Investment thrives on risk,
doesn’t it? The higher the risk, the higher the returns. However, the return
can go in either direction --a big win or a big loss. Ghanaians like to frame
it slightly differently and for a good reason – a gargantuan win or loss. It is
the task of the wise investor to carefully assess their risks, both obvious and
hidden, subject them to rigorous quantitative and qualitative analyses before
taking a decision. This is especially critical when the investment is being
made with the taxpayers' money.
The government of Ghana is
about to make a very big loan deal with the Chinese government. The protracted
loan has generated a lot of controversy in Ghana starting from 2011. It
involves Ghana taking a $3 billion loan and paying back with 13,000 barrels of
oil daily for the next 15.5 years. It’s called “trade-by-barter” and its
underlying principle is simple: use what you have to get what you need. China has
a healthy load of cash, much of which has to be invested outside of its economy
to ensure macro-economic stability. Ghana has oil and needs capital to bring
its infrastructure to a point that maximizes gains from the product. So, the
two countries have decided to help each other out through trade. It's that
simple. The complication, however, comes from the fairness of terms of the
agreement.
Going by the current price of
crude oil ($107/barrel), the government will have to pay back 7.9 billion to
the Chinese government by the duration of the contract. Thus, interest on the
loan alone is almost 5 billion -- about 1 billion short of double the actual
loan amount. Excellent return on investment for the Chinese government! But
what about Ghana?
Two renowned professors hold
diametrically opposed views on the loan. The US-based Ghanaian Professor of
Economics at American University and President of Free Africa Foundation,
George Ayittey, who came up with the initial figures, is of the opinion that
the deal is bad for Ghana. The Professor-President of Ghana, John Evans Attah
Mills, however, believes the deal is good for the nation and is bent on pushing
it through. Professor Mills completed his doctoral thesis in the area of
taxation and economic development and is obviously not a newcomer to
quantitative analysis. So why are the two professors at odds with each other on
the Chinese loan? And by the way, Daily Guide reported on February 29 that
government of Ghana’s lawmakers have already voted in favor of the loan
agreement.
Does the deal make an
investment sense to you from the figures above? Should the government go ahead
and take this level of risk with taxpayers' money? Before you jump to a hasty
conclusion and risk breaking a leg or two, pause and reflect for a few minutes.
Well, as it turns out, the answer is not that simple when the assumptions
behind the figures are laid bare. The decision even becomes slightly...well,
call it "nightmarish" when the raw numbers are toasted in the
microwave of econometric analysis. Did I say toast in a microwave?
First, the figures presented
earlier assume that the current price of crude oil ($107/barrel) will stay
constant over the 15.5 years of the contract’s life. Second, it does not
control for future rate of inflation. Third, the computation fails to factor in
future discount rate over the contract period. Bright Simons, the Director of
Research at an Accra-based think-tank, was quick to add one more factor which
almost eluded me initially: the figures assumed a zero rate of depreciation for
the Ghanaian currency (Cedi) over 15.5 years. At this stage, I guess you're
beginning to appreciate why the deal has "occupied" the Ghanaian
airways for over a year.
The Ghana government’s
financial analysts surely did price projection for crude oil over the 15.5-year
period, taking into account historic prices of crude oil as well as interest
and inflation rates. They might have also analyzed potential national and
global events that could affect the future price of crude oil. Examples are the
financial health of major trade partners in Europe, the US and Asia; global
economic growth projections (because it affects demand for energy), and market
analysis for alternative energy sources. Perhaps, they also controlled for the
future of conflict-ridden oil producing nations such as Nigeria (thanks to Boko
Haram) and Iraq.
In fact, government officials
are more optimistic about the loan than most critics could imagine. The Chief
Executive officer of Ghana National Gas Company (GNGC), Dr. Adjah-Sipa Yankey,
is reported by Reuters as saying the $700 million gas project which the loan
will finance will be able to pay off the $3 billion loan after five years.
"Once we start operations, in between four-and-a-half to 5 years we will
generate enough money to pay of[f] the entire loan and start making
profits", Dr. Yankey said to to Reuters in 2011.
And, yes, critics of the loan,
including Professor Ayittey, and many opposition party members, have done their
own analyses, too. The opposition Member of Parliament (MP) for Manhyia, Dr.
Mathew Opoku Prempeh, is reported as saying the nation stands to lose $2.325
billion from the loan agreement. He continued, "… [The] negotiated
agreement makes mockery of the people of Ghana, and…smells of corruption..."
Another opposition Member of Parliament is quoted by AllAfrica.com as saying
the contract "...breached the Petroleum Revenue Management Act 815 of
2011, section 18(7) which precludes collateralization of the nation's oil for a
period not more than ten (10) years.” It is important to point out that a major
rival financial institution, the International Monetary Fund (IMF), is also
opposed to the loan deal.
On their recent posts,
Professor Ayittey and Kofi Korsah further clarified the terms of the loan
agreement. According to Ayittey, the infrastructure projects, which the loan is
meant to develop under the Ghana Shared Growth and Development Agenda (GSGDA),
will be built with Chinese construction workers, not Ghanaian workers. This is
happening at a period when the unemployment rate is hovering around 11% (2000
est). He labeled the deal as a "chopstick mercantilism with a human face.”
Kofi Korsah, a London-based Ghanaian, mentioned that per terms of the contract,
the loan will be disbursed not in bulk but in tranches over a five-year period,
which further goes in favor of China.
It is important to keep in mind
that the Chinese government is in business to make money, obviously. The
Chinese financial analysts likely did their own financial analysis and made
projections before crafting the terms and conditions of the loan. Should their
assumptions hold, they hope to make a good profit from the deal. A profit for
China could mean a loss for Ghana and vice versa. However, for a small economy
like Ghana, with no benefit of scale, unlike that of China, even a slight loss
could have far-reaching consequences. It is nonetheless possible that the deal
would be mutually beneficial, although China still stands a better chance,
given the present terms of the agreement -- at least from a layman’s
perspective.
The onus lies on the government
of Ghana to double-check its facts and assumptions (both explicit and implicit)
before signing the contract, as it has far-reaching ramifications for the
nation's nascent economy. Another option is for the government to push for
re-negotiation of aspects of the loan to make it fairer for both parties. Given
the information above, should the government of Ghana commit the nation to the
$3 billion loan agreement with China or not? Which of the professors’ views do
you side with? Is the answer still as simple as it seemed from the beginning?
