Resource-backed loans: Does Zimbabwe have an option?

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  • Major tax revenue sources are thinly distributed across sectors and tax heads
  • Country’s unsustainable external debt traps the economy at growth rates below its potential

Harare – In its March 2020 Article IV Consultation report, the IMF noted the gravity of Zimbabwe’s external debt situation and the negative burden it exerts on the economy, particularly the country’s continued recourse to collateralised external borrowing on commercial terms.

The report alerts that without a resolution of the country’s unsustainable external debt, the economy will be trapped at growth rates below its potential.

Zimbabwe has been facing limited access to concessionary foreign loans, grants and aid since the late 1990s after defaulting on the IMF loan repayment, with the placement of the country on international sanctions worsening its situation.

Presenting a research paper dubbed “The Developmental Impacts of Recently Gazetted Afrexim Bank Loans” at a dialogue workshop on Public Debt Management organized by the Zimbabwe Coalition on Debt and Management (Zimcodd) in the capital on Tuesday, Prof Gideon Zhou said inwardly, the country has limited alternative revenue sources to finance the public sector, with tax revenue almost exclusively accounting for total government revenue.

He said to worsen the matter, the major tax revenue sources are thinly distributed across sectors and tax heads. Despite the predicament, the demand for public investments has remained high, more so in the wake of climate-change disasters and the COVID-19 pandemic.

“The country’s situation has compelled it to rely on resource-backed foreign loans as the only source of foreign financing in order to bridge the foreign resource gap or requirements for key fiscal requirements to sustain the economy. Consequently, it is estimated that much of the external debt contracted by the country since 2000 is resource backed.

“In principle, resource-backed loans can involve outright surrender of ownership of a natural resource in exchange for a package of foreign investment and/or a loan; or collateralization of a foreign loan by some domestic resources, or an agreement to ring-fence the future income streams from the sale of some domestic commodities for purposes of servicing a foreign loan. The resources involved are usually minerals and other commodity exports such as tobacco,” said Prof Zhou.

He pointed out that transparency should guide the securing of resource-backed loans because opaque processes promote corruption, breed externalization and money laundering and a possibility of undermining national sovereignty especially when resource ownership is surrendered to creditors.

 In a country with weak accountability and governance institutions for the extractive sectors, Prof Zhou noted that the resource-backed financing model usually circumvents the oversight of parliament and the general public.

He said the model can, therefore, lead to over-collateralization or outright theft of the country’s natural resources and deprive future generations of the right to exploit and use the natural resource endowments.

Examples of countries that have relied on natural resource backed loans, especially from China include Venezuela, Zambia, Uganda and Angola

“Despite the criticisms against resource-backed loans, Zimbabwe continues to use the model as an option of last resort given its situation. The Centre for Advanced China Research, for example, indicates that the Government of Zimbabwe collateralized legal title to the country’s platinum deposits, while there have been claims that other minerals such as gold, chrome and diamond have been used as collateral against loans from Chinese Eximbank and China Development Bank.

“Given the country’s circumstances, the model allows the country to access foreign lines of credit at low interest cost than would be the case without collateralization. The system reduces the country’s risk premium on the loans,” added Prof Zhou.

The public debt situation in Zimbabwe has become unsustainable and a major obstacle against efforts that are meant to turnaround the economy.

The government has increasingly relied on debt finance for both recurrent and public sector investments; including social security, health and education, agriculture support and infrastructure development.

The country’s total public and publicly guaranteed debt as a percentage of Gross Domestic Product (GDP) stands at more than 70 percent, a figure that is well above the SADC regional threshold of 60 percent and also above the limit of 70 percent stipulated in the Constitution of Zimbabwe.  External debt also accounts for close to 40 percent of GDP.

The higher the debt-to GDP ratio, the less likely the country will pay back its debt and the higher its risk of default.

Defaults can cause borrowing countries to lose market access and suffer higher borrowing costs. World Bank studies advise that if the debt–to-GDP ratio of a country exceeds 77 percent for an extended period of time, it slows economic growth. 

In reflecting the country’s adverse debt situation, the IMF’s 2020 Article IV Consultation Report on Zimbabwe noted that the country is in debt distress and hinted that its external debt is unsustainable and needs a resolution for the country to grow at full potential and achieve its Sustainable Development Goals (SDGs) targets.

Prof Zhou also pointed out that a country is said to be in distress when it is unable to fulfil its financial obligations.

“The fact that Zimbabwe’s external debt is unsustainable and that the country is in debt distress is undisputed. This is clearly illustrated by the accumulation of external debt arrears, which currently account for about 60 percent of the total public debt. Arrears payments have thus become major components of the public debt problem in Zimbabwe. This shows the increasing incapacity of the country to service the debt.”

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