Policy shift key to curbing gold smuggling

IT is estimated that gold worth more than US$2 billion (above 35 tonnes) is smuggled out of Zimbabwe every year to markets such as Dubai (United Arab Emirates) and South Africa.

Victor Bhoroma :analyst

Besides, the obvious benefit of evading local taxes, gold smuggling is a lucrative avenue for money laundering as the proceeds are not repatriated back to Zimbabwe where exchange control regulations make it difficult for investors to move their foreign currency earnings to offshore accounts.

Earlier this year, the Zimbabwe Anti-Corruption Commission (Zacc) confirmed that over US$7 billion in cash and properties have been stashed outside the country by former and current senior government officials and local business people. Some of the properties and cash are in South Africa, Switzerland, United Kingdom (UK), United States, Singapore, Hong Kong, Malaysia, Mauritius and Spain, among other countries.

It is now an open secret that most of the yellow metal mined in Zimbabwe is smuggled to Dubai. Gold exports to the UAE soared in the past three years from under US$226 million in 2016 to about US$1 billion in 2019.

The illicit trade in gold is not limited to Zimbabwe alone. An analysis by Reuters in 2018 established that gold worth billions of dollars is being smuggled out of Africa every year through the UAE, which acts as a gateway to markets in Europe and the US.

Customs data showed that the UAE imported gold worth over US$15,1 billion (446 tonnes) from Africa in 2016 alone, up from US$1,3 billion (67 tonnes) in 2006. Much of the gold was not recorded in the official export data of the 46 African states where the gold is mined.

The contribution of gold to Zimbabwe’s export earnings, local employment and economy can never be over emphasised. The yellow metal has been a consistent performer on the country’s export earnings chart for the past 10 years. Harare raked in US$1,3 billion in export earnings from 27,6 tonnes of gold in 2019, up from US$1,14 billion recorded from an all-time production high of 33,2 tonnes in 2018.

However, deliveries to the central bank have plummeted in the first 10 months of 2020 with exports tumbling 23% to US$697 million and cumulative production falling from 23 tonnes to 16 tonnes in the same period.

The country is projected to produce less than 20 tonnes in 2020, with production from artisanal and small-scale miners falling sharply due to smuggling and resentment over payment delays.

Gold smuggling in Zimbabwe is done through well-organised syndicates that include top politicians, minerals marketing officials, security agents, local buyers, financiers or sponsors, customs officials at border posts and airports and foreign dealers.

The players are known to law enforcement agents and in society, thus it points to lack of political will to effectively solve the smuggling problem.

However, the central bank can implement the following policies to curb smuggling and shore up the country’s foreign earnings:

Addressing the pricing structure
The major contributor to side marketing of gold and its smuggling has to do with delays in payment by Fidelity Printers and Refiners (FPR) and unsustainable export retention levels for primary producers.

Currently, FPR is paying an average price of US$54/gram of gold to small scale and artisanal miners for the past four months, when the London Bullion Market Association (LBMA) quoted price is US$61/gram. Primary Gold producers retain 70% of their export earnings while 30% is converted into Zimbabwean dollars using the central bank’s crawling peg.

To reduce smuggling, FPR should review prices daily in line with LBMA benchmarks and pay for delivered gold instantly. LBMA prices are set twice daily (at 10.30am and 3pm) in US dollars. The central bank should make arrangements to import foreign currency and prefund FPR since average daily/weekly/monthly gold output is known to the authorities.

Similarly, the central bank should gradually increase the retention levels for primary producers so that they retain 100% of their proceeds and repatriate them back to the country. This means that the central bank should desist from contracting more debt (mortgaged on Gold exports) and all external debt should be settled via tax revenues from treasury.

Mining is a business and the central bank has limited control on the illicit trade of the yellow metal. It simply needs to improve viability for the miners, thereby indirectly curbing smuggling.

Formalisation
One of the key challenges with artisanal mining in Zimbabwe is that the miners operate informally. The miners use old mining techniques to produce while ignoring key safety standards and environmental pollution concerns.

To curb smuggling, FPR and refiners should register all small scale and artisanal miners starting with size of claim, location, average output and other KYC details. Once the miners are formalised, production can easily be tracked and managed in each province via account managers.

Dedicated account managers can then address miners’ concerns from availing mine development finance, mining equipment, tracking production challenges and any payment concerns in the field. Where artisanal miners are concentrated and deliveries justify, secure gold milling centres can be established close to source.

Formalisation ensures that artisanal miners are not left at the mercy of unscrupulous gold buyers or sponsors who provide equipment to desperate miners and smuggle the mineral out of Zimbabwe. Similarly the government can also support miners in a transparent manner which guarantees primary productivity and audit trail for tax collection purposes.

Licencing more buyers
The inefficiencies at FPR have far reaching consequences on the entire gold mining value chain and are key in perpetuating illicit trade in the yellow metal. Currently, primary producers are devising strategies to supply their produce to small scale miners who get their payment 100% in foreign currency or divert the produce to parallel market buyers who pay higher prices on delivery.

To improve efficiency and provide competition, the government should license two or three additional buyers who buy gold and deliver to the central bank in return for a viable commission. The best placed institutions are commercial banks where the government has residual control such as ZB Bank and CBZ Bank. To reduce leakages and pilferage, the government would need to plug any security loopholes and allow the additional buyers room to pay LBMA indexed prices.

It is no longer economically sustainable to maintain a monopoly under FPR in the face of perennial payment challenges, systemic leakages and rampant gold smuggling which is costing the nation millions in potential tax revenues and providing avenues for money laundering to offshore banks.

Zimbabwe is losing over US$2 billion every year that could potentially be reinvested locally to develop the mining industry and be invested in other economic sectors locally. A policy shift is also critical in oiling the foreign exchange market considering the fact that gold exports can provide 50% of the country’s foreign currency needs. Well-oiled cartels have taken control of gold production in the country and are gradually cementing smuggling routes that are also benefitting players outside the mining sector who seek to externalise funds out of the country.

Gold smuggling has been going on for too long for the government to pay a blind eye the issue when those involved in its illicit trade are widely known and benefitting from the current settlement system. With production declining below 20 tonnes per year, it is inevitable that the US$4 billion gold mining target envisaged by the country will be mission impossible.

Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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