Debt and Extractives
Jubilee Debt Campaign has worked with CAFOD, Christian Aid and Global Witness to investigate the reckless lending such extractive resources can attract from abroad.
This briefing finds that overwhelmingly it serves the interests of companies and wealthy elites and often leads to huge levels of unpayable and unjust debt, the loss of economic sovereignty, and corrupt and unaccountable governance.
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Natural resources
Governments of poor countries expect large levels of future income from their extractive industries and their natural resources can act as actual collateral for loans. For some countries with lows credit ratings, collateralized debt has been the only way to raise external financing worth billions of dollars.
However, if a country sees a fall in the prices of its natural resources its government has less money with which to pay back the relatively more expensive debt. This often leads to a country falling into arrears, triggering penalty interest charges and resulting in ever more debt.
In turn, this debt can mean that countries are forced into an even greater dependence on these resources – sometimes under the advice of international financial institutions such as the World Bank and International Monetary Fund – in order to earn the money needed to repay their debts. In the long-run this increases their dependence on rich country lenders and international banks.
Resource curse
This is a vicious circle that helps explain why some of the countries richest in natural resources are actually the poorest. The impact of indebtedness often exacerbates the so-called “resource curse” – a wider set of consequences that affect many resource-rich countries, including economic problems, conflict, corruption and environmental damage, which result from their natural wealth.
For example, with the sharp decline in oil prices in the early 1980s the Republic of Congo could no longer service its debts to banks and oil companies. As the Congo’s debts ballooned, it sought further oil backed loans. By 1990, the Republic of Congo’s oil revenues had already been mortgaged up until 1994. Subsequently a few people have become very wealthy, while Congo remains one of the poorest countries in the world.
This is a scenario we’re seeing over and over again in countries like the Philippines, Zambia and Nigeria. In all these stories, it is the ordinary people of the country that suffer; losing out on healthcare, education, basic human rights and an accountable government.
What Next?
We need a fundamental re-think of the lending system as a whole and particularly the extractives sector, so that it doesn’t rob countries of their sovereignty, it serves real development needs and it encourages accountability to people.
There must also be appropriate measures to tackle corruption in resource-rich countries, build accountability and increase parliamentary and citizen capacity to scrutinise government decisions regarding extractives projects and their financing, as well as to ensure the proper management of any revenue released by debt cancellation. A new international framework for responsible financing of the extractives sector would prevent future unpayable and unjust debt burdens.
The current economic crisis is being seen by many as an opportunity to rethink the models of development that have been followed for several decades, and to pursue equitable and green approaches rather than continued blind faith in markets. Any such transformation must include careful scrutiny of the role of extractives in developing countries, if these resources are to contribute successfully to sustainable local and global economies.
