China’s $2 billion deal with Ghana sparks fears over debt, influence and the environment


THE Chinese government has released phase one of funding for a substantial road construction project in Ghana as part of a $2 billion infrastructure deal which gives Beijing access to the country’s reserves of bauxite — a crucial source of aluminum.

The deal has drawn criticism from environmental activists, political opposition, and international government investment partners, with a new report from risk consultancy EXX Africa highlighting a lack of transparency and increasing threat to debt sustainability.

A Chinese delegation led by Vice Premier Sun Chunlan  agreed mid-November to release the first tranche of funding, worth $649 million, for nationwide road construction projects following bilateral talks with Ghanaian Vice President Mahamadu Bawumia.

Projects under phase one have been sanctioned by China Export and Credit Insurance Corporation, known as Sinosure, with six further projects due to be confirmed by year-end.

As part of a memorandum signed between the two nations last year, Beijing will finance $2bn worth of rail, road and bridge networks, and in exchange, China will be granted access 5 percent of Ghana’s bauxite reserves.

The $2bn Master Project Support Agreement (MPSA) would see Chinese state-owned hydropower and construction company Sinohydro gain access to the mineral, and is part of a wider loan facility worth $19 billion. Bauxite is the world’s main source of aluminum.

Beijing sweetened the deal by committing to fund 100 vehicles for the Ghana Police Service and offered a 300 million yuan ($42.7 million) grant and a debt write off of 250 million yuan.

China has a similar arrangement in place with Guinea, exchanging $20bn in loans across the next two decades for access to bauxite ore. Between 2000 and 2017, China agreed around $143 billion in infrastructure loans across the continent.

According to Elizabeth Stephens, managing director at Geopolitical Risk Advisory, while often lauded as offering a shared path to prosperity, such high profile deals frequently fail to lift African nations’ poorest residents out of poverty.

‘This is because African governments often lack the will or capacity to ensure the proceeds from mega-projects have the desired trickle-down effect and Chinese investors do not make this a prerequisite of investment,’ she says.

Debt sustainability

In his first budget mid-November following the latest IMF visit, Ghana’s Finance Minister Ken Ofori-Atta pledged to boost spending by 21 percent, promising higher public sector wages and more infrastructure projects. He also announced plans to raise $3bn in international debt markets.

The expansionist push comes as President Nana Akufo-Addo and his ruling New Patriotic Party (NPP) look to next year’s presidential and parliamentary elections, with former president John Mahama’s National Democratic Congress (NDC) aiming to build an opposition coalition comprising nine entities.

A special report published in November by analysts at EXX Africa highlighted several concerns that are absent from the Ghanaian government’s spending plans.

The EXX Africa report highlighted that Ofori-Atta’s spending pledges would increase the budget deficit to 4.7 percent of GDP in 2020 from 4.5 percent in 2019. It anticipates that much of the $3bn debt raising will go towards public sector pay increases and benefits to state employees, along with boosting expenditure in key electoral constituencies.

Ghana has a history of drastic spending hikes during electoral cycles, and this proposed increase comes at a time of slowing economic growth, with output expected to fall from 7.46 percent in 2019 to 5.61 percent in 2020 and 4.22 percent by 2022, according to the IMF.

Meanwhile, government debt levels are not expected to fall far below the current level of 63 percent of GDP over the coming years, exacerbating concerns about debt sustainability in a country which was bailed out by the IMF in 2015 amid chronic budget overruns, and is currently rated as being at high risk of debt distress.

With reliance on overseas development finance increasing, Ghana faces a souring of relations with the US and other investment partners, such as the International Finance Corporation, over a recent contract cancellation involving US government funding to the consortium managing its state power utility. This could further its reliance on Chinese lending.

‘The extent to which the loan facility is beneficial depends on the terms of the loans and the way in which the money is invested, neither of which are clear,’ Stephens said.

Those comments echoed the EXX Africa study which also criticised the bauxite deal for a lack of transparency.

‘The deal risks further undermining the government’s credibility for transparency ahead of the 2020 elections and weaken its debt sustainability outlook,’ it added, pointing out that the current NPP government has added almost $10bn to the national debt since taking office in 2017.

Environmental fears

The deal has come under fire from conservationists over its potential impact on the ecosystem of the Atewa forest in southeastern Ghana, which forms part of the Upper Guinean Rainforest.

‘There are concerns that this bauxite mine, in the mountainous forestland of Atewa, could pollute three major rivers that originate there — the Densu, Birim and Ayensu — which provide drinking water to three regions of Ghana, including one million people in Accra. The fact that detailed environmental impact studies are not publicly available is a concern,’ Stephens said.

The Water Resources Commission has expressed concern over the pollution to these rivers, while the US Forest Service in March provided a technical consultation on Atewa which warned of ‘potential significant and permanent impact’ on the forest reserve and its water source.

The Ghanaian government has played down concerns but has yet to present compelling evidence to the contrary.

Bawumia announced mid-November the beginning of work on a Chinese-funded $130 million dollar construction project to upgrade training facilities and equipment at 15 Ghanaian technical universities. However, Sephens cautioned over the involvement of educational funding as a means of developing ‘soft power.’

‘Funding the constructon of schools and universities is likely to enable China to exert significant influence over the curriculum at a time when concern is being raised about Chinese investment being used to influence teaching at Western universities,’ she says.





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