By Mukasiri Sibanda
As important strides are made to attain the US$12 billion mining earnings target by 2023, up from US$2.7 billion recorded in 2017, the big question is how is this going to change for better the lives of Zimbabwe? And how will intergenerational equity be enhanced?
Zimbabwe recently announced reforms of the mining royalty policy regarding precious metals and high-valued minerals – gold, diamonds, platinum group of metals (PGMs), and lithium. Royalties for these four minerals will be paid partly in cash and in the final refined product. According to the government, several reasons have necessitated this policy shift. The spike in mineral earnings ensures that there is revenue to support public expenditure while mineral reserves are also built to accumulate savings.
By building mineral reserves, the country is enhancing the sharing of intergenerational equity, creating opportunities to leverage reserves as collateral for borrowing and to support currency stability. Mining sector annual earnings have nearly doubled from US$2.7 billion recorded in 2017 to US$5,73 billion in 2021. Projections by the Ministry of Finance show that mining earnings will reach US$7.3 billion by the end of the year, achieving 60.8% of the US$12 billion target for 2023.
This phenomenal growth of mining earnings coupled with recently increased royalty rates for platinum and lithium translates to more government revenue from mining royalties. Public fears, if any, for a likely spike in inflation because of suppressed government revenue due to the new royalty policy may not be warranted. Inflationary pressure, in this case, may arise because the government might resort to borrowing to plug budget deficits contributed by dwindling government revenue.
Rather, public pressure must be ratcheted on the government and corporates to curb illicit financial flows (IFFs) from the mining sector. The IMF’s Tax Avoidance in Sub-Saharan’s Mining Sector Report 2021, “the primacy of royalties in the region and the lesser role of cash flow taxes on economic rents places some limits on how responsive the total fiscal regime can be to changes in prices and production.”
In Zimbabwe, the only cashflow-based tax is the Additional Profit Tax (APT) only applicable to holders of special mining leases. It would make sense for APT to apply to all mining companies that generate revenue that is more than US$10 million per annum for all special and ordinary mining lease holders.
According to the UN Economic Commission for Africa (UNECA), drivers of IFFs are unequal and secretive agreements, abusive transfer pricing, trade mispricing, overly generous tax incentives, smuggling, and corruption. Mining agreements are not public. Parliament scrutiny and approval are lacking despite a constitutional requirement of an Act Parliament to guide the negotiation and performance of mining concessions and agreements.
The end game is to ensure transparency, honesty, cost-effectiveness, and competitiveness. On tax avoidance by Multi-National Enterprises (MNEs), IMF estimates that Africa is losing corporate income tax revenue ranging from US$450 million to US$730 million annually.
Tax incentives equate to a discount on tax revenue, if not managed well, which can be a huge cost to the fiscus, depriving much-needed public expenditure of universal access to health and education. Great Dyke Investments, a platinum mine, for example, was awarded a five-year tax holiday on corporate income tax, additional profit tax, and withholding tax on resident shareholders. Smuggling linked to gold alone is bleeding the country US$1.2 billion a year, according to the Minister of Home Affairs, Kazembe Kazembe.
Interestingly, one of the mechanisms for resourcing the Sovereign Wealth Fund (SWF) established under an Act of Parliament in 2014 was the ringfencing of a portion not exceeding a quarter of mining royalties. The revenue was to be deposited in an account held at the Reserve Bank of Zimbabwe (RBZ).
Since the SWF was established, this financing arrangement was not followed and that is why the move to fine-tune the financing options to include precious and high-valued minerals is commendable. Indeed, through his weekly column, the President had hinted that the new royalty policy will need to be reconciled with the SWF Act.
According to Investopedia, investing in precious metals is a hedge against inflation, and it’s another option to diversify an investor’s portfolio. While gold is the most preferred among precious metals, silver, platinum, and palladium are all commodities with unique risks and opportunities that can be included in a precious metal investment portfolio.
Therefore, the government is certainly not caught offside because of its intent to build reserves of PGMs, diamonds, and lithium in addition to gold. It is noteworthy that the government expressed that the policy will be flexible to accommodate scarcity and global demands for minerals.
The hunt for value
Citizens must be aware that the value of minerals is quite volatile depending on supply, demand, and geopolitical issues. For instance, during times of war, political instability, and global pandemics as the case with COVID-19, investors go into gold hoarding mode. On geopolitics, the sanctions imposed on Russia have caused further constrained the supply chain of PGMs which augurs well for favourable international market prices for PGMs.
Mining royalties, together with corporate income taxes and state equity participation characterise the mining fiscal regime in Zimbabwe, just like in many African countries. The Mines and Minerals Act is the principal legislation that governs mining royalties. And it is complemented by the Finance Act in terms of changes to the royalty rates applicable for each group of minerals. Royalties, broadly, make government revenue more predictable, and they are easier to administer.
Unlike corporate income tax, royalties are payable whether the company is profitable or not. They are easier to administer in the sense that the royalty rate is applied on the gross invoice value of the minerals compared to corporate income tax which involves several deductions that are prone to aggressive accounting. This makes mining royalty revenue less prone to illicit financial flows.
Zimbabwe uses a combination of both fixed and variable royalty rates. Gold is the only mineral that attracts a variable royalty rate depending on the international market price per ounce. Above US$1200 per ounce of gold, the rate is 5% and anything below that attracts 3%. All other minerals have fixed rates, but they are differentiated with high-valued minerals like diamonds, platinum, lithium, and precious metals attracting higher rates compared to industrial or base metals, black granite, and coal.
Royalties: what do we get?
Even though mining revenue in Zimbabwe is blighted by the lack of transparency, mining royalty is the only revenue stream that is distinctly reported by the Zimbabwe Revenue Authority (ZIMRA). Despite several policy pronouncements to join the Extractive Industry Transparency Initiative (EITI) in the past decade, nothing tangible materialised. Since the information on mining royalties is publicly available from revenue performance and annual reports generated by ZIMRA, it is of interest to share the performance of the mining royalties.
In 2020 and 2021, mining royalties contributed 3.25% and 2.97% to the total tax revenue.
All in all, mining royalties account for a small share of total government revenue, but a significant portion of the overall government revenue from mining. The tinkering of the royalty regime to build mineral reserves of precious metals and high-valued minerals is a step in the right direction that bodes well for intergenerational equity. After all, countries like the UK and France which import gold, with Africa being a major source of the supplies, have significant reserves of gold and established commodity exchange markets for metals. As part of decolonising benefit-sharing from mining, as opined by the President, building mineral reserves is fundamental to the quest of enhancing equitably benefit-sharing from mining.
The implementation part will ultimately determine the development impact of this policy measure. Can the RBZ of Zimbabwe be trusted given the mishaps around foreign currency management? Can a leopard change its spots?
Read more from Mukasiri on his blog https://mukasirisibanda.wordpress.com/