Governments that are both cash-strapped and already indebted have always had the odds stacked against them. What is a country supposed to do when itâ€™s rejected by the usual sources of credit, but its expenditures continue to pile up? Traditionally, the only answer has been to seek debt alleviation with private and public creditors. But governments that have the advantage of being resource-rich have always had another potential answer: raising loans against future resource productionâ€”loans that donâ€™t count as sovereign debt.
Itâ€™s a clever bit of financial engineering that has expanded dramatically over the past 15 years. The Natural Resource Governance Institute calculates that African and Latin American countries contracted at least $164 billion in resource-backed loans, especially oil, between 2004 and 2018. Thereâ€™s a catch, of courseâ€”just not one that applies to the elites who are striking these deals.
Oil-backed loans provide borrowers with money but often carry exorbitant fees for fixers as well as high interest rates. This amounts to a major source of public finance risk for the weakly governed countries that resort to them. Itâ€™s not just that they are exposed to the fall in the prices of the commodities backing the loans. Because the oil-backed loans are not recorded as external public debt, the borrowing and spending is highly opaque to outside observers. The money thus rarely goes to savings and investment and is instead siphoned offshore toward international financial hubs. Elites in resource-rich countries seek out these loans because they maximize their personal discretion in spending the moneyâ€”or, as it were, in stealing it.