British diplomats in Harare have privately expressed serious concerns over Zimbabwe's plans to mortgage gold reserves to guarantee a syndicated long-term loan arranged by the African Export and Import Bank (Afreximbank) to clear its US$1,161 billion arrears to the World Bank, diplomatic sources have said.
This comes as the International Monetary Fund (IMF) also raised the red flag over the use of non-concessionary funding to clear arrears. The World Bank has also expressed concerns about that.
As first reported by the Zimbabwe Independent last December, Treasury is considering using gold-backed loans to settle its arrears with the World Bank.
Currently saddled with a debt overhang of US$10,8 billion, accrued from both public and private sector borrowing, Zimbabwe's failing economy has plunged deeper into recession since 2013.
Already, government has paid the IMF US$110 million using its special drawing rights (SDR) holdings. For the AfDB US$600 million arrears, government will repay its obligations through a refinancing scheme in which Afreximbank will provide about US$300 million while international banking and financial services group Standard Chartered Bank (Stanchart) Plc will pay the balance. A World Bank memo seen by the Independent last year says the clearance of arrears would not only improve Zimbabwe's access to concessional funding, but also ensure a win-win outcome.
"Britain supports the clearance of International Finance Institutions (IFI) arrears by the Government of Zimbabwe on sustainable terms," a diplomat familiar with the developments said this week. "While it has absolutely no involvement in the transaction, if the transaction goes ahead, it may be secured against future mineral revenue, so it will consume part of government's future income and therefore add pressure on Zimbabwe's public finances. It is unclear whether this arrangement would be sustainable. However, it would be anything but a bailout."
The British government, sources say, is also concerned with Zimbabwe's poor human rights record. This week, police crushed a demonstration organised by the youth wing of the opposition MDC-T calling for electoral reforms ahead of next year's polls.
"Arrears clearance is necessary but not sufficient for Zimbabwe to re-engage with IFIs. As shareholders in these institutions, the British government will also consider the situation in relation to human rights, rule of law and sound governance. When government is ready for meaningful and comprehensive reform, Britain stands ready to help Zimbabwe find its way back into the international community," another diplomatic source said.
Relations between Zimbabwe and Britain became frosty after the chaotic fast-track agrarian reform programme at the turn of the millennium which saw white commercial farmers losing vast tracts of land to locals, leading to sanctions.
Contacted for comment, a spokesperson from the British embassy would neither confirm nor deny, but said Zimbabwe needed more reforms before re-engaging with IFIs.
"The UK has welcomed Zimbabwe's intention to complete arrears clearance with the IFIs. Broader reforms -- especially on the rule of law and human rights -- would help improve relations with the international community and make sustainable debt restructuring easier. We have urged caution in taking on further commercial debts to clear arrears without progress on sound macro-economic management and structural reforms," the British embassy spokesperson said.
Last week, the IMF said the use of gold reserves to settle arrears was costly.
"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," the IMF board said after concluding Article IV Consultations on Zimbabwe.
"They are willing to collaterise gold proceeds to settle these obligations, and pave way for regularisation of arrears with other creditors ... Additionally, collaterising gold proceeds could complicate future debt relief. The key question is the timing and quantity of new financing that the arrears clearance could unlock."
Last month, the World Bank in its economic update on Zimbabwe also cautioned against the use of non-concessionary funding to clear arrears.
"The authorities are committed to expediting the clearance of arrears to other multilateral creditors, including the African Development Bank (US$610 million), the World Bank (US$1,2 billion) and the European Investment Bank (US$212 million), the report reads. "However, resorting to non-concessional lending to clear arrears in a context of tight liquidity conditions and depleted international reserves could add pressures to an already tight budgetary situation if not accompanied by fiscal, monetary and investment reforms."
In 2015, government launched a joint exercise with preferred creditors -- the World Bank, IMF and the AfDB -- to explore options to clear US$1,8 billion in arrears.
The arrears clearance plan also includes approaching the Paris Club after the IFIs arrears clearance.
The country's debt arrears amount to US$5,6 billion split between multilateral creditors (US$2,2 billion), the Paris Club, an informal grouping of creditor nations (US$2,7 billion), and non-Paris Club creditors (US$700 million).
Zimbabwe owes the Paris Club about US$6 billion. Arrears contribute about US$1 billion. Arrears to non-Paris Club creditors amount to US$476 million.