THE World Bank (WB) has warned Zimbabwe against seeking resource-backed loans during ongoing efforts to stem prolonged downturns.
International financiers have shunned stretching out to Zimbabwe citing a high country risk profile precipitated by debt distress.
Fresh data showed this week that Zimbabwe’s debt increased to ZW$1,86 trillion (US$17,15 billion) in 2021, from about US$13 billion in 2020.
This amount is almost equivalent to the country’s gross domestic product (GDP).
Government has been mortgaging the country’s huge resource endowment for lifelines to wade off a deteriorating crisis that has recently been highlighted by failing infrastructure, foreign currency shortages and an inflation rage.
“Rising debt and record-high commodity prices are tempting many developing countries to pledge their natural resources to secure the financing they so urgently need,” the WB said in a recent blogpost titled Developing Economies Should Think Hard About Taking on Resource-Backed Loans.
“They should tread carefully: a renewed embrace of resource-backed loans could backfire on them,” the lender added.
The report specifically warned Zimbabwe against surrendering its minerals in exchange for debt.
“Zimbabwe recently entered into discussions with a commodity trader to hand over revenues from its lucrative gold and nickel mines to pay off its debts to the company,” the report added.
In one of the latest such moves, reports said last month that global commodities giant Trafigura and Zimbabwe had discussed a deal that would give the commodities trader control over output from some of the nation’s biggest mines as repayment for debts.
According to Bloomberg, under the deal, “Trafigura would be paid US$225,6 million by nickel and gold-mining subsidiaries of state-run Kuvimba Mining House Ltd for fuel bills Zimbabwe owes Trafigura on contracts dating back to 2016.”
Trafigura is one of the world’s biggest oil and metals traders, with a history of deals in Africa that have drawn scrutiny from authorities, including in South Sudan and South Africa, Bloomberg said.
The WB said examples where commodities-for-deals had backfired, including those clinched by countries like South Sudan.
“That country (South Sudan) is already paying the price of a poorly designed oil-backed loan it took on when its production capacity was still strong. Chad is struggling to restructure its debt because the commercial lenders behind its oil-backed loans have little incentive to cut the government any slack.
“Resource-backed loans involve large government borrowing — usually for infrastructure — that are collateralised by future income streams from their natural-resource wealth. Such loans are often opaque: little is disclosed about their contractual terms, which means public accountability can be hard to ensure,” the WB said. “Such loans are not new — they go back at least a century. But they became widely used across resource-rich developing countries during the commodity boom of the early 2000s. In sub-Saharan Africa, for example, such loans represented nearly 10% of total new borrowing between 2004 and 2018.”
The paper showed that Zimbabwe had entered several resources-backed loan (RBL) deals over the period under review.
“In 2006, Zimbabwe contracted a US$200 million loan from China Eximbank for the purchase of agricultural equipment, the platinum deposits in Selous and Northfields reserves were given as collateral,” the WB added. “There is no information on whether platinum production was to be carried out by Zimbabwean or Chinese mining companies, only that China reportedly asked that the rights to 50% of the potential platinum reserves be put up as collateral for the loan, which is freed once the loan is fully repaid in cash.
“We have rarely observed still-in-the-ground resource assets (rather than flows) being used as collateral. This is in line with Gelpern et al’s 2021 review of Chinese loan contracts more broadly, where they found limited evidence for using still-in-the-ground resource assets as collateral.”