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Zimbabwe warned against mortgaging mineral resources

Zimbabwe has been warned against mortgaging mineral resources in the ongoing efforts to stem prolonged downturns. The World Bank (WB) announced the concerns and said the 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. 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. They should tread carefully: a renewed embrace of resource-backed loans could backfire on them. 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 WB said

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. 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.

Commodities-for-deals

The WB said examples where commodities-for-deals had backfired, including those clinched by countries like South Sudan.

“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. “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 WB said.

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. 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,” the WB added.

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