The International Monetary Fund (IMF) and the People's Republic of China do not
make for an easy fit. The most conspicuous clash between the IMF and China is
going on today in the Democratic Republic of Congo, with copper the big issue
at stake.
In 2007, as Congo emerged from civil war, a Chinese consortium concluded a US$9
billion agreement with the government. The Chinese investors would develop
mines and infrastructure - including $3 billion in projects over the next four
years - and obtain the right to mine 10 million tonnes of copper and 600,000
tonnes of cobalt in return (quantities that are undoubtedly subject to
adjustment based on changes in market price for these commodities).
The IMF is working to obstruct it.
Congo's President Joseph Kabila, who was slotted into his office after a
less-than-exemplary election and with no little legerdemain by the Western
powers, has shown clear signs of pursuing an independent course by playing off
the Chinese against the West.
In response, vociferous Western concern over the Chinese deal has extended from
the IMF to the US government and even to Rwanda-backed rebel leader and wannabe
US asset Laurent Nkunda.
Nkunda included examination of the Chinese deal (but not of a contract
involving a copper project by Freeport MacMoRan of the United States) as one of
the eight demands he made to the UN special envoy last year, when his
insurrection was at its height. AFP reported:
A Kinshasa-based expert,
speaking on condition of anonymity, said Nkunda's tactics had the added
advantage of being music to Western ears. The expert recalled that Washington's
top Africa diplomat, Jendayi Frazer, discussed the issue of Chinese contracts
with President Joseph Kabila for 45 minutes when she visited Kinshasa.
"Nkunda is trying to put the West in his pocket," the expert said, speaking on
condition of anonymity. "He is especially trying to please the Americans."
Nkunda is now staying in Rwanda under mysterious circumstances and ready to
return to the fray when his backers consider the moment opportune.
How much the DRC government is intimidated by the possibility that Nkunda and
his selective brand of economic nationalism will be unleashed from the eastern
haven to do battle against the Kabila regime on behalf of the West and against
Chinese influence is, for now, a matter of conjecture.
The most pressing threat to Kibala's freedom of movement for the time being is
the colossal $11 billion debt incurred and embezzled during the reign of his
predecessor, Mbuto Sese Seko. The IMF is mediating between the DRC and the
Paris Club of creditors concerning resolution of the debt.
The IMF is also openly calling for the Chinese deal to be renegotiated. The
stated reason is that the IMF is concerned that the Chinese deal increases
government indebtedness at the same time that the Congo is executing an
agreement to write down its external debt on concessionary terms.
This is despite the fact that the China's Congolese loans - like the Beijing's
loans to Angola, where China secured a concession with the help of a
pre-emptive $2 billion infrastructure credit - will be secured, not by cash,
but by commodity produced by the project, in this case copper.
China was not amused, according to a March 3 report by Bloomberg:
The
IMF's demands are "blackmail", Wu Zexian, China's ambassador to the country,
said in a February 25 interview in the eastern Congolese city of Goma. "The
contract will not change."
IMF managing director Dominique
Strauss-Kahn was in Kinshasa on May 26, 2009, and announced the carrot - relief
for the debts incurred by the previous regime - while he brandished the stick:
IMF
staff are finalizing negotiations on a new program under the Poverty Reduction
and Growth Facility, pending an outcome, consistent with debt sustainability,
to the mining and infrastructure cooperation agreement between DRC and China.
... Before the IMF Executive Board can consider a new program for the DRC, a
positive solution to the issue of the Sino-Congolese agreement and financing
assurances of the Paris Club are needed.
In a classic
illustration of Western reporting on China and the developing world, the actual
story - IMF threatens to withhold debt relief unless the Chinese deal is
renegotiated - got a bit of a twist - as in Voice of America's "Chinese Mineral
Deal Blocking Congo's IMF Debt Relief." [1]
A Chinese outlet recast the AFP report with a more accurate headline: "DR Congo
needs China contracts and debt relief: IMF" [2], and provided this quote from
Strauss-Kahn indicating that the importance of giving some lip service to China
is recognized inside the IMF, if not in the Western media:
It was
absurd for the country to have to choose between lightening its burden or
taking the Chinese contract, [Strauss-Kahn] added. "What we need is both the
contract and the debt relief, the DRC needs both," said Strauss-Kahn.
Beneath all the huffing and puffing about the parlous state of Congo's
financial house, there are some facts on the ground:
First, the Congo economy is growing, at a rate of at least 2.5% per annum this
year, even in the midst of the global recession.
Second, the budget shortfall created by the collapse of copper and oil prices
is, as a matter of magnitude, not very large. Congo, like Angola, is out of
cash because it has no rainy day money after years of civil strife. It needs a
bridge loan of about $420 million (representing about six months of imports) to
keep the doors open. [3]
Benchmark world prices for copper, Congo's primary mineral export, on the
London Metal Exchange traded at around $4,600 per tonne at the end of May, down
from a record high of almost $9,000 per tonne last July, according to Reuters.
International oil prices tumbled from above $147 to below $40 before recovering
to around $70 at present.
The IMF already provided half of the $420 million bridge loan amount in early
March, giving the Congolese government enough cash to make it through June - by
a remarkable coincidence, the time when the IMF's review of the Chinese
contract and a DRC review of the Freeport contract are expected to be
completed.
Third, Congo's infrastructure is devastated by war and neglect. The government
wants the Chinese in there building things, not the IMF taking advantage of the
country's cash flow problems to lecture about the $11 billion in bad debts
incurred by a previous regime.
There is another factor in the China-IMF-Congo equation: Western concern over
the Congolese government's stated desire to renegotiate the Freeport contract.
The Western owners of the Tenke Fungurume project are upset that the Congolese
government, after a review of contracts concluded by the previous regime,
demanded that the government's stake in the project be increased to 45% from
17.5% (which would presumably go a long way toward alleviating IMF concern
about the country's ability to service its debt).
They are also worried that the DRC might reallocate an undeveloped portion of
the Tenke Fungurume reserves to the Chinese project, according to Bloomberg:
Freeport
has explored less than half of its Tenke Fungurume concession area, which spans
an area of about 600 square miles [960 square kilometers], the company said on
its Website. The risk to Freeport is that the government tries to gain control
of part of the property that would only be developed in decades' time, said
Charl Malan, a mining hedge-fund manager at Van Eck Associates Corp in New
York. The government's joint venture with the Chinese companies is a likely
beneficiary of any property that may be taken from the Tenke lease, he said.
[4]
It appears possible that, once Freeport's contract for
Tenke Fungurume is affirmed (something that the company expects will happen in
the second quarter of 2009), the Chinese contract and the IMF loan will
proceed.
For the time being, the Chinese do not appear to be persuaded by IMF rhetoric,
or interested in backing down.
Bloomberg interviewed China's ambassador to the Democratic Republic of the
Congo, Wu Zexian (who made the "blackmail" comment cited above) after
Strauss-Kahn's visit:
Wu said the agreement creates no new debt for
Congo because the Export-Import Bank of China, which is funding the deal, is
taking the risk.
The IMF says "it's a problem and I say it's not a problem", he said, adding
that China may consider adapting the deal if the IMF provides a "good" reason
to do so.
"I think what Mr Strauss-Kahn said isn't new," Wu said. "The discussion hasn't
changed."
In a separate interview with Reuters, Wu said:
"We
have avoided from the very beginning a situation that would eventually lead to
further debt. And so there is no discussion possible," Wu Zexian, China's
ambassador to Congo, said.
Grumbling aside, it looks like
China's ox may be gored on the matter of the interest rate for the loan. The
original agreement was on commercial terms, but IMF pressure (happily seconded
by the grateful Congo government) will perhaps get interest rates dialed back
to something like what Angola got from China: the benchmark London Interbank
Offered Rate plus 1.75%.
Published reports also indicate that the IMF is calling for the project total
to be capped at $6 billion instead of $9 billion. [5]
This might mean that the Congo government is being encouraged to shrink the
Chinese project in response to the current decline in copper prices - instead
of allocating undeveloped reserves from Freeport's mine to give China rights to
more copper than the original 10 million tonnes meant to cover the $9 billion
deal.
The idea that the Congo should make do with fewer roads, hospitals, and
airports so that Freeport's property rights are properly respected may excite
some dissatisfaction inside the DRC with the IMF approach.
As to the idea that Congo would not pledge copper resources to guarantee
billions of dollars in expenditures - and either let Beijing stand in line
together with the Western powers that witlessly shoveled $10 billion of
unsecured cash into former president Mobutu Sese-Seko's regime or see China
walk away from the deal - that probably won't fly either with the Chinese or
the Congolese.
The fact that the IMF is engineering the renegotiation of one of China's most
important overseas resource deals - perhaps as part of an effort to get the
Congo to accept its true role as a Western client - is unlikely to endear the
organization to Beijing.
Notes
1. For Voice of America report, click
here.
2. For SinoDaily report, click
here.
3. For details, click
here.
4. For full report, click
here.
5. See
here.
Peter Lee writes on East and South Asian affairs and their intersection
with US foreign policy.
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