Government has announced new export retention thresholds for the gold sector, altering the 55:45 structures (miners: government). The new thresholds increase the miners’ retention to 70%, while reducing government’s retention to only 30%.
These ratios apply to primary producers, who account for 37% of the total produce. Over the last two years, artisan and small-scale miners’ contribution to total production has averaged 63%. Zimbabwe produced a total of 27,6 tonnes of gold in 2019, coming off a dollarisation high of 33,2 tonnes. Historical trends show that gold production in Zimbabwe has had a positive correlation to economic growth. In 2008, which was the worst year in terms of economic growth, the country produced three tonnes of gold.
Perhaps the correlation related more to currency stability than to economic growth. Fidelity Printers and Refiners, a government agency, is the sole authorised buyer of gold in Zimbabwe. Given the hyperinflation of 2008, Zimbabwe’s currency lost substantial value. For miners receiving a significant part of their gold sales proceeds in Zimbabwean dollar, the resultant losses were a huge disincentive to produce. The success realised for most of the period between 2009 and 2018 is attributed to the scrapping of retentions given that the economy was dollarised.
In Zimbabwe, the application of retentions was necessitated by substantial subsidy levels which prevailed from 2016 onwards. The 1:1 exchange rate regime, which defied the principles of free market economics, exerted huge pressure on government, which retained the obligation to clear the foreign currency payments backlog. Without government retention, the foreign currency situation would have been worse.
In the case of 2020, miners have been clamouring for high export incentives in the range of 70% to 80%, up from 55%. Their argument has been that there is significant loss of value given that the 45% claimed by government is settled at sub-optimal exchange rates, which are not reflective of inflation. The export retention portion due to government has been settled at Reserve Bank-dictated rates of 1:25 since March, while prices have tracked the parallel exchange rate, now seen at 1:65.
What this means is that exporters incurred high and rising costs for the local component of their total operating costs. Looked at from another angle, the lower exchange rate would mean the miner would be selling produce at prices which are close to 70% of global spot, after converting the local portion at parallel market rates. This realisation highly dis-incentivises production and promotes side-marketing, especially for the artisans.
Production trends for 2019 and 2020 show that deliveries were low in periods where the exchange rate variance between the interbank and parallel market were wider. An imposed exchange rate of 1:25 against a worse-off parallel exchange of 1:65 would result in a worse off production and deliveries pay-offs.
The further tilt in retention in favour of miners incentivises production, all else being equal. For artisanal miners, whose share of contribution is relative higher than that of primary producers, the payment of a full sum in United States dollars could bust side-marketing, believed to be rampant in Zimbabwe. For primary producers, the impact depends on how stable the parallel exchange rate is.
The further it moves away from the central bank’s rate, the higher the loss to miners. As the rate moves adversely up to a certain point, the gains from high retention are undercut by the loss from rate depreciation. This would eventually dis-incentivise production. While most of the southern African region uses its own currency to purchase gold, notably in South Africa, a stable currency and fair exchange rate allow for full compensation of value.
The basic underlying variable, which is of concern is the underlying currency. Without a stable currency, it is not conceivable that production will simultaneously increase at the same rate it would have, with a stable currency. Gold is a key sub-sector as it accounts for the majority of forex receipts in Zimbabwe, around 25%. How the central bank handles the sub-sector’s affairs is of paramount importance.
Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org