By Zvikomborero Sibanda
Last week, treasury chief professor Mthuli Ncube announced to Parliament that the government has found 10 gold companies that will have a majority shareholding in the country’s sole gold refinery, Fidelity Printers and Refiners (FPR).
The sale of a 60% stake is valued at US$49 million, while the Reserve Bank of Zimbabwe (RBZ) will retain 40% ownership of the gold refinery company. The RBZ will also retain a 100% stake in the printing, minting, and gold financing business.
Under this new proposed FPR structure, the 60% private equity will be allocated based on the average volume of goldthe companies have delivered to the refinery over the past three years.
As per the initial privatisation plan announced in December 2020, large-scale (primary) producers are expected to buy 50% shares while 7% will be available to small-scale miners through their representative bodies and the balance of 3% will be for gold buying agents.
The privatisation of the parastatal was now long overdue. Also, the privatisation of a gold refinery is in tandem with international best standards. For instance, the Rand Refinery of South Africa is privately owned by the five biggest gold producers.
The economic intuition behind the privatisation of FPR is to unlock value, for both the government and gold miners in Zimbabwe. In recent years, the parastatal faced challenges in paying for gold deliveries due to forex shortages affecting the country,resulting in miners selling to smugglers instead.
Apart from delays in payments, the FPR price offering was way below the international offering, prompting rampant side marketing and smuggling of the yellow metal thereby prejudicing the nation huge amounts of forex earnings annually. Some conservative estimates from the International Crisis Group have Zimbabwe losing US$1,5 billion in gold revenue annually due to corruption and smuggling.
If payment of gold deliveries was smooth, 2020 is the year the country was expected to benefit significantly from gold exports. That year, global gold prices were up 25% reaching their all-time high around July supported by the ravaging Covid-19 pandemic.
Gold is a haven during times of uncertainty, a characteristic it derives from its long history of use as a store of value and currency. But, being that as it may, gold miners managed to deliver about 19,05 tonnes to FPR in 2020, down 31,13% from 27,66 tons achieved in 2019.
In 2019, the nation experienced one of its worst electricity deficits in more than a decade, with loadshedding schedules running for an average of 15 hours per day yet more gold was delivered to FPR than in 2020 when the electricity situation had greatly improved thanks to import support and gold prices skyrocketed. From this observation, one can be satisfied that more gold was produced but siphoned out of the country illegally.The FPR estimates that in 2020, it lost about 11 tons of gold due to leakages.
So, privatisation of the gold refinery will go a long way in correcting existing mouthwatering price imbalances between local and global offerings. As local prices mirror the global market, deliveries to official points of sale will balloon hence increasing capacity utilization of the refinery.
It is reported that the Msasa-based refinery is yet to reach its 50-ton per year installed capacity since its establishment in 1988. Further, exports will jump thereby increasing forex balances in the economy, which is critical for the stability of the Zimbabwe dollar. According to RBZ Exchange Control regulations, all exporters (including gold miners) are obliged to cede 40% of their forex earnings, a portion of which is used to finance weekly forex auction trades.
Nevertheless, some imbalances must also be corrected for the nation to reach its full gold potential. For instance, the RBZ retention thresholds are too high, increasing operating costs for miners. Ceding 40% of forex in exchange for a fragile Zimdollar renders local miners uncompetitive hence a need to reduce the threshold to 10-20%.
Currently, the local currency is trading at ZW$145-150 in the parallel market while the RBZ rate is under ZW$87 to the US dollar. This gives parallel premiums, the percentage difference between alternative rates and official rates, of over 65%. Under global best standards, these premiums should not exceed the 20% threshold. This is hurting exporters while disproportionately benefiting importers.
Also, public corruption must be ameliorated and more financial support should be given to small-scale miners. These small-scale miners have been the largest contributors to annual gold output. Hence, there is a need to formalise their professional bodies to make sure their voices are heard in decision-making processes.
In my view, the recent incentives to miners instituted by the government are steps in the right direction and have started to bear fruits. The Bank introduced the 2,5-5% gold delivery incentive.
Also, the Treasury has introduced incremental export incentives where large miners who exceed their average monthly deliveries to FPR will retain 80% in forex on the incremental portion and are now allowed to export their increment directly but under the facilitation of the FPR.
There was a remarkable surge in gold deliveries in June and July 2021 recorded at 2,924.3 kg and 2,824.6 kilogrammes respectively compared to June and July 2020 deliveries of 1,409.6 kg and 1,406.4 kgs respectively. Cumulatively, gold deliveries to FPR from January to July 2021 stand at 12,779.29 kgs, 6% ahead of 12,017.85 kgs delivered during the same period last year.
In as much there is a lack of transparency on the transaction itself -partial privatisation of the parastatal- I am convinced that the benefits will far outweigh the costs. Gold is a key traditional export for the country hence efforts must be done to clamp excessive leakages and increase output.
- Sibanda is an economist at Equity Axis. — firstname.lastname@example.org