HomeColumnistsWhat do we know about resource-backed loans?

What do we know about resource-backed loans?

Countries obtain funding through taxation, borrowing, printing money and foreign aid. According to the Addis Initiative in 2015 developing countries were encouraged to collect more and spend better through Domestic Resource Mobilisation (DRM).

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economist

In 2019, about 98% of Zimbabwe’s total revenue was tax revenue and 23% came from the mining sector. In the 2021 national budget, Zimbabwe’s total external debt was estimated at US$8,2 billion. As at the end of September 2020, arrears remain a major component of the external debt, at US$6,34 billion, constituting 77% of external debt.

Considering the above, Zimbabwe cannot access loans from the International Financial Institutions (IFIs), Paris Club, and other bilateral lenders because of country risk levels, bad debtor and restrictive measures. At the moment printing money is not an option since it is inflationary and the government cannot depend on aid to finance its budget or to repay existing loans.

Despite that, dependence on outside resources is not sustainable, undermines national sovereignty and creates vulnerability to unfair conditionalities tied to development assistance, foreign loans, and aid. Cornered in such a situation, through the National Development Strategy 1 (2021-2025) the government has pledged national natural resources as collateral for loans. It is therefore worth exploring what these Resource-backed Loans (RBLs) are, what are the advantages and disadvantages, for the Zimbabwe situation and come up with recommendations.

According to the study carried by Natural Resource Governance Institute (NRGI) in 2020, resource-backed loans (RBLs) are all loans provided to a government or a state-owned company, where: repayment is either made directly in natural resources (in kind) such as oil or minerals, or from a resource-related future income stream; or repayment is guaranteed by a resource-related income stream, or where a natural resource asset serves as collateral. In simple terms, our mineral resources or revenue streams from these are minerals that are used as collateral security to these loans. There are claims that in Zimbabwe minerals such as platinum, chrome and diamond have been used as collateral for some loans from Chinese Eximbank and China Development bank. This article will dwell much on Zimbabwe-Chinese RBLs, they bring about some important opportunities and also severe risks.

RBLs can, therefore, potentially finance significant infrastructure investment at sometimes advantageous borrowing terms. Examples include RBLs used to construct Kilamba Town housing in Angola, Atuabo gas plant in Ghana, Pointe-Noire Brazzaville road in the Republic of Congo and Villonaco wind farm in Ecuador. According to the findings of the research presented by Zimcodd during the recent 12th Alternative Mining Indaba (AMI), due to Zimbabwe-China relations which are based on the doctrine of non-interference, sovereignty, mutual respect, Chinese loans are regarded as cheaper, faster, flexible and come in large volumes. RBLs can be structured to mitigate volatility and that they can be renegotiated in a difficult time. Zimbabwe is facing some restrictive measures and facing difficult times so RBLs may be suitable in such circumstances.

There are claims that weak resource governance can jeopardise a loan, according to the 2017 Resource Governance Index (RGI), which measures the quality of governance in the oil, gas and mining sectors across 81 countries, Zimbabwe scored 29 below the regional average and is a sign of weak resource governance. The market for RBLs is not competitive, Zimbabwe cannot access loans from the IFIs, Paris Club, and other bilateral lenders which leaves Chinese loans less competitive. Our negotiating power is very low, we are getting the shorter end of the stick.

In addition, RBLs are often hidden. During the 12th AMI, it was agreed that RBLs in Zimbabwe occur below the radar of public scrutiny, parliament oversight, and other accountability institutions. There are fears that this may promote illicit deals such as rent-seeking, financial crime and corruption, money laundering and externalisation of funds. There were also fears that such loans might have been contracted for consumptive and not productive purposes.

Another challenge is that large RBLs can undermine debt sustainability. There are claims that Zimbabwe’s collateralised loans amount to US$6,8 Billion most of it being owed to China Exim Bank. Due to the opaqueness of RBLs, it may be difficult to deny or substantiate such claims. If it’s true, it means they are not part of the external debt of US$ 8,2 Billion mentioned earlier and Zimbabwe runs a risk of Beijing seizing some of its assets as what happened with Sri Lanka. Table 2 shows a tip of the iceberg of RBLs in Zimbabwe.

There are claims that Chinese RBLs are not conditioned on human rights governance, democracy and other civil liberties and political rights. This may explain why we have heard a lot of allegations of abuse of human rights by Chinese companies in Zimbabwe.

Zimbabwe is not alone in this, there are a lot of countries in Africa that have used these RBLs, among them Ghana, DRC, Chad and Angola. For example, Angola guaranteed a US$2 billion loan from China which financed infrastructural rehabilitation following the devastating civil war. The Republic of Congo was the recipient of over US$5 billion through RBL with deals in secrecy.

Zimbabwe remains susceptible to serious national losses if no remedy is applied against the rampant multilateral contracts (AMI 2021).  Through the National Development Strategy 1 (2021-2025) the government has pledged national natural resources as collateral for loans. This policy adoption weakens the national fiscal planning for today and greatly for emerging generations.

Recommendations

The government, the parliament, Civil Society Organisations (CSOs) and general citizens especially youth and women should be concerned about RBLs. We need to capitalise on their benefits and at the same time guard against the possible dangers. Some of the policy recommendations that came out of the NRGI 2020 study and those agreed during the 12th Alternative Mining Indaba (AMI) include the following:

Borrow transparently:  All key terms of loan contracts must be approved by parliament and should be made public. Where loan contracts are bundled with contracts for extractive rights or trading, the government should publish contract terms for those elements.

Bring loans on budget: Loans must be vetted by countries’ ministries of finance and subject to parliamentary scrutiny, disclose the full debt situation and to be more careful of the implications of additional debt burdens and how the proceeds are spent.

Invest productively: RBLs must be spent in productive investments that can generate returns over the long term that exceeds their financing costs.

Make borrowing more competitive: Governments should encourage competition amongst potential RBL providers on loan terms and financed projects. This will help governments secure the best possible deals when presented with alternative options.

Respect prudent borrowing limits: Countries’ ministries of finance need to scrutinise any RBL and ensure that the additional loan fits in its overall debt management strategy and that total debt levels stay within prudent levels. There is a need for Debt Management Policy to enhance the country’s ability to make decisions on entering into debt obligations.

Avoid using resource rights as collateral: The lender may demand excessively large collateral, which in turn increases the risks.

Bring experts to the negotiation: Governments need robust institutions with the capacity to negotiate such complex deals as RBLs.

Citizens should require transparency: In the design, feasibility, selection, pricing, tendering, and management of mega-projects. The principles of Public Finance Management enshrined in section 298 and section 315 subsection 2 of the constitution must be adhered to.

Nyamudzanga is an economist, tax consultant, ZES member, holder of a masters in tax policy & Administration and degree in economics .These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, an independent consultant and past president of the Zimbabwe Economics Society. — kadenge.zes@gmail.com or mobile +263 772 382 852.

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