Assessing Zim’s new mining royalty policy
The Zimbabwe government has implemented a policy to collect half of the mining royalties due to treasury in physical minerals, instead of foreign currency as has been the case for the past decades under local regulations. The new rule only affects royalties from diamond, gold, lithium and platinum which fetch high prices on the world market. Strong mining performance in 2021 generated over US$4,4 billion in export earnings, an 18% growth from 2020 export value of US$37 billion.
In the first half of 2022, mineral exports grew by 32% from US$2,194 billion to US$2,899 billion buoyed by the rally in global commodity prices. As such, the mining sector accounts for about 12% of the country’s gross domestic product (GDP).
Mining in Zimbabwe
Zimbabwe is endowed with two prominent geological features namely the rich Great Dyke and the ancient Greenstone Belts (also known as Gold Belts) which are home to billions worth of reserves in chrome, gold, nickel, diamond, iron ore and platinum. The country has a massive competitive advantage in the mining sector with a highly diversified mineral resource base of over 40 commercially exploitable minerals.
The country boasts the second-largest platinum deposit and high-grade chromium ores in the world, with approximately 2,8 billion tonnes of PGM and 10 billion tons of chromium ore. Foreign Direct Investment (FDI) figures and enquiries are heavily biased towards mining, highlighting the importance of the sector to the country’s growth and employment prospects in the medium-to-long term. The mining sector has an estimated 950 operating mines across the country, and these range from international mining houses to small-scale mines.
Mining law
Mining in Zimbabwe is guided by the Mines and Minerals Act Chapter 21.05. There are various incentives given by the government for exploration and mining. For holders of special mining leases, taxation is at a flat rate of 15% as opposed to 24,72% for other miners. however, holders may be liable to additional profit tax calculated on a formula. holders of special mining leases may be exempted from other taxes such as Non-Residents Shareholders Tax, non-residents tax on fees, royalties, and remittances. Similarly, all capital expenditure incurred exclusively for mining operations is 100% tax deductible.
The Rural District Councils Act Chapter 29.13 also permits rural district councils to charge land development levies on mines operating in their locality. Royalty rates to the government are set through the Finance Act and are paid in foreign currency.
Smuggling & illicit trade
In 2020, the government admitted that only a third of gold produced in the country is delivered to Fidelity Printers and Refiners (FPR).
The bulk of the gold worth over US$1,5 billion (over 35 tonnes) is lost through smuggling cartels that have influence in the entire value chain from artisanal miners on the ground to international buyers that export the mineral to South Africa and United Arab emirates (Dubai) among other destinations. In 2013, an international watchdog on diamond mining pointed out that diamonds worth at least US$2 billion had been stolen by the country’s ruling elite, international dealers, and criminals, in perhaps one of the biggest single plunder of diamonds in the world.
Zimbabwe discovered diamonds in Marange, Manicaland in 2006 but the revenue that could have revived the country's struggling economy was channeled into a parallel government structure in a systematic process that left the mining area underdeveloped and nursing the scourge of the resource curse.
Noble on paper
On paper, the policy looks noble as other countries such as the United States, Russia and China have billions worth of reserves of gold and other precious minerals which are considered strategic for national interests. Similarly, it is the mandate of the central bank to buy and build gold and silver reserves to support the domestic currency. however, the central bank has been buying and exporting all the gold produced locally. To date, Zimbabwe’s central bank has no gold reserves despite it being one of its core mandates.
In April 2021, Zambia’s central bank reported that it had purchased 283 kg of gold worth close to US$15 million as part of its plans to build reserves worth US$100 million by December 2022. South Africa, a key gold producer, had 125,3 tonnes of gold reserves as of April 2022. Ghana, which is the continent’s leading producer, had 8,74 tonnes at the same period. Neighboring Botswana has foreign currency and gold reserves worth US$4,8 billion. As such it would have made economic sense for the central bank to use gold royalties to build reserves considering the wobbly nature of the Zimbabwean dollar.
Conflict of interest
Public concerns on the new policy emanate from the fact that most government officials operate various small artisanal mines, while some are invested in various major mining houses. The government operates several mines under the Zimbabwe Mining Development Corporation (ZMDC), with the entity involved in jointventure operations, contract mining and gold milling across the country. Additionally, the government recently formed Kuvimba Mining house which owns Fredda Rebecca Gold Mine, Shamva Gold mine, Darwendale Platinum block among other assets.
The conflict arises when the officials that wield state authority and the government itself set mining legislation, regulate mining activities, and operate their own mines at the same time. The government then proceeds to partner other private parties and Politically exposed Persons (PePs) to mine and market the minerals, buy gold from miners and now, keep millions worth of the same minerals it mines, buys, and regulates.
Questions arise on the genuineness of policies enacted in the sector, whether they are intended to benefit the generality of citizens or a selected few? Who will be the custodian of what belongs to the state and whether they possess the transparency required to play that role?
Plugging revenue losses
Mining royalties earned the country ZW$3,7 billion (3% of government revenues) in 2021 with the bulk emanating from the targeted precious minerals which fetch high prices on the world market.
The government has been experiencing challenges to collect tax revenues and meet public service (core duty of the government) deliverables due to lack of funds. Therefore, it remains to be seen how the government plans to plug the hole left by taxes paid in hard currency in favour of stones that will be kept in local vaults. What is the opportunity cost of such a policy?
Security & audit concerns
The government announced that the Reserve Bank of Zimbabwe (RBZ) will store finished mineral reserves in its vaults. This entails development of onsite and offsite highly secured facilities for the precious gems as the current facilities may not sufficiently cater for the output on the ground.
Key concerns emanate from the safety of the gems considering the fact that the Auditor General (AG) has for the past 10 years unearthed millions of stolen or misappropriated funds that have not been accounted for by various departments in government to date.
Key loopholes on the new policy also emanate from the methodology used to account for the minerals periodically, the need for physical evaluation by experts and continuous revaluation of the value of the reserves since world prices change. how will the government sell its platinum or lithium reserves when need arises besides going back to the royalty paying entity for logistics?
Unsettling investment
Miners have not raised alarm on the new policy as it does not affect their operations or alter their business models in the local market. however, such policies are worrying to potential investors locally and beyond. Policy inconsistency has been the Achilles heel for investment in Zimbabwe and the new regulations accentuate the fears of ill-thought-out or knee-jerk policies especially in the run up to elections.
Mortgaging mining commodities
In a desperate move to secure credit from a few regional or global lenders, the central bank and the government have mortgaged mineral deposits and commodity exports in the past. There has not been transparency on the value of mortgaged resources and the mechanics of extended facilities. hence, it can be a cause for concern if the reserves are diverted to the repayment of such opaque loans. It would be ideal to table a debt repayment plan where tax revenues are used to repay debt and arrears.
Utilisation of mining royalties
Minerals are diminishing or finite assets, hence royalties should be utilised to build capital or other assets to benefit the nation in future. hence, it is not productive for the government to use mining royalties to pay for recurring costs such as salaries, motor vehicles or fund travel expenditure for government officials.
In other countries, royalties are used to build sovereign wealth funds and investments in gross capital formation.
In the past few years, government blueprints have focused on mineral beneficiation and boosting exports towards the US$12 billion mining industry. Now the focus may be on how to effectively collect precious gems from miners. Only time will tell whether the new royalty policy will be sustainable considering the above and if there is not going to be a policy Uturn as is the case with all ill-thought-out or ill-implemented government policies.
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