HomeBusiness DigestMining sector slow down spells doom for economy

Mining sector slow down spells doom for economy

The story of Zimbabwe’s economy has always revolved around natural resources with agriculture being the key driver in terms of contribution to the gross domestic product (GDP), total exports and employment creation until 2012 when mining took over.

Taurai Mangudhla

At peak, agriculture contributed over 30% to GDP, while accounting for between 60 and 70% of employment.

This was to change in 2012 after agriculture crumbed due to lack of funding as a result of the fast track land reform of 2000 that destroyed the country’s land tenure system, making most of the country’s land worthless. By 2014 agriculture exports amounted to 33% of total exports from over 50% at peak.

Since then, the extractive sector has taken a leading role, driving economic growth with a boom in gold production since introduction of the multiple currency regime in 2009 and opening up of the sector to accommodate artisanal miners, formely called Makorokoza, who earn a living by trapping into the earth’s bowels in search of precious minerals mostly gold.

In 2014, government argued agriculture was capable of autonomous growth in the current recovery of the economy despite statistics showing the sector contributed an estimated 15-19% of the GDP compared to peak levels of over 30 %.

This ushered in a new epoch, economically, with all eyes and hope for turnaround and growth on mining.

However, Zimbabwe’s miners are singing the blues, spelling doom for the economy given that mineral exports accounted for an average 55% of total exports between 2012 and 2015 and an average 9% of GDP between 2013 and 2015, according to the Chamber of Mines of Zimbabwe.
So critical is mining that it, together with agriculture, is expected to drive a 2,7% annual GDP growth for Zimbabwe in 2016 according to Finance minister Patrick Chinamasa’s 2016 national budget.

A Chamber of Mines of Zimbabwe study has shown the mining sector feels the pinch of falling international commodity prices coupled with problems at home that have seen key indicators such as the capital intensive sector’s contribution to the GDP and exports on a slippery slope.

The Chamber of Mines study, that was published last week, shows output for most minerals fell in 2015 due to weakening prices and macro-economic challenges such as lack of capital, erratic and unsustainable power tariffs as well as high costs of labour that have rendered extracting a number of minerals unprofitable.

Official statistics also indicate the total value of mineral shipments slid steadily between 2012 and 2015 from US$2,2 billion to US$1,8 billion due to low output and subdued prices on the global market.

Contrary to Chinamasa’s forecasts of a 2,4% growth in the mining sector, the study predicted a modest 1,6% growth in output.

Mining sector output recorded negative growth of around -3,4% and -2,5% in 2014 and 2015 respectively as most minerals recorded declines in output, led by chrome which reported the largest decline of 48% in output followed by coal and diamonds at -31% and -30% respectively. A 30% boon in production was only recorded on gold followed by a modest 1% growth in platinum while copper production remained flat in the period under review.

Profitability for the mining industry has declined across most minerals, with most respondents of the study recording losses during the period under review. Only 20% of the respondents during the survey forecast profitability in 2016 down from 30% recorded in 2015 and 40% in 2014.

Factors undermining viability as ranked by the respondents are shortage and high cost capital, low commodity prices, shortage and high cost of power, high wage costs, followed by high procurement costs including erratic supply and finally high and static royalties. The sector, according to the survey, requires US$3,8 billion investment. Out of this, US$2,6 billion will be for development investment and US$1,2 billion just to remain afloat.

Mining industry capacity utilisation also fell from 71% in 2014 to 60% in 2015.

Problems in the mining sector are already manifesting in a growing liquidity crisis that has resulted in a biting cash shortage which forced banks to lower their daily automated teller machine (ATM) withdrawal limits from US$3 000 to US$800 last month.

In December, a number of banks were unable to make telegraphic transfer remittances to foreign destinations for values as little as US$1 500.

At the time, sources in the central bank said financial institutions were struggling to avert a cash crisis due to the liquidity crunch exacerbated by dwindling exports -from all sectors of the economy including mining that have forced financial institutions, in some instances, to physically repatriate cash in order to deposit into their nostro accounts and fund foreign telegraphic transfers. The central bank sources said companies in Zimbabwe were not exporting, hence banks had no funds in their foreign accounts. Economist Moses Chundu said a slowdown in mining is bad news for Zimbabwe given its overreliance on primary industry.

“Agriculture depends heavily on weather and we know there is drought which leaves one leg for us to stand on and anyone serious knows this spells doom for us,” said Chundu, adding “there is no other viable source of revenue for treasury besides mining right now.”

The economist argued declining international prices are not Zimbabwes’ biggest challenge in mining, but internal problems such as unfavorable policies and lack of policy consistency.

“I have been talking to people in the Chamber of Mines and they say indigenisation is the issue here that’s why companies are not investing. You see what happened is Chinamasa gazetted new frameworks and it was all thrown out before a new one was gazzeted two days later. This points to inconsistency because you see changes on such a crucial policy in two days,” Chundu said.

Harare based researcher Tapuwa Nhachi said, mining has a significant bearing on Zimbabwe’s economy hence the need for the country to brace itself for a generally weakening economy due to problems in mining.

“We have weakening international prices and as you can see countries that rely on oil have already been hit. That’s the problems with mining because the prices are volatile,” said Nhachi who is programmes coordinator with independent think-tank, the Institute of Sustainability Africa.

Nhachi said the country should start looking at other possible economic enablers that are not mining.

“An economy should not be based on the extractive industry. Actually the extractive industry should be part of an expanded, linked value chain which should be aimed at contributing resource mobilisation for the country,” said Nhachi.

“Zimbabwe has always been an agrarian economy and this turn to mining is actually an indication of problems that have killed agriculture and we need to address them. We also need to stop relying on resources and ensure our economy evolves.”

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