Eric Bloch: Killing the goose. . .

SINCE the “inclusive government” came into being, Zimbabwe has made some significant strides in reversing the abysmal economic decline which has prevailed for over 11 years.

The world’s greatest-ever hyperinflation has been slain, replaced with deflation. Basic commodity scarcities have disappeared, replaced by ready availability throughout the country.

Although far from sufficient, industrial productivity has almost quadrupled. Foreign and domestic investor confidence is beginning to be expressed, albeit as yet with only limited investment materialising.  These are but a few of the many indicators of a developing economic upturn.

However, the ravages of gross governmental economic mismanagement for more than a decade have been of such magnitude that the advances achieved in 2009 are very small, as against those necessary. Much more has yet to be achieved.

Comprehensive economic recovery requires restoration of wellbeing, productivity and growth, in all sectors, including agriculture, mining, manufacturing and tourism.

Such restoration is possible (even though, inevitably, not as rapidly as desirable), provided government has a real will to achieve it, to an extent of subjugating political considerations to the vigorous and constructive pursuit of sound economic policies, and determined implementation of those policies.

However, although the drive and facilitation of the economic recovery must be dynamically pursued in respect of all economic sectors, that which can most rapidly attain substantial growth is mining, and therefore a key focus must be upon its development (whilst in no manner disregarding the needs for recovery of all other sectors).

A rapid return of mining to former production levels, and then a speedy enhancement of that production to greater heights will yield much needed employment and consequential sustenance for many. It will generate considerable downstream economic activity, and will be the source of major inflows from abroad, by way of investment and from the export of production.

And it will be a source of considerable revenues for the fiscus, in part by way of taxation on mining profits, and to a major degree from indirect taxes. These include customs duties and other import imposts, taxation of employee earnings, and the taxation on the employee expenditures of their earnings.

Regrettably, however, this appears not to be fully and properly understood by government.  In his recent 2010 Budget statement, Minister of Finance Tendai Biti said (amongst the innumerable other statements made by him in his two-hour-and-ten-minute long presentation to parliament) that although the mining industry enjoyed considerable revenues, it paid minimal taxes.

He was very critical of this, berating the industry for its limited contributions to the fiscus, scathingly suggesting that mining is depriving Zimbabwe of its vast mineral natural resource, without adequate compensation. He contended that this was because of excessively generous taxation allowances to mining ventures, concurrently with very low taxation rates applied to the sector’s income.

Although it is indisputable that some mining ventures have been beneficiaries of considerable incomes for the minerals mined, the minister was oblivious of the extensive expenditures which most mines must inevitably incur to produce those incomes, and unfortunately have had to do so in recent years.

The mining industry, as has been the case for all other industries, has been faced with endless demands for wage increases.

These increases are a very material factor in operational viability, as unavoidably mining is very labour intensive. It has been faced with vast escalations in utility tariffs, and in addition has had to expand very substantially on alternative sources of utility supplies, in view of the unreliability and irregularity of service delivery by Zimbabwe’s parastatals.

Much has had to be expended on mining infrastructure maintenance, refurbishment and rehabilitation, and upgrading. And many revenues have not been received by the industry, the foreign currency inflows having been very extensively “expropriated” and retained by the Reserve Bank.

However, Biti’s desperation for fiscal inflows have blinded him to the realities of most in the mining sector, whilst at the same time he has been erroneously convinced that the industry is “milking” Zimbabwe, wholly to the industry’s benefit and advantage.

In so misguiding himself, he has been aided and abetted by the Minister of Mines, Obert Mpofu, and the Minister of Economic Planning and Investment Promotion, Elton Mangoma.

As a result, Biti not only flagellated the mining sector for alleged minimal contribution to the economy and the fiscus, but also whipped and beat it with additional taxes, and threats of even more.

In introducing his proposed tax measures on mining, Biti said: “The current mining tax regime is highly preferential in recognition of the capital outlay related to the sector.  As a result, the contribution of the mining sector to the fiscus is minimal, compared to other countries in the region.”

Amongst his 2010 taxation intents for the mining sector, Biti is:

  • Removing the option to spread taxable income derived from the sale of a mining claim over four years, such income becoming taxable, from 2010, in the year of claim disposable (irrespective of when sale proceeds are receivable);
  • Reducing Exclusive Prospecting Orders from 65 000 to 20 000 hectares, with key application and renewal fees being raised to US$100 000;
  • Introducing a fee of US$100 per hectare per annum on unworked claims and;
  • Increasing royalties on precious metals (gold and platinum) from 3% to 10,0%, with effect form 1 January 2010.

Although it is understandable that Biti has rapacious hunger for fiscal revenues, as such revenues are presently minimal as compared to the gargantuan demands upon the fiscus by all arms of government, by intensifying taxation upon the mining industry he is “killing the goose that lays the golden egg”.

He should be facilitating the growth of the industry, thereby not only aiding the initially necessary, overdue acceleration of economic recovery, but also massively enhancing the fiscal inflows he so desperately needs.

He would achieve that enhancement not only by direct taxation on the mines, but also on the downstream beneficiated economic enterprises.

He would also achieve it through considerably greater Paye revenues from greater numbers employed, and through much increased indirect taxes on the expenditures of the mines and their workers.

Instead, he is constraining the industry’s viability and growth, and minimising his future revenue receipts. He should fatten the goose that lays the golden egg, not slaughter it.

 

By Eric Bloch

Top