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China tightens purse strings on Zim deal

Bernard Mpofu

AHEAD of President Emmerson Mnangagwa’s high-profile visit to China at the beginning of next month, it has emerged government’s proposal to securitise minerals in a bid to secure US$1,5 billion funding from the Asian nation has crumbled as Beijing questioned the viability and sustainability of the deal, the Zimbabwe Independent has been informed.

This comes at a time government is desperate for funds to ease the liquidity crunch and cash shortages gripping the economy. The cash problems are Mnangagwa’s biggest immediate test since he came to power through a military coup last November after ousting his mentor former president Robert Mugabe.

Informed sources said Beijing is tightening its purse strings as Harare is struggling to repay China’s outstanding loans amounting to US$160 million ahead of the visit.

Mnangagwa was last in China in July 2015 while he was still vice-president. The straight-talking Chinese gave him a reality check as they demanded political reform and change in Zimbabwe before financial support and co-operation.

Finance minister Patrick Chinamasa and Reserve Bank of Zimbabwe governor John Mangudya are already in Beijing ahead of Mnangagwa’s trip. Informed sources said they were negotiating a debt rescheduling plan with the world’s second-largest economy as they tried to get new funding.

The visit also comes at a time the China Export and Import Bank is said to be reluctant to extend further concessional funding to Zimbabwe before the country clears its debt stock. Sinosure, which guarantees loans extended by the Asian powerhouse, wants arrears paid back before new finance could be guaranteed and extended to Harare, which is practically broke.

Both institutions have, however, committed to extending further loans to Zimbabwe once a solution to the problem has been found. The ongoing talks between Chinamasa, Mangudya and officials from the two institutions are key to the deal.

Zimbabwe is trying to reschedule the US$160 million debt it owes China’s Eximbank and Sinosure. “Harare wants the terms of the loans restructured in order to extend the repayment period,” a source said. “This may mean a delay in the due dates of payments or reducing the arrears instalments by extending the payment period and spreading them.”

Official sources told the Independent the naming of Sino firms accused of siphoning funds out of the country has also unsettled Chinese authorities and investors, further complicating things.

Mnangagwa this week named several Chinese companies which allegedly externalised funds running into hundreds of millions of dollars.

Zimbabwe is also desperately looking for US$1,8 billion to clear arrears to international financial institutions (IFIs) to secure US$2 billion in fresh funding under the Lima Plan.

In 2014, Zimbabwe entered into negotiations with China seeking to use its mineral proceeds to guarantee future loans. China’s Eximbank and Zimbabwe’s Ministry of Finance officials engaged in the talks for a rescue and stimulus package.

At the time, the funding request and use of minerals as collateral was considered plausible. The then mines minister Walter Chidhakwa said government’s yet-to-be-fully-functional exploration company would be key in identifying mineral deposits earmarked for securitisation of loans and joint- ventures.

However, it has since emerged that the plan has unravelled as the Chinese questioned its feasibility, according to reliable sources. The sources say the Chinese government is not too keen on the arrangement, although it may be a subject for discussion when Mnangagwa meets Chinese President Xi Jinping in just over a week’s time.

“No such deal is under consideration, although it may come up for discussion. Maybe in the future somebody will take it up again and we will resume talks. I cannot rule that out, but for now the deal is off the table,” a government official said. “The Chinese feel that this is not viable. Valuation, that is estimating and determining the value of minerals, is a complicated process.”

China has over the years been risk-averse in granting Zimbabwe huge loans given the country’s high political risk and low credit rating.

Sources said the Chinese will tell Mnangagwa that the best way out is to create a conducive environment to attract foreign direct investment, revive production and export to earn forex rather than get loans and sink deeper into debt.

Zimbabwe is already drowning in debt which is over US$11 billion. The country recorded a government debt equivalent to 77,4% of its Gross Domestic Product in 2016. Government Debt-to-GDP averaged 72,6% from 1990 to 2016. It reached an all-time high of 147,7% in 2008 and a record low of 31,4% in 2001.

Generally, government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

According to the International Monetary Fund (IMF), Zimbabwe is in debt distress, and its total public and external debt is unsustainable. With longstanding external arrears, foreign financing has been scarce, and large fiscal deficits are lately being financed through domestic borrowing.

Domestic debt, which was negligible five years ago, has increased sharply to more than 25% of GDP, and is on an unsustainable trajectory. External debt indicators, notably those related to solvency, continue to breach their thresholds under the baseline scenario, while those measuring liquidity (debt service) are deteriorating over time. Attaining debt sustainability would require sharp fiscal consolidation and external support from the international community.

IMF managing director Christine Lagarde in January met Mnangagwa on the sidelines of the World Economic Forum in Davos. Mnangagwa made a commitment to stabilise the economy and to work towards normalising the country’s engagement with the international community. Lagarde promised the IMF to continue to support Zimbabwe as it addresses its economic challenges.

Zimbabwe’s arrears to the IMF-administered Poverty Reduction and Growth Trust were cleared in October 2016, allowing Zimbabwe’s eligibility to be restored and the declaration of noncooperation to be lifted.

However, discussions are still ongoing over financing and modalities to clear the arrears to the World Bank and the African Development Bank. As reengagement with international institutions is delayed, and reforms proceed at a slow pace, debt negotiations with bilateral creditors also remain constrained. External obligations are being serviced selectively, with a view to unlocking additional financing.

While the Chinese are tough negotiators, sources say they are willing to help. “China wants to increase its economic cooperation with Zimbabwe,” a source said. “Mnangagwa will be one of only three African heads of state visiting China this year, reflecting Beijing’s willingness to engage with Harare to do viable and sustainable business for mutual benefit.”

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