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Last Updated: 04/28/2003Banks, Guns and Baguettes in Angolagate's Missing Billions
Joseph Schumacher scrutinises the current situation in Angola, and finds the international financial system wanting. See also our current book review of Joseph E Stiglitz's critique of the IMF and his prescription for reform.
The dilemma of how to dissuade International banks supporting corrupt regimes, is finally receiving long overdue attention. A stark case is Angola which although extremely wealthy in oil and diamonds is one of the poorest countries on earth, with over 80% of its population subsisting below the standard of absolute poverty on less than one dollar a day.
Angola is among a number of states whose governments benefit from an unfettered international banking system that refuses to regulate its lending practices to administrations that have dubious financial practices and generally pass little of the borrowings on to its citizens. Despite growing condemnation of the practice Angola is again currently negotiating with a private banking consortium to further mortgage its natural resources for a billion dollar loan.
Angola should be doing well. Annually it earns between 3 to 5 billion dollars (US) from its oil resources, by last years reckoning accounting for some 87% of its state income. Its 25-year civil war finally ended last April after the death of UNITA rebel leader Jonas Savimbi and the price of its growing oil exports has been boosted of late by the Iraq war.
The Missing $billion
The problem is that around a billion dollars of state funds goes missing each year, as much as a third of its budget, presumably siphoned off in a tangled web of corruption and back room arms deals. At present the nations foreign reserves have sunk to less than US$200 million and the government refuses to disclose where up to $900 million of export earnings have been spent since last July.
Because of its perennial precarious financial situation, Angola has for some years relied heavily on international bank loans to meet shortfalls in state spending, which had been primarily the army's war against the rebels, leaving very little for social spending. However its options are running out. The International Monetary Fund recently decided on denying Angola credit until its concerns about the government's financial practices are addressed. This followed a leaked internal IMF report last October that expressed distress at the Angolan Governments bad habit of misplacing a billion dollars annually and the concern for Angolan society's lack of benefit from its oil wealth.
Since relations between it and the IMF soured the Angolan government has turned to a tried and true source, the French Bank BNP Paribas, which heads a consortium, with which it began negotiating a $1bn, oil backed loan, two months ago. This loan would be subject to the usual huge arrangement fees for the middlemen and at far higher interest rates than would be charged by the IMF.
PNB Paribas and Angola have a long history of dealings, and the bank is a central player in a report released by the NGO Global Witness in March last year, entitled, All the Presidents Men. The 100-page report is a damning indictment of the predatory and amoral nature of the international financial and banking systems. The reports cataloging of, what has been dubbed 'Angolagate' is also revealing for its glimpse of the global process of controlling international oil exploration in developing countries. A process that is sure to spread in the intensifying grab for new sources of oil.
The copiously detailed and meticulously researched report purports to tell the tale of how the Angolan Governments legitimate war of self defense against UNITA turned into a conspiracy involving some of Angola's highest level politicians and individuals robbing the country of its wealth. This was accomplished through kickbacks related to overpriced arms deals, financed by oil-backed loans, which were diverted straight into a parallel budget of the shadow state. Nicknamed Angolagatge by the French press, the story has the ingredients of a classic blockbuster political scandal, with the tentacles of the case stretching back to the arrest of an ex-Presidents son in Paris along with some shady Eastern European businessmen, money laundering, illegal arms dealings and even connections right to heart of the American republican party. The now de rigueur connection to US Vice President Dick Cheney and Haliburton, the oil company he once was CEO of and which has extensive contracts in Angola.
However at the heart of the scandal are the International banks operating in Angola, among which, BNP Paribas with its continuing extensive activity in the country is prominent. The report does not suggest that Paribas directly facilitated the kick-back process from the arms trade that had been, and probably still is, taking place, or that the bank was necessarily aware of the end use of the funds it provided. However it does condemn the bank and indeed the whole banking industry's lack of commitment to transparency and social responsibility. On a broader sense the 'Global Witness' raises a raft of ethical questions that deserve attention. Paramount among these, and one not easily answered; is whether banks should be held accountable for how their money is spent?
"The report challenges the Governments policy of obtaining short-term loans at high interest rates, when the vast majority of this income appeared to do little or nothing for the development of the country or for the provision of much needed domestic services. An almost complete lack of transparency about such loans means that the information about their size or purposes is very difficult to obtain internationally, and almost impossible to obtain in Angola. This creates an extraordinary set of circumstances, whereby the banks providing credit have in effect, established an entire set of parallel financing for the state that has been totally free of any scrutiny by the people of Angola, whilst the basis of these loans is oil, which is meant to belong to the people."
Banks ignore IMF
The investigations by Global Witness suggest that the Angolan Government borrowed over US$3.55 billion by mortgaging future oil production at high interest from September 2000 to October 2001 alone. Such figures vividly illustrate the level of misallocation of funds when contrasted to the US$200 million the UN barely managed to scrape together last year to feed the one million internally displaced Angolans dependent on international food aid.
In fact safeguards and guideline do exist to regulate international lending to developing countries. In 2001 the IMF drew up an agreement with Angola regarding how much in private loans the government of that country should take on, to responsibly encourage growth. This agreement limited state borrowing from private institutions to US$269 million. However, this was soon ignored by both the Angolan government and the banks on a massive scale. It is true that IMF austerity programs have been discredited in some countries and that the economics orthodoxy governing such situations has lost much of its certitude. However in Angola's case the Private banks involved should have easily realized that this was a case where the advice of the IMF was undeniably in the best interests of Angola. The Global Witness report makes a number of recommendations for banks operating in Angola:
Lack of transparency
As the Global Witness report makes clear any analysis of Angola's problems is complicated by the lack of transparency in its oil industry. The Angolan state oil company, Sonangol, refuses to publicize how much it earns from oil revenue, making corruption and misuse of state money easy. This is accomplished with cooperation, albeit often through duress, from the major multinational oil companies who regard Angola as an increasingly important source of oil. The situation in Angola is often cited in the 'Publish what you pay campaign', which was launched by more than thirty prominent NGOs to pressure western governments to promote transparency over resource revenues worldwide. A central demand of the campaign is to make it mandatory for oil, gas, and mining companies to publish their fundamental financial transactions with national governments as a condition for being listed on international stock exchanges and financial markets. This is standard practice for companies operating in developed countries, though those same companies seldom do the same in the developing world.
While a transparency campaign relying on an ethos of greater corporate responsibility in the natural resource industry has been gathering momentum, the international banking industry has on the whole escaped scrutiny. There is no organized movement, such as the 'Publish what you pay campaign', however a piecemeal concensious is starting to emerge amongst debt cancellation activists on how to tackle the problem of debt taken on by governments, who are guilty of refusing to consider the best interests of its citizens. Debt relief campaigners have begun to include the term 'odious debt' in their calls for debt cancellation for the third world. This term refers to any debt taken on by unrepresentative and undemocratic regimes, and as such should be regarded as illegitimate. They contend that such monies should be not have to be paid back as the debt was incurred without the consent of the nations populace and not used for their benefit. Aside from the unequivocal moral force of such arguments, there are practical problems of such a stance, which cannot be ignored. One argument is that private banks are an important source of financing for development and infrastructure projects in the third world, lending money that would not otherwise be available. If banks knew that there was a chance that there loans may not have to be paid back, because of an arbitrary pronouncement on an regimes legitimacy then they would be extremely unlikely to lend money to any poor unstable country. This argument while having much validity ignores an unfortunate aspect of the current lending environment in the third world - 80% of private investment to non-western nations went to 12 countries, stars if you will of the developing world, which are sucking in a preponderance of the investment dollar. Of this 80% of that was invested in China. Most countries are not getting lent to, as they do not make good propositions for investing. However many of these countries are still paying of the loans previous administrations took out in the early 90 s, 80s and even 70 s when the financial market was far more conducive to lending to developing nations.
Other isolated attempts are being made to tackle the problem of odious debt. Last year Edward Fagan, a maverick lawyer best known for successfully suing Switzerland on behalf of Jewish World War Two victims, began proceedings in New York against Banks, which lent to South Africa's apartheid regime. The suit is demanding US$50 billion in reparations from Citibank, Credit Suisse and UBS on behalf of the victims of Apartheid repression. Fagan is claiming the banks credit helped prolong the apartheid regime, which was ostracized by the International community when the UN imposed trade sanctions in 1985, but because it had sufficient borrowing power from its mineral resources did not fall until 1992. The case is still being fought over.
One interesting solution to the dilemma of how to prevent lending to illegitimate regimes without harming healthily private lending and investment to developing nations has been put forward by Seema Juyachanden and Michael Kremer of Harvard University. Their suggestion is to institute the option of an international loans embargo that could be put in place on rouge regimes. Adjudicated by the UN, this mechanism would take the form of an international declaration in advance that an odious government couldn't rightfully borrow in the country s name. This would give private banks fair notice that they lend at their own risk and loans breaking the embargo may be justifiably repudiated by subsequent administrations. Giving banks this kind of incentive would quickly dry up loans to unstable dictatorial governments, while retaining a degree of targeting and the potential to leverage improved behaviour. Given the nature of third world debt, governments deemed illegitimate by the International community would find it much more difficult surviving without the acquiesce of the finance markets.
In this period when a more targeted modal of sanctions against states, which aren't adhering to international norms of acceptable behavior is needed, such an addition to international statecraft would be beneficial.