African Reserves Loans

World Bank warns Zim against mortgaging mineral resources

THE World Bank (WB) has warned Zimbabwe against seeking resource-backed loans as part of ongoing efforts to stem prolonged downturns.

International financiers have avoided expanding into Zimbabwe citing a high country risk profile precipitated by over-indebtedness.

New data this week showed Zimbabwe’s debt rose to 1.860 billion Zimbabwean dollars (US$17.15 billion) in 2021, from around US$13 billion in 2020.

This amount is almost equivalent to the gross domestic product (GDP) of the country.

The government has mortgaged the country’s huge resource endowment for lifelines to mitigate a deepening crisis that has recently been evidenced by failing infrastructure, foreign exchange shortages and inflationary rage.

“Rising debt and record commodity prices are prompting many developing countries to pledge their natural resources to secure the financing they so urgently need,” the World Bank said in a recent blog post. entitled Developing economies should give serious consideration to the possibility of taking out loans secured by resources.

“They should tread carefully: renewed adoption of resource-backed lending could backfire,” the lender added.

The report specifically warned Zimbabwe against giving up 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 repay its debts to the company,” the report added.

In one of the latest such moves, reports last month indicated that global commodities giant Trafigura and Zimbabwe had discussed a deal that would give the commodities trader control over the production of some of the largest mines in the country in repayment of their debts.

According Bloombergunder the agreement, “Trafigura would be paid $225.6 million by the nickel and gold mining subsidiaries of state-owned Kuvimba Mining House Ltd for fuel bills that Zimbabwe owes Trafigura on contracts dating back to 2016”.

Trafigura is one of the world’s largest oil and metals traders, with a track record of deals in Africa that have come to the attention of authorities, including in South Sudan and South Africa, Bloomberg said.

The World Bank has cited examples where commodity swaps have backfired, including those entered into by countries like South Sudan.

“This country (South Sudan) is already paying the price for an ill-conceived oil-backed loan it took out while 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 reduce the government’s room for manoeuvre.

“Resource-backed lending involves large government borrowing – typically for infrastructure – that is secured by future revenue streams from their natural resource wealth. These loans are often opaque: little is disclosed about their contractual terms, which means public accountability can be difficult to secure,” the WB said. “These loans are not new – they date back at least a century. But they became widely used in resource-rich developing countries during the commodity boom of the early 2000s. In sub-Saharan Africa, for example, such loans accounted for almost 10% of total new borrowing between 2004 and 2018. . »

The document showed that Zimbabwe had entered into several Resource-Backed Loan (RBL) agreements during the reporting period.

“In 2006, Zimbabwe took out a $200 million loan from China Eximbank for the purchase of agricultural equipment, platinum deposits in the Selous and Northfields reserves were pledged as collateral,” the WB added. “There is no information on whether the platinum production was to be carried out by Zimbabwean or Chinese mining companies, only that China has allegedly requested that the rights to 50% of potential platinum reserves be pledged for the loan, which is released once the loan is fully repaid in cash.

“Rarely have we observed resource assets still in the ground (rather than flows) being used as collateral. This is consistent with Gelpern et al’s broader review of Chinese loan contracts in 2021, where they found limited evidence for the use of resource assets still underground as collateral.