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Analysis of the 2018 monetary policy statement: a focus on mineral export incentives

  • RBZ’s export incentives from 05 May 2016 to 31 December 2017 sterilised mineral royalty revenue by a discounting factor of nearly 86%. This obviously hurts the government’s desire to create fiscal space, when revenue generation is constricted my toxic incentives

Themed “Enhancing financial stabilisation to promote business confidence” is the 2018 monetary policy statement tooled to support mining sector led contribution to socio-economic development? This monetary policy was crafted in the context of cash shortages that chocking the ASGM formal trade; RBZ gold support fund, although a welcome development, it is only benefiting a few and there is no clarity on how men and women are benefiting from the fund; moratorium to facilitate recoupment of externalised money and assets; ballooning government debt crowding private sector access to capital; and complaints by Civil Society Organisations (CSOs) that export incentives have sterilised mining royalties. This articles specifically focuses on rationality of the export incentive scheme concerning mining. It builds on two prior articles- How Helpful or Harmful is RBZ’s MINING Export Incentive Scheme and Does RBZ’s Export Incentive for Mining Need a Re-think .

To stimulate export earnings, RBZ introduced a 5% export incentive scheme in May 2016. Mining as the largest exporter automatically became the largest beneficiary of export incentives. During public pre-budget consultations, CSOs like ZELA raised concern that export incentive in the mining sector have sterilised mineral royalties. Furthermore, export incentives are an unnecessary sweetheart deal to a sector that largely exports raw minerals. A sector whose resource base is finite which treasury and civil society accuse of not fairly contributing to development finance, illicit financial flows are a major concern.

Cumulative export receipts and incentives amounts (05 May 2016- 31 December 2017)

Sector

Export Receipts (USD)

Incentive Amounts (USD)

Bond Notes Issued to Banks (USD)

Mining excluding gold

$2,645,809,356

$58,268,089

$56,000,000

Gold producers

$1,282,023,093

$59,313,208

$59,200,000

Totals

$3,927,832,449

$117,581,297

$115,200,000

Extracted from the 2018 Monetary Policy Statement page 8

From the above table, the mining sector received export incentives amounting to $117,581,297 from 05 May 2016 to 31 December 2017. Looking at annual revenue performance reports produced by Zimbabwe Revenue Authority (ZIMRA), the only distinct mineral revenue stream is royalty income. In 2016 and 2017, mineral royalties’ contribution was $62,901,509.54 and $136,013,3018.23 respectively, amounting to $136,013,3018.

Considering that mining sector received $117,581,297 as export incentives from 05 May 2016 to 31 December 2017 and paid $136,013,308.23 mineral royalties almost in the same period, January 2016 to 31 December 2017, in real terms, mining paid mining royalties amounting to $18,432,011.23 as royalties. Effectively, mineral royalties were discounted by nearly 86% if we factor in export incentives. Royalties are a reliable and predictable income stream which is less sustainable to tax evasion and tax avoidance unlike profit based taxes. RBZ’s move to sterilise mining royalties hurts government’s fiscal abilities to finance service delivery from the country’s huge mineral wealth endowment.

According to RBZ, the rationale for export incentives is to drive export earnings. In the mining sector, export earnings can be boosted by several factors which include either price or production increments or a combination of the two. Also export earnings can be boosted by mineral value addition and beneficiation and access to capital among others.  The monetary policy contends that world commodity prices for base metals and precious metals are firming, platinum being an exception. A positive development on export earnings which is not related to export incentives.

Ferrochrome production has spiked mineral export earnings, the lifting of the ban on raw ferrochrome exports is the main driver increased production in addition to favourable market prices. Gold, the lead export earner in the mining sector is anchored by Artisanal and Small-Scale Gold Mining (ASGM) whose production has eclipsed large scale miners in 2017.  ASGM accounted for 53% of the country’s total gold production, 24,843.87 kgs.  A combination of factors can be credited for this success story. The “no questions asked policy on gold deliveries” and RBZ’s gold production support fund are some of the prominent factors. $74 million was disbursed to 255 small scale gold miners in 2017 and RBZ has doubled the fund in 2018 at $150 million.

If the above factors are to be considered, RBZ must surely come up with a sensible justification on how the incentives scheme in the mining sector has boosted mineral production. Failure to access cash at the bank is rapturing trust between ASGM and government, a condition that festers illegal trade of gold. RBZ pays 70% cash in form of US dollars and 30% through a bank transfer or bond notes, the latter getting a 5% premium. The export incentive regimen will continue according to RBZ. Gold export incentives have been increased to 10%, but without addressing persisting cash shortages, more gold in the ASGM will find its way to the black market which is prepared to pay 100% cash in foreign currency.

The drive to boost exports through incentives can better be addressed by a progressive export incentive regime. Exports of raw minerals should not be rewarded, but with increased mineral value addition, the export incentives accruable to the mining sector should also increase. As it stands, there seems to be policy discord, on one hand government is incentivising miners for exporting raw minerals. And on the other, government has export taxes to discourage the beneficiation of raw minerals. Minerals are a finite resource. The opportunity to garner taxes to fund social service delivery will not last forever. It disheartening to note that RBZ has discounted mineral royalty revenue by 86% for the past 2 years. To finance the Sovereign Wealth Fund (SWF), 25% of mineral royalty revenue was ear marked for this exercise. RBZ’s puts into jeopardy intra and intergenerational of mineral wealth, a violation of constitutional principle on public financial management.

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