11 June 2014

Zimbabwe: China Loan - Don't Steal Children's Future, Govt Warned

THE government was warned Wednesday that it risked taking away "the future of (the country's) children" with its plans to use prospective mineral revenues as collateral for a possible multi-billion dollar Chinese loan.

Some $30 billion is needed to finance the five-year ZimAsset economic plan.

More immediately however, government requires cash urgently to rescue an economy which the administration's own advisers say is moving in reverse gear.

The central bank recently issued a dire warning about the country's economic prospects.

"(The economy) is going to decline and it will be similar to the 2007/08 but this will be worse because we are dollarized so we do not have anything or a policy that will stabilise the economy immediately like what happened in 2009," Reserve Bank of Zimbabwe (RBZ) senior division chief, Simon Nyarota told a meeting of industrialists in Harare last month.

Early this year, Finance Minister Patrick Chinamasa revealed he was negotiating a rescue package thought to be around US$10 billion with the Chinese government.

The ruling Zanu PF party describes China as an all-weather friend, with President Robert Mugabe's administration benefiting from significant support extended by Beijing over the years.

However, as Zimbabwe's needs increase beyond cash handouts in the hundreds of millions of dollars, Beijing is now playing hard ball.

The Chinese appear to be thinking twice about the prospect of adding another US$10 billion to a country sitting on debts of a similar magnitude which Harare is also failing to repay anyway.

Analysts also said China was concerned that the new loan would largely be used to finance recurrent expenditure such as civil service salaries as well as finance an equally costly patronage system.

"China's caution is at least partly due to the fact that Zimbabwe intends to spend the loan money on recurrent government expenses, primarily civil servants' wages," wrote human rights lawyer, Sarah Logan this week.

"Spending money on salaries will not generate any interest or other return on investment. Consequently, China realizes that there is little chance that Zimbabwe will be able to repay the loan once the money is spent."

Aware there was a risk they would not get their money back, the Chinese have demanded collateral for the loan, helpfully suggesting proceeds from all future mineral sales revenuesa s an option.

But outgoing World Bank economist Piffaretti said such an arrangement was fraught with huge risks for Zimbabwe.

"Securitisation of minerals is one way of financing things; however it brings a lot of risks," Piffaretti told a media briefing in Harare Wednesday.

"It's not an easy solution because you might end up giving away more than you are getting. It is really not advisable at your (Zimbabwe's) development stage.

"You might just take away the future of your children. When you get a loan you know what the costs are.

"You sit down and negotiate on penalties and interest rates. You have a good picture of what you are getting into. It's even better when you get a grant."

Logan also cautioned: "The government's short-term vision will result in the country's natural resources being rapidly depleted and signed away.

"By extracting Zimbabwe's mineral wealth today and failing to invest in development that would offer future benefits, the government is denying future generations the opportunity to share in the country's mineral wealth.

"Furthermore, not only will there be no resource wealth left for future generations, it is very likely that the actions of the current government will leave the country deep in debt, financially crippling Zimbabwe for generations to come."

Piffaretti said Zimbabwe was better off arranging concessional loans to stimulate the country's faltering economy.

"I would advise Zimbabwe to try and access concessional loans as much as possible," she said.

"When you start securitization, there are many issues and typically securitisation is legitimately pulling the tool box but it is not advisable as a panic button because that typically leads to things that are not in the country's interest."

She expressed concern over the accelerating rate of de-industrialization in the country, adding that government should broaden economic activity to ensure sustainable growth.

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