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3 China plays long game on
Congo copper By Peter Lee
With
the exception of the United Kingdom - which passed
a law limiting vulture fund recovery from Highly
Indebted Poor Countries (HIPC) governments to the
90% haircut accepted by multilateral and bilateral
lenders - the governments of the world have
professed themselves helpless to deal with the
issue of sovereign commercial debt - the
sustenance of the vulture funds.
In
New York state, for instance, vulture funds
successfully lobbied to eliminate a common law
protection, quaintly known as champerty, against
Shylockian purchase of debt for the purpose of
filing a lawsuit.
When the Democratic Republic
of Congo, after a protracted and onerous process,
finally obtained debt relief in 2010, a press
release from the Paris Club grouping of European
and North
American government
debtholders placed the onus on the country to
somehow impose on unwilling creditors the same
deal it got from the Paris Club and the
multilaterals:
The case of the
Democratic Republic of Congo raised the issue of
non-cooperative behavior from some litigating
creditors.
The government committed to
seek from all its remaining external creditors a
treatment comparable to HIPC debt relief.
[5]
The Democratic Republic of Congo's
sovereign debt headaches - and China's developing
world challenges - are not limited to the
depredations of the vulture funds.
Sovereign states, unlike
corporations or individuals, cannot seek
bankruptcy protection. A new regime is liable for
the obligations for the debts of its predecessor.
An impoverished regime - especially during a
recession - cannot finance its energy imports and
other critical needs, let alone service its debt.
Therefore, it needs access to
an international lending facility.
That
creates a sizable role for the determinedly
free-market advocacy of the socialism/state-sector
averse International Monetary Fund (IMF) in the
impoverished and indebted countries that China is
often attempting to woo.
The
$30 million in defaulted Zaire obligations
purchased by FGH is only a tiny fraction of the
$10 billion in rotten sovereign debt incurred by
the Mobutu Sese Seko regime - debt which the
Democratic Republic of Congo terms "odious".
The
debt was owed to a salad bowl of multilateral
institutions (African Development Bank, the IMF,
etc), a host of national governments, and
commercial debtors (like FG Hemisphere). Most of
the Democratic Republic of Congo bilateral
(government-to-government) debt was in the hands
of members of the "Paris Club" of European and
North American lenders.
The
World Bank and the IMF midwifed negotiations with
the Paris Club and the multilaterals to retire and
restructure multilateral and bilateral debt under
the HIPC initiative.
With great fanfare, most of
the multilateral and bilateral debt was written
off in 2010.
The great event was meant to
occur in time for the 50th anniversary
independence jubilee. However, thanks to
churlishness by Paris Club members Canada (which
was aggrieved by perceived mistreatment of a
Canadian mining company, First Quantum, by the
Democratic Republic of Congo government) and
Switzerland, the announcement had to be delayed
until after the celebration.
Genuine debt relief did occur
as part of the HIPC initiative.
However, it should be
remarked that the very raison d'etre of the HIPC
initiative was to assist poor countries that
already would not - and could not - service their
debt.
The financial impact is
probably less than the news reports such as "$12.3
billion in Democratic Republic of Congo debt
relief" might imply. [6]
The
BBC estimated that, at the time of the 2010 debt
relief, the Democratic Republic of Congo was
paying a not inconsiderable but certainly not
massive $300 million a year in debt service. The
principal - the $10 billion - has gone bye-bye.
The Democratic Republic of Congo could only pay a
fraction of the interest each year at present, and
for the foreseeable future.
In
actuality, therefore, France, as an example, was
not writing off $2 billion dollars in debt so much
as it was sacrificing a yearly cash flow of
several tens of millions - out of a total foreign
aid budget of $5 billion.
The
HIPC workout, therefore, was not conceived as a
panacea for the Democratic Republic of Congo's
previous debt problems.
For
the international community, for the Democratic
Republic of Congo - and for China - the HIPC
initiative is significant in what it demands
today, and in the future.
In
order to qualify for the HIPC, the Democratic
Republic of Congo had to meet extensive
requirements for good governance, transparency,
and privatization. Funds made available by debt
relief were to be funneled into virtuous poverty
reduction programs, implying that the Democratic
Republic of Congo had swapped financial
indebtedness for moral indebtedness.
Once
it qualified for the HIPC, the Democratic Republic
of Congo gained access to IMF loans, which it
needed to cope with the global recession.
To date, the Democratic
Republic of Congo has borrowed $320 million, with
the capacity to borrow another $200 million from
the IMF's extended credit facility. The loan is
interest free but, after a 5-1/2 year grace
period, the loan has to be paid back in 10 years.
If the Democratic Republic of Congo takes the full
$520 million, it looks like it will face debt
repayment to the IMF at a rate of $100 million per
year in the latter half of the decade. [7]
In
other words, it has swapped "odious" debt it was
rather cavalier about paying, for IMF debt it has
to pay back.
The Democratic
Republic of Congo has also committed to a lot of
social, regulatory, fiscal and financial reform
demands that the IMF believes would lead the
war-shattered, impoverished, and corrupted nation
into the promised land of sustained growth fueled
by private investment.
For reasons of institutional
as well as pro-Western bias, therefore, the IMF
would be hostile to the Chinese
copper-for-infrastructure barter deal.
First of all, the Sicomines
deal is government-to-government, and does not
conform to the free-market/private sector makeover
the IMF envisages for the Democratic Republic of
Congo. The Western nations have little interest in
solving the vulture fund conundrum or seeing the
Democratic Republic of Congo exacerbate its
sovereign debt problems by encumbering the
government with new obligations.
For
reasons of convenience as well as ideology, the
IMF would like to see the Democratic Republic of
Congo government avoid business operations - and
their opportunities for corruption, mismanagement,
and market distortions - altogether.
Also, if the Democratic
Republic of Congo successfully executed the barter
arrangement with China, it might extend the model
to other infrastructure deals, thereby
undercutting the private enterprise model that the
IMF is so eager to promote - and decreasing
Western leverage over the country by making it
less dependent on the IMF's good offices to
attract capital.
It is likely these
reasons, and not the dubious claim that Democratic
Republic of Congo government guarantees to China
represented an unacceptable increase in sovereign
indebtedness, were behind the IMF's demand that
the Sino-Congo lese copper deal be scaled back
from $9 billion to $6 billion, thereby sacrificing
half of the infrastructure component. [8]
The
IMF's lack of enthusiasm for
government-to-government wheeling and dealing in
the Democratic Republic of Congo can be seen in
its 2011 country report. In the extractive sector,
the main area of Chinese interest, it declares:
16. Concerning structural policies,
staff, jointly with the World Bank, focused
discussions heavily on measures to enhance
governance and transparency in extractive
industries (forestry, mining, oil). A few
high-profile disputes in these industries, lack
of transparency in transactions, and concerns
over the relatively low level of returns to the
state from the exploitation of natural resources
have highlighted deficiencies in the policy
framework. Although the authorities did not feel
these issues signaled deterioration in the
business climate, they did agree that better
management of natural resources is essential to
the Democratic Republic of Congo 's long-term
development.
17. The authorities agreed
to pursue a broad range of reforms in extractive
industries, developed in close collaboration
with the World Bank. These reforms aim, inter
alia, to ensure the sanctity of contracts and
private property rights and enhance the
transparency of transactions in these
industries. The authorities also indicated an
interest in taking the necessary steps to accede
to the 1958 New York Convention on the
Recognition and Enforcement of Arbitral Awards.
[9]
It is open to question whether the
Democratic Republic of Congo, for practical as
well as self-interested reasons, shares the IMF's
whole-hearted free market orientation.
As
the FG Hemisphere case demonstrates, for instance,
the Democratic Republic of Congo government is
actively resisting the imposition of an arbitral
award in the Hong Kong courts.
There are
also strong indications that the Democratic
Republic of Congo, despite its pledge of
allegiance to the IMF, also continues to relish
the opportunity to engage in the kind of
opportunistic contract renegotiations that private
sector partners find particularly infuriating but
owners of commodities with high price volatility
find irresistible.
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