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Gold sector regulation and the opportunity cost

LATEST statistics for gold deliveries to Fidelity show that only 1,36 tonnes of gold was delivered in the month of October. This is -0,07% less than deliveries in the prior month’s outturn and -43% below the same period last year.

Ceteris Paribus:Respect Gwenzi

Cumulative year to date (October) volumes at 15,94 tonnes are 27% below the same period last year. Government expects full year deliveries to reach 28 tonnes having revised the target from an earlier 40 tonnes target. The expected target for 2020 implies a projected run-rate of six tonnes per month over the remaining two months. Given a monthly average outturn of 1,59 tonnes so far in the year, it is certain that the projected full year target will be widely missed. Based on our internal projections, 2020 volumes will come in at 18,5 tonnes which will rank as the worst performance in six years. The underperformance also reduces chances of achieving a 100 tonnes per annum target by 2023.

The underperformance in gold deliveries comes on the backdrop of bullish price performance on the international markets. In 2020 gold has rallied by close to 30%, thus boosting earnings for gold producing countries such as Zimbabwe. Assuming the country would have met its target of 40 tonnes, net annual gold receipts would have swelled past the US$2 billion mark, at US$2,2 billion for the first time in the history of Zimbabwe. This would have equated to 50% of net export proceeds accruing to Zimbabwe.

The magnitude shows the relative importance of gold and the gold sector in Zimbabwe’s economic development and growth prospects. It also highlights pivotality of the sector in anchoring currency stability. Failure to craft policies that encourage investment in the gold sector and mining sector in general, derail the country’s efforts to reconfigure economically.

To fully demonstrate the relational effect between gold production (deliveries) and economic growth we have to refer to 20-year data stretching 2000 to 2020. Over the first 10 years of the millennium the highest annual outturn was recorded in 2000. This is the year, Zimbabwe’s economy underwent massive induced shifts due to the fast track land redistribution, the impact of which was to be felt in succeeding years.

In 2000, production came in at 22 tonnes, before coming off in successive years a low of 12,6 tonnes in 2003, a decline of over 40% in three years. GDP data on the other hand, shows that over the same period economic growth turned from positive in 2000, to negative over the next three years. The worst being in 2003, over which the economy contracted by 16,99%. So over the period, we can clearly see that economic growth was directly responding to gold production.

Looking at a lengthier period, after rebounding in 2004 to a high of 21,3 tonnes, gold production went on to fall in successive years reaching an all-time low of just three tonnes in 2008. It is common knowledge from the study of Zimbabwe’s modern-day economic history that the year 2008 ranks as the most painful economically.

In the respective year the economy recorded an adverse economic growth spurred by inflation and exchange rate depreciation. Post-2008, gold production rebounded strongly, given a more stable currency, going all the way up to a record high of 33 tonnes in 2018. My observation is that the more stable the environment characterised by stable inflation and exchange rate higher the production of gold. This is because gold proceeds to producers are regulated by the government through the RBZ. The RBZ uses a surrender and retention scheme to generate foreign currency and manage its utilisation in the economy.

Zimbabwe has a growing small-scale gold sector, whose reflexivity is enormous given its structure. The sector, which now accounts for over 60% of gold receipts, is thus highly prone to side marketing. The case of Henrietta Rushwaya easily comes to mind. No royalties, taxes and surrender portion is effected and thus grossly prejudicing the economy. Policy makers should find a balance shoring up scarce forex and encouraging production, lest the benefit of tighter controls be outweighed by the loss of production and higher receipts in a boom year such as 2020.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net.

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