40%. But we all know too well that at the moment there is not a single Ghanaian company capable of building the gas project and that when funding commercial projects Western banks also find opportunities for their own home companies. Such sole sourcing, of course, denies us the benefit of weighing bids and choosing on the basis of technical efficiency or capability.

Given available options, however, the fundamental question is whether we can use the presence of foreign companies to build local capacity and which foreign players have proved to be more willing to transfer technical capabilities to local partners, be they public or private. It is not enough to just employ Ghanaian labour on Chinese-funded projects. We must extract maximum possible benefits through industrial policies, such as requiring wherever possible that Ghanaian companies understudy Chinese companies in all projects as partner contractors.

In five years, will Ghana have had sufficient awareness to be building some of its own bridges, dams, gas pipelines, roads, etc. with Ghanaian cash and Ghanaian expertise? That, beyond the mechanics of the current loan amidst partisan brinkmanship, is a serious question Ghanaian policy-makers and civil society must answer.

Kobina Idun-Arkhurst (kobkurst@gmail.com)

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