13 July 2017

Zimbabwe to Mortgage Gold for Loans

Zimbabwe now seeks to use gold proceeds to secure a loan to clear debt arrears with multilateral lenders, as its $1,8 billion debt clearance plan appears to lose momentum.

Initially, in terms of the October 2015 debt plan, endorsed in Lima, Peru, by international creditors, Zimbabwe sought to secure close to $900 million from Algeria. This plan has fallen through and Harare is pursuing a gold-backed loan from various potential sources, including commodity firm Trafigura.

Trafigura has interests in Zimbabwe's petroleum sector and its associate, Sakunda Holdings, funded a $190 million government maize production scheme in 2016. This year, Sakunda is leading a $487 million effort to fund grain production in the 2016/17 farming season.

Government has not published details of how it now intends to implement the arrears clearance plan, given changed circumstances since the plan was tabled nearly two years ago. However, Finance and Economic Development Minister, Patrick Chinamasa, announced in April that Zimbabwe's debt refinancing plan had been approved by both the World Bank and AfDB, a development he said amounted to 'clearing a major hurdle.'

"The terms and conditions of the facilities that the Reserve Bank of Zimbabwe have put in place to repay the debt arrears to the World Bank and AfDB have been scrutinised and adjudged by the affected International Financial Institutions (IFIs) and found to be reflective of current market conditions with financing terms similar to market transactions recently concluded by several sub-Saharan African countries during 2016 and 2017," Chinamasa said at the time.

"It is on this basis that Zimbabwe can now proceed to repay its debt arrears."

However, the IMF, whose staff engaged senior Zimbabwe government officials -- including the chief secretary to the President and Cabinet Misheck Sibanda, Chinamasa and central bank governor John Mangudya (pictured) -- from May 2-12 2017, has now revealed that government plans to collateralise gold.

Zimbabwe produced 23 tonnes of gold in 2016, generating $914 million revenue, according to the mines ministry.

Originally, Zimbabwe planned to use a bridge loan of $819 million arranged by the African Export Import Bank (Afreximbank) to repay $601 million to the African Development Bank (AfDB) and the $218 million to the World Bank's International Development Association (IDA).

The long-term bilateral loan from Algeria would repay the International Bank of Reconstruction and Development (IBRD) an amount of $896 million.

The country was to use SDR allocations held by the International Monetary Fund (IMF) to settle $110 million arrears due to the same institution. This was done in October 2016.

According to the initial plan, the clearance of these arrears, totalling $1,825 billion, was expected to be completed by June 2016.

However, the country failed to implement the strategy in terms of settling the balance of outstanding arrears to the other parties, even after seeking the support of British and American banks and advisors.

Now, an IMF report released last week said after the bilateral loan to clear the World Bank arrears and the IDA turnaround facility failed to materialise, Zimbabwe proposed a sequential approach, and sought an alternative package from commercial lenders.

It only managed to clear IMF arrears using the SDR holdings.

"The authorities view market resources, an option with costlier financial terms, as the only alternative to clear World Bank arrears in the absence of official support. They are willing to collateralise gold proceeds to settle these obligations, and pave the way for regularisation of arrears with other creditors," said the IMF in its report accompanying a board statement on the country.

It warned that this route would have dire consequences on the country.

"There are concerns over the sustainability of relying on market resources to repay the World Bank obligations, which are currently not being serviced. Additionally, collateralising gold proceeds could complicate future debt relief. The key question is the timing and quantity of new financing that the arrears clearance could unlock. Assessing this matter has proved challenging amid uncertainties over the strength of policies to restore sustainability and the appetite for support at the Paris Club," said the IMF.

The Washington-based multilateral lender said inadequate progress on reforms had undermined prospects for new external financing, while insufficient assurances of new financing had weakened the reform momentum in Harare.

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