African Economies Haunted by Oil-Backed Loans as Traders Call in Debts

Controversial deals that offered quick cash in exchange for future oil production are eating up government budgets.

Already reeling from years of civil war and corruption, South Sudan’s economy is being shaken again by plummeting petroleum prices, and a line of creditors demanding repayment for years of oil-backed loans that date back to the beginning of the country’s civil war.

South Sudan was one of a handful of African oil-producing nations to sign “prepayment agreements” with international commodity trading firms, which gave governments cash at the time in return for shipments of oil to be delivered later on.

“Such deals were an important source of financing for many oil-rich governments on the continent during a commodity boom that began around 2007,” said David Mihalyi, a senior economist at the Natural Resource Governance Institute.

When oil prices later fell, first in 2015 and 2016, then again this year, countries like Chad and the Republic of Congo needed more oil than they were able to deliver to repay the money they had borrowed.

When South Sudan took its first prepayments in 2013, oil topped $100 a barrel. Within a few years, prices had halved, effectively doubling the amount of oil needed to repay loans that had already been spent. Then, in April this year, oil plunged below $20 a barrel.

In the meantime, creditors have come calling.

Britain’s High Court in June ordered South Sudan to pay commodity trading giant Trafigura $9.7 million within 30 days. Court documents show the government had already paid an additional $36 million towards the debt earlier this year, following legal action after South Sudan failed to deliver six cargoes on time between May 2018 and March 2019.

South Sudan had instead allocated the shipments to other creditors, according to an oil ministry report that has not previously been made public.

As oil prices have fallen, repayments on oil-backed loans are exacerbating an economic crisis in a country that depends on oil for 85 percent of its national budget.