Should China bailout Zimbabwe?

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IN January 2013, Zimbabwe’s national account held a mere US$217. Since then, the ruling Zimbabwe African National Union Patriotic Front (Zanu PF) has won another election and the country’s economy has gone from bad to worse. Industrial activity has largely ceased and foreign direct investment has dried up. Loans from China have kept the government afloat for the last three years, but with the country’s rising external debt, even China is wary of extending further unsecured credit to Zimbabwe.
Unable to borrow from anyone else (due to its appalling credit record), the cash-strapped government is currently negotiating a comprehensive financial rescue package with China, valued at an estimated US$10 billion. However, before China extends further loans to Zimbabwe, the Chinese government is insisting that Zimbabwe provide security for the loan. Securing the loan would ensure that China has a way of recovering some of the loan value even if Zimbabwe defaults on repayments.
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. 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.
But what can Zimbabwe offer China as collateral? Beyond the country’s mineral wealth, there is little of financial value in Zimbabwe. It should not be surprising, therefore, that the government intends to use the country’s gold and diamonds to secure the Chinese loan. While the details of the rescue are yet to be made public, it’s clear that an agreement has been reached between the two countries. While reaching a deal with China appears to be a promising short-term solution to vast economic woes, Zimbabwe’s economy will likely face a series of problems as the rescue unfolds.
As far as business is concerned, the rights to mine and export gold and diamonds are already held by several privately-owned mining companies. Since the Zimbabwean government needs possession of the mined minerals in order to secure the loan, the government will need to violate contracts signed with mining companies in order to gain possession over the mined minerals. To this end, the government informed mining companies on April 28 that they would have to sell their mined gold and diamonds through the Reserve Bank of Zimbabwe (RBZ).Advertisement

Presumably, the RBZ would pay companies for the minerals and then use the minerals as collateral for the loan. However, it remains unclear whether mining companies will receive full market value for their minerals under this arrangement. It is also unclear how the RBZ will pay for the minerals, although using a portion of the loan funds seems the most likely option.
The problem extends further; the government needs to consolidate its hold over the country’s diamond sector in order to ensure that this policy is fully complied with. Consequently, the government has indicated that only one of the seven mining companies currently at Marange will be allowed to continue operating. The licenses of the other companies will be revoked and their operations closed. Although it has not been confirmed, it’s probable that the one company allowed to remain operating will be Mbada Diamonds, which has a concession in Zimbabwe’s infamously violent Marange diamond fields.
Mbada Diamonds is chaired by retired Air Vice Marshall Robert Mhlanga and is rumoured to have close ties with President Robert Mugabe. Closing off the sector to other investors will discourage foreign direct investment, which will negatively impact the economy. It will also hamper transparency efforts, making it easier for senior government officials to pillage Zimbabwe’s natural resource revenues.
The Chinese government has defended its request to secure the loan with Zimbabwe’s minerals, stating that such a move is “in accordance with rules and regulations when granting any loan.” However, despite China’s attempts to normalize the arrangement, there is no clear precedent where minerals in their raw form, or the proceeds of mineral sales, have been used to underwrite a government loan in this manner.
Although the US$10 billion bailout amount is relatively negligible for China, the lending arrangement means that China now has a vested interest in the performance of Zimbabwe’s economy. Consequently, China also has a growing interest in how Zimbabwe’s business and investment environment is governed, and has begun to publicly express concern over some of the government’s economic policies.
Recently, Han Bing, the outgoing Chinese Embassy Economic and Commercial Counselor, spoke out against the government’s frequent investment policy changes. Han noted that Zimbabwe’s lack of policy consistency was spooking investors and harming business operations in the country. Importantly, since the value of the proposed collateralized minerals is only a fraction of the loan amount, China now needs a healthy Zimbabwean economy if they hope to have the loan repaid in full.
The government’s short-term vision will result in the country’s natural resources being rapidly depleted and signed away. By spending the loaned money on today’s consumption, Zimbabwe is missing important opportunities to use its precious resource wealth to fund investments that offer lasting benefits. Investing instead in education, health, and infrastructure would boost the economy in the long-term and would improve Zimbabweans’ standard of living.
But 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 Zimbabwean government will leave the country deep in debt, financially crippling Zimbabwe for generations to come.
Rather than sign the nation’s minerals away to China, the government should stabilize and improve Zimbabwe’s business and investment environment. Instead of scaring investors away, the government should create an environment that encourages investment and industrial activity in the country. It is only through developing all sectors of the economy that Zimbabwe will successfully generate employment opportunities and achieve sustainable economic growth.
Furthermore, it is vital that the government adopt a long-term perspective when making policy decisions. They need to consider investments that will yield the greatest returns for Zimbabwe in the coming decades, as well as today. Developing an environment conducive to doing business, and investing in a healthier and more educated population will be crucial to Zimbabwe’s economic recovery. Adopting a long-term approach will ensure that future generations inherit the benefits of today’s investments, rather than an undeveloped and debt-ridden country.
Sarah Logan is a Zimbabwean human rights lawyer currently completing an MPA at Columbia University’s School of International and Public Affairs. This article was first published by the World Policy Journal.