International ratings agency, Fitch says Ghana could face some potential long-term political risks from the US$ 2 billion bauxite-for-loan agreement with Chinese firm Sinohydro.
The ‘barter” agreement between Ghana and Sinohydro will see the latter develop infrastructure in exchange for refined bauxite.
But Fitch in its latest report on Ghana said though likely a boon for economic growth, the project carries some political risks.
They include the minority in Parliament are demanding that the International Monetary Fund investigate the agreement, insisting the agreement should be considered as an addition to the debt burden.
Fitch said “there is a moderate risk that should the IMF determine that this agreement does add to the government debt burden, Ghana’s relations with the international body and with international debt markets may be affected.”
Secondly, the value of refined bauxite is likely to fluctuate, which assuming the agreement is based on a monetary value for the refined bauxite will see the amount of bauxite handed over to repay the debt potentially rise considerably. This Fitch said could see the industry handing over much of its produce to China which may produce a domestic political backlash from opposition parties or from worker’s unions, affecting social stability.
“If the value of bauxite were to plunge and Ghana could not meet the terms of the agreement there is a risk that Sinohydro or the Chinese state may use the position to extract political concessions. The failure to repay debts to a Chinese firm - incurred over a construction project - saw China take over control of Sri Lankan port Hambanthota, and although we deem such a scenario unlikely in Ghana, it highlights a risk that debt to Chinese firms can lead to political concessions being extracted.”
It added that “these political headwinds are likely to stoke some opposition to government policies within the legislature, but for now we maintain that the government's large majority will contain this. As we approach the 2020 election however, these factors may pose greater risks to policy continuity and to the government's ability to act without regard to external constraints.
Cocoa reforms threatened
Fitch also said some risks to policy formation will oblige the government to abandon plans to cut subsidies to the cocoa sector.
However, “We stress that the government will remain able to pass policy in most other areas and it will survive to the 2020 election.”
It added “The finance minister's plans to end subsidies to cocoa farmers are likely to arouse significant opposition, likely leading to the policy directive being dropped”.
Finance Minister, Ken Ofori-Atta has reaffirmed his commitment to ending large subsides to Ghana's 800,000 cocoa farmers, which had been put in place at a time of low cocoa prices. After he proposed ending subsides in January 2018, strong opposition from ministers including the agricultural minister, Fitch stated saw discussion shelved for several months.”
“Though subsidies are weighing on expenditures, we expect that the government will be forced by considerable opposition and political concerns into abandoning plans to cut them, suggesting that policy-formation may face some limited impediments”, it emphasized.
It reiterated that the plan will be abandoned due to political gains.
“800,000 cocoa farmers are a large electoral constituency and the ruling New Patriotic Party has considerable support amongst them, having promised them higher spending on farming in the 2016 general election. This will make government MPs reluctant to support these measures.”
Additionally, the ratings agency said “There has already been outspoken opposition to these proposals from within the cabinet, when the agricultural minister expressed his opposition to dropping subsides publicly in March 2018. This suggests that there will be open dissent even within the executive if such a move is pushed forward.”
On top of that, farmers are facing restricted credit access due to some headwinds to the banking sector, indicating that they will be unable to find the funds to cover the losses themselves.
Fitch said this suggests that farmers will be hit hard by a cut in subsidized prices and may turn to large protests and supporting opposition parties if the subsidies are cut.
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