Harare – As inflationary pressures turn Zimbabwe into a consumptive market, local miners have requested Government to allow for the full retention of their foreign currency earnings in hard currency to save their entities from collapse. Currently, gold miners retain 55% of their export proceeds as foreign currency whilst other minerals retain 50%. Accounting for 70% of Zimbabwe’s annual foreign currency receipts, mineral earnings have been a reliable foreign currency revenue source for the cash strapped Zimbabwe government to service its Afreximbank obligations. According to the trade economics report, Zimbabwe’s cumulative external debt for 2018 stood at US$13.1 billion.
The government of Zimbabwe introduced a forex retention scheme for various economic sectors to extinguish its external debt and to finance its foreign obligations. Adding his voice to the miners’ call, the chairman of the Zimbabwe parliamentary portfolio committee on mines and mining development told delegates at the launch of the 2019 state of the mining sector report that his committee was pushing for an 85% forex retention threshold for the mining sector. “We shared our position with Mthuli Ncube on this issue and the Finance Minister recognised the need for an upward review, but to what level he did not disclose”, Edmund Mukaratigwa said.
A Reserve Bank of Zimbabwe (RBZ) source told ENN Zimbabwe correspondent Carol Mvundura that government desperately needs foreign currency to service its debts with Afreximbank. He alleged that the Afreximbank obligation amounts to over US$2 billion and is securitised by future foreign currency earnings from the mining sector. Part of this historical debt was used to import fuel, electricity and other critical requirements for the country, the source alleged. This technically means that government used future mineral earnings as a loan guarantee to Afreximbank without the knowledge and consent of the miners. “Consequently, government will not give respite to the miners on this currency retention issue”, the RBZ official said.
Currently, Zimbabwean miners are not allowed to withhold their foreign currency earnings for a period of more than 30 days as they risk being forced to surrender the values at the official exchange rate which is 40% below the black market rate. Local commodity prices in Zimbabwe are being informed by the black market exchange rate. At the same time, the localised component of miners’ foreign earnings, which is equivalent to 45% of their total foreign earnings, is given to them at the official managed exchange rate. This exposes Zimbabwean miners to an exchange rate loss of 40%, excluding the potential loss of value of the local currency to inflation. Inflation and exchange rate fluctuations are the twin evils that are threatening the viability of businesses in Zimbabwe. Miners, just like other businesses operating in Zimbabwe, have been forced by these twin evils to adopt consumptive expenditure behaviour to minimise loss of value due to risks from inflation and exchange rate movements.
Officiating at a mining industry breakfast event on Thursday, Zimbabwe Mines Minister Winston Chitando promised to have dialogue with the Chamber of Mines of Zimbabwe officials in the coming week to deliberate further on these and other challenges as he cited lack of adequate financial support to the sector from Treasury. Addressing delegates at a 2020 budget seminar recently, Finance Minister Mthuli Ncube said reviewing upwards the forex retention thresholds is a difficult proposition considering the national foreign currency obligations confronting Zimbabwe at present. The juxtaposed opinions from the two government ministers leave miners with little hope for victory on the foreign currency retention dispute.
Since they are not retaining 100% of their export earnings, local mining firms have told government that they now want to pay royalties in local currency to cushion their operations from inflationary risks. In Zimbabwe, a royalty is a usage tax on mining firms calculated as a percentage of the gross market value of minerals produced. It stands at 15% for diamond producers, with gold and other precious minerals taxed between 10% and 4% respectively.
Zimbabwe’s inflation and exchange rate risks, together with policy inconsistencies and disrespect for legal contracts; including this disputed foreign currency retention regulation and ZESA’s ring-fenced electricity supplies guarantee to mining companies which is not being fulfilled, have eroded business confidence and prospects for year 2020 in the mining sector as confirmed in the 2019 state of the Zimbabwe mining sector report.