IN DEPTH: Zimbabwe is suffocating under the weight of $13 billion in Chinese loans

By Kitsepile Nyathi for The East African


HARARE: Zimbabwe is suffocating under mounting international debt as it begins to pay the price of massive borrowing from China for infrastructure projects at the end of Robert Mugabe’s rule.

Beijing has funded the expansion of Victoria Falls International Airport and the expansion of the southern African country’s main source of electricity, the Kariba Hydroelectric Power Station on the Zambezi River, among other major projects.

Ongoing major infrastructure projects funded by Chinese financiers include the expansion of the Hwange spa resort with a $1.2 billion loan, the upgrading of Robert Mugabe International Airport and the construction of dams.

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The loans saw Zimbabwe’s outstanding public and publicly guaranteed external debt reach $13.35 billion at the end of December 2021.

It excludes $3 billion that President Emmerson Mnangagwa’s government pledged to pay white Zimbabweans whose commercial farms were seized during the country’s controversial land reform program that began at the turn of the millennium.

This debt has also pushed Zimbabwe’s domestic debt obligations to unsustainable levels amid indications that external and domestic debts now exceed $19 billion.

However, it is the external debt that gives the authorities a hard time given the volatility of the local currency and the accumulation of arrears, particularly from Chinese loans.

A report issued by the Debt Management Office of the Ministry of Finance warns that “external debt arrears, which amounted to $6.6 billion (49% of public and publicly guaranteed external debt ) remain a major and protracted challenge to restoring debt sustainability and to the economy, resulting in lack of access to public external financing.

Minister of Finance Professor Mthuli Ncube

Last year, the economically struggling southern African country spent just $59.30 million to repay outstanding external loans.

The payments included $9.60 million in token installments to multilateral banks and Paris Club creditors.

Zimbabwe was blacklisted by major international financiers such as the World Bank, International Monetary Fund (IMF) and Paris Club members nearly two decades ago after defaulting on its loans.

In September last year, the government began making token quarterly payments of $100,000 to each of 16 Paris Club creditors as it sought ways to extinguish mounting debt.

By the end of May, Zimbabwe had made $8 million in token payments to multilateral banks and $4.8 million to Paris Club creditors.

Zimbabwe is already in default on active loans from China, affecting the disbursement of funds for ongoing projects, the debt management office said in the report.

“The low loan disbursement is due to the accumulation of arrears on active loans from China Eximbank (amounting to 4266 million) on projects such as Victoria Falls International Airport (54 million dollars), the expansion of the NetOne network ($61 million) and the expansion of the Robert Gabriel Mugabe International Airport ($3 million),” the report said.

He said the ratio of the value of public debt to gross domestic product is estimated at 50.9% against a threshold of 35% prescribed under the DSA for low-income countries, which made the untenable situation.

“External debt cost and risk indicators are affected by the continued accumulation of external debt arrears,” the report added.

“The portfolio is vulnerable to exchange rate risks, as indicated by external debt representing 78% of total debt as well as short-term external debt to international reserves at 68.8%.

“This implies that any movement in exchange rates will have a large impact on the portfolio and will increase the cost of servicing debt.”

Zimbabwe’s currency, which was reintroduced in 2019 after a decade of dollarization, is on a downward spiral against major currencies.

After being pegged to the US dollar when it rebounded, it now trades at ZW$379.2 for one greenback in the official market, while in the widely used parallel market one US dollar comfortably fetches around 850 Zimbabwean dollars.

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To address the debt crisis, Zimbabwe is considering joining the Heavily Indebted Poor Countries (HIPC) initiative or undertaking a non-HIPC pathway involving debt restructuring and arrears clearance through financing relay and using its own resources.

The HIPC initiative, which was launched by the World Bank and the IMF, facilitates 100% debt relief for poor countries that meet strict requirements.

Previously, Zimbabwe explored the HIPC route when the late Mugabe formed a joint government with the late opposition leader Morgan Tsvangirai between 2009 and 2013, but the idea was rejected by the ruling Zanu-PF extremists, who resisted political and economic reforms that could have made Zimbabwe eligible for debt relief.

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The Zimbabwe Coalition on Debt and Development (ZIMCODD) said the latest debt strategy would be meaningless without real political and economic reforms.

“It remains to be seen whether Harare will honor its debt strategy given that the success of all options proposed in this strategy is highly dependent on the full implementation of political and economic reforms,” ​​ZIMCODD said.

“In its conclusion to the 2021 service monitoring program, the IMF indicated Harare’s lack of progress in putting these reforms in place in line with the expectations of creditors and the international community.

“While the two options considered in the Harare debt strategy are sufficient to provide a lasting solution to the debt crisis, the strategy has also laid bare the effects of toxic policies on economic progress.”

ZIMCODD noted that after initially rejecting the HIPC Initiative, the same authorities who rejected the idea “a decade later now see great benefits in participating in the HIPC Initiative” due to the limited options for resolving the Booming debt.

He also noted that the weakening of the Zimbabwean dollar would worsen the debt crisis as the country would struggle to service external loans.

“Local currency volatility increases the cost of servicing external debt,” ZIMCODD added.

“This in turn crowds out the provision of social services, the gold bullion, especially for the poor majority.

“Currency instability also puts pressure on government spending because it forces the Treasury to grant unsustainable spending reviews, which is unavoidable.”

Zimbabwe has also mortgaged its vast mineral resources in exchange for loans from China and Trafigura, a global commodity broker, in a move recently described as dangerous by the World Bank.

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According to recent reports, President Mnangagwa’s government has discussed a deal with Trafigura that would give the commodity trader control of production at some of Zimbabwe’s biggest mines to enable debt repayment.

Trafigura would receive $225.6 million owed to it by Zimbabwe for fuel supplies dating back to 2016.

In an article titled “Developing economies should give serious thought to providing resource-based loans,” the World Bank said Zimbabwe has also made deals with China to repay loans by mortgaging mineral resources.

“In 2006, Zimbabwe took out a $200 million loan from China Eximbank for the purchase of agricultural equipment and the platinum deposits in the Selous and Northfields Reserves were pledged as collateral,” the World Bank said. .

“There is no information on whether the platinum production was to be carried out by Zimbabwean or Chinese mining companies, only that China would have requested that the rights to 50% of the potential platinum reserves be put as security for the loan, which is released once the loan is fully repaid in cash.

“We have rarely observed yet in land resource assets (rather than flows) being used as collateral.

“This is consistent with Gelpern et al’s examination of Chinese loan contracts more broadly where they found limited evidence of the use of resource assets still underground as collateral.

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

In May, President Mnangagwa asked the African Development Bank (AfDB) to lead Zimbabwe’s debt repayment strategy as the country sought to erase its unsustainable debt overhang.

The huge external debt has been blamed for the country’s inability to access affordable long-term financing from multilateral and bilateral donors.

Although Zimbabwe cleared its arrears to the IMF in 2016, it cannot access funding from the Bretton Woods institution because of the money it owes to the World Bank, AfDB and the Bank. European investment.

“As a general rule, the IMF cannot lend to any member country that is in arrears with other international financial institutions,” the IMF said last year when explaining why Zimbabwe was excluded when it gave millions to African countries such as South Africa and Zambia. loans to help them protect their savings against the impact of the Covid-19 pandemic.

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