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ZELA’s analysis of the 2020 mid-term budget and economic review

By ZELA – Wednesday 22 July 2020

ANALYSIS (Mining Index) – ON 16 July 2020, the Minister of Finance and Economic Development (MoFED), Professor Mthuli Ncube, presented the Mid-Term Budget and Economic Review to the Parliament of Zimbabwe.  The review comes at a time when the country is experiencing an upsurge in the number of COVID-19 cases.  In  his   budget  review  statement,  Minister  Mthuli  revised   the country’s economic growth in 2020  from the original 3% to -4.5% on account of  COVID -19 induced  challenges  such  as  lower  commodity  demand  and  international  commodity  prices; reduced tourist arrivals; disruption of global supply chains for both raw materials and final products  and  services,  slowing  down  of  global  financial  flows  ,  remittances  and  portfolio investments, currency volatility; and high inflation. This paints a gloomy picture in terms of the economic performance and the ability of the country to respond adequately to this ravaging pandemic. It is evident from the overall picture that the budget review presents that the COVID-19 pandemic has added more wounds to the already struggling economy.

Although there are many interesting angles to explore the Mid Term Budget Review from, as the Zimbabwe Environmental Law Association (ZELA), because of our entrenched interest in mining governance issues, our laser focus is on how the budget review makes a link between mining and socio-economic development. The mining sector’s economic footprint has been growing over the years and this has been mainly attributed to the collapse of other key sectors of the economy such as agriculture. Over the years, ZELA has been working to influence mining policy reforms that help to deliver greater transparency, citizen participation and accountability in the management of public revenue generated from  mining activities. The government in October 2019 launched a US$12 billion mining strategy. Under this strategy, gold is expected to contribute US$4 billion, platinum US$3 billion while chrome, iron, steel diamonds and coal will contribute US$1 billion. Lithium is expected to contribute US$500 million while other minerals will contribute US$1, 5 billion.  The strategy if pivoted on a mining fiscal regime that curb corruption and abuse of mineral revenue will make a difference on the domestic resource mobilisation landscape of the country and achievement of equitable and inclusive development. With six months of the implementation of the strategy, it is important to make use of the Mid- term Budget Review to take stock of progress or lack of it. Without doubt, COVID -19 affected negatively  on  the  implementation  of  the  strategy.  It  is  important  to  check  progress  on  the measures that the government is putting in place to ensure that the country’s commitment to rack  in 12 billion export earnings from  mineral  extraction is not  off-track.

More also, it is important to assess through the budget review how the country is harnessing the opportunities in  the  mining  sector  to  respond  to  the  social  development  challenges  that  the  country  is confronted with within the COVID-19 pandemic context and beyond.

Another important angle to look at is the extent to which the Mid Term Budget reflects on the progress that the country has made on legal and policy reforms targeting the mining sector.

Key 2020 budget priorities that the government committed to implement  and are of interest to ZELA  included, stakeholder consultations on Extractive Industries for Transparency  Initiative ( EITI) and  conclusion of legal reforms in the mining sector, reaping benefits from concluded agreements   in  platinum,  gold,  chrome  and  other  minerals,  driving  equitable  and  inclusive development through supporting communities to manage  their own affairs, drive development and ensure lower tiers of government do not rely on the good will of the central government for resources . It will be important to reflect on what has been achieved in the last months in that aspect.

The Budget Review confirms the realities on the impact of COVID -19 Pandemic on the Mining sector COVID  -19  affected  negatively  the  Mining  sector  generally  through  declining  commodity pricing and reduced output. According to the Mid Term Budget Review,  growth in the  mining sector is now projected to slow-down to -4.1%  from +4.7%  that was projected in the 2020 Budget  Statement,  reflecting  the  impact  of  COVID-19  and  other  challenges  including perceptions  around  retentions,  erratic  power  supply  and  loss  of  skills in the  mining sector.

However, the sector is still contributing significantly to the country’s export earnings. In 2020, export  earnings  from  the  mining  sector  are  constituting   60%   (The  sector  is  contributing USD$60  for  every  USD$100  foreign  currency  earned  in  Zimbabwe)  of  the  total   foreign currency earnings and this represents an increase  from the 55% that  the sector contributed in 2019.

Outside generating foreign currency for the country, the mining sector contributes to the government’s domestic resource mobilisation through payment of taxes such as royalties. The sector also creates employment and other benefits through its backward and forward linkages although at minimal levels due to lack of an inclusive mining policy and regulatory framework. COVID-19 presents a challenge in terms of realisation of these benefits. From a sectoral perspective, the gold sector which contributes  significantly to the country’ export  earnings  generated  from  the  mining  sector  has  not  been  spared  from  COVID-19.

According  to  the  Mid  Term  Budget  Review,  Gold  deliveries  in  the  first  quarter  of  2020 underperformed. The 2020 first quarter output contribution by ASM fell by 15.22% and LSM fell by 6.96% compared to 2019 first quarter output. Gold deliveries are projected at 27 958 kg for the year 2020,  which is lower than the  2019 levels despite the  favourable international prices obtained compared to the previous year. The budget makes an acknowledgment that reduced deliveries reflect increased leakages through smuggling and diversion of gold to the informal market arising from issues around foreign currency retention ratios. Government cites continuous engagement with  mining companies including small-scale miners on pricing and viability issues, establishing gold buying centres around the country  ( such as Bubi Centre in Gwanda) as some of the  key enablers to improved gold deliveries   to  Fidelity Printers and Refiners (FPR).

The  ZWL$  18.2  Billion  Economic  Stimulus  Package  expected  to  contribute  towards revival of the Mining sector The presentation of the Mid Term Budget and Economic Review was done nearly three months after the government announced its ZW$18.2 Billion Economic Stimulus Package to scale up production  in  all  sectors  affected  by  COVID-19,  address  the  constraints  faced  by  a  large section of small-scale industries, improve health facilities and reduce poverty and hardships to assist vulnerable groups in our society.

Out of the ZW$18.2 Billion, ZW$ 1 Billion was meant to support a credit facility to incentivise investment in Large Scale and Small Scale mining, speed up implementation of a computerised cadastre system, the publicly accessible system that will make it easier to allocate mining rights and titles reducing problems of double- mine allocations, mine disputes and consequently corruption and criminality in the sector. It seems the government was not adequately prepared to roll out this programme in the mining sector as there is no progress to talk  about since  1 May, 2020 when it was announced.

According  to  the  Mid  Term  Review,  the  resources  are  already  being  disbursed  to  all  key areas.  One would have expected the government to share  information on the criteria  to be used  to allocate the funds to the mining sector, government’s  priorities  and  how the priorities are linked to the 12 Billion Mining Strategy. In its analysis  at the end of May, 2020  ZELA noted that the funds allocated to the various  sector of the economy including the  mining sector were losing value rapidly due to the  continued depreciation in the value of the local currency (http://www.zela.org/download/key-mining-sector-related-highlights-for-may-2020-stacap/). Now that the amounts have depreciated further before their use, one would have expected the government to increase the funding commitments to generate a meaningful impact on reviving production  in  the  mining  sector.  Key  raw  materials  needed  for  mining  production  require foreign currency and any delays in the implementation of the policy in targeted areas means that  the ZWL$ 1B Billion will not make any major difference as the local currency continues to lose value.

Extractive Industries Transparency Initiative (EITI) is now Off The Country’ Mining Governance Policy Radar.

ZELA noted with concern the silence of the Mid Term Budget and Economic Review on the progress on the adoption of EITI. The government continues to sing about transparency and accountability but there are no tangible action on the ground and there is no framework to guide  this.  Government’s  interest  to  join  EITI  was  reignited  by  the  2019  National  Budget Statement. The 2020 Pre Budget Strategy Paper recommended “… the 2020 National Budget should  proffer  specific  steps  on  Zimbabwe  joining  the  Extractive  Industries  Transparency Initiative ( EITI) as a way of enhancing transparency and curbing any corruption activities that may deter investment in the sector.  Unexpectedly, the 2020 National Budget, however, only gave a light reference to the continued multi- stakeholder discussions on joining EITI. ZELA did not lose hope because of the light touch that the government did on EITI during the 2020 National Budget. What was important was that the government had at least maintained the EITI narrative in its 2019/ 2020 National Budget. However in the Mid Term Budget and Economic Review that was presented, the Minister indicated that “Priority policy areas to attain the 12 Billion  Revenue  target  by  2023  and  other  Transitional  Stablisation  Programme  (TSP) benchmarks include; reviewing and updating mining legislation, enhancing exploration and investment in mining, modernisation and computerisation of the mining title administration system  (mining  cadastre),  improving  transparency  in  the  mining  sector  and  establishing  a viable fiscal regime. Furthermore, beneficiation and value addition of minerals to create more jobs and earn more foreign currency are priorities for the sector”.

Whilst the government has reiterated its commitments to anchor the US12 Billion Mining strategy on Mining policy and Transparency reforms, there is no specific mention from the  Mid Term Budget and Economic Review  on EITI. ZELA would have expected to get an update from the government on the EITI  stakeholder  engagements  that  were referred  to  during  the  2020  National  Budget.  The silence  of  the  government  on  EITI  probably   confirms  further  that  the  government  is backtracking  in  terms  of  implementation  of  EITI.   Earlier  this  year,  a  newspaper  article published on 31 January, 2020 hinted on the loss of steam around implementation of EITI. The  article  indicated  that there was a lack of buy-in on the implementation of EITI because the policy is being driven  by western countries . The reality that the country is confronted with is that EITI’s adoption in Zimbabwe  is dying a natural death.

While  the  implementation  of  EITI  has  potential  to  bring  a  win-win  situation  between government and the private sector, there seem to be huge fears on joining the standard. One can only speculate that probably its out of fear  that the standard would expose the rot and corruption in the mining sector, and this could be detrimental to the military and politicians holding  government  positions  who  have  been  alleged  to  be  heavily  involved  in  mineralexploration ( https://263chat.com/zcdc-board-resignation-a-tip-of-the-iceberg/).

However, it is important to note that issues of transparency and accountability are a matter of constitutional requirement. Our 2013 Constitution has founding principles on transparency and accountability.  Section  298  (1)  on  principles  of  national  budget  calls  for  transparency  and accountability in all public financial matters. Section 13, National Development states that the State and all institutions and agencies of government at every level must endeavour to facilitate rapid  and  equitable  development  and  must take measures  to  ensure that  local  communities benefit from resources in their areas. If the Government of Zimbabwe decides otherwise on EITI adoption, the progressive option will be for government to consider    borrowing  EITI principles that  are  not covered in our legislative framework, include them in the legislation framework and implement these. These principles include contract disclosure.

The 2019 Open Budget Survey ( OBS) Results referred to in the Mid Term Budget Review Are Not Adequate to  Reflect  On the Mineral Governance Landscape in Zimbabwe In his presentation of the Mid Term and Economic Review statement, the Minister of Finance and Economic Development (MoFED) refers to Zimbabwe’s improved performance on the International  Budget  Partnership  (IBI)’s  2019  Open  Budget  Survey  (OBS).  Whilst  it  is applaudable from a statistical point of view that the country has recorded an increase in its OBS score from 23 in 2017 to 49 in 2019, and has been ranked number three in Africa after South Africa  and  Namibia.  It is important for Civil Society organisations  and  other  stakeholders working on mineral revenue transparency issues to note that the OBS methodology does not adequately reflect how well the country vast mineral resources are managed to achieve social and economic development. As such, the statistics presented by the Minister  should not be taken to mean that all is well in the mining governance sector.

The Open Budget Survey provides basic transparency information on three important elements namely, budget transparency, participation and oversight. Without appearing to discount the importance of OBS results, availing budget documents timely and online, creating platforms for people to participate in public hearings on budget does not amount to improved mineral revenue management. OBS is not sectorial based and it cannot be an adequate measure for the level of transparency and accountability in the mining sector. The country is improving on the OBS indicators (budget transparency, participation and oversight indicators) but performing poorly on the mining governance reforms. Lack of contract disclosure, absence of transparency and  accountability  in  the  negotiation  of  contracts  all  provide  evidence  of  weak  mining governance practices.

Dealing with Mineral Leakages

On dealing with mineral leakages, the Mid Term Budget Review statement indicated that more resources will be spent on capacitating security institutions engaged in monitoring and curbing mineral leakages. The Minerals and Border Control Unit will also be prioritised. This is a positive policy announcement. The government will go a long way in solving some of the mineral leakages if this commitment is actioned upon. However, as ZELA, we believe that the problem of illicit mineral trade and illicit financial flows especially in the gold sector can be adequately and sustainably dealt with if the government addresses the underlying causes such as ineffective price systems. The news that circulated a day after the announcement of the Mid Term Review (https://miningzimbabwe.com/breaking-fidelity-hikes-gold-price/) claimed that Zimbabwe’s sole gold buyer and exporter, Fidelity Printers and Refiners (FPR) threw away its gold pricing framework which pegged the price of  one gramme of  gold at US$45  and adopted a  pricing system that is aligned to the international gold market. ZELA is yet to get an official position from FPR on this latest development.  If it is true and the implementation of the new gold trading framework is already underway, this could be seen as one of the immediate impact that the Mid Term Budget Statement has made in terms of dealing with  gold revenue leakages. When the flat rate of US45 per gramme came into effect on the 26th of May, 2020,  ZELA noted in its analysis (http://www.zela.org/analysis-of-new-gold-buying-framework-in-zimbabwe-with-a-special-emphasis-on-artisanal-and-small-scale-gold-mining/)    that the trading regime was falling short of essential means to extinguish the illicit gold market, as the rate of US$45 per gramme of gold was not aligned with the gold price movements on the international market.

Revenue Sharing Arrangements: Transfers to Provincial Councils and Local Authorities(Devolution Funds)

The 2018/ 2019 Budget cycle saw the government starting to disburse devolution funds as per the Section 301 of the Constitution which says, 5% of the national budget should be allocated to  local  tiers  of  government.  These  funds  present  an  opportunity  for  local  communities  to benefit from revenue that is collected at central level by government. Mining activities also contribute  to  revenue  that  the  government  collects  at  central  level  although  there  is  no disclosure in terms of the contribution of mining activities into this fund.In this year’s Mid Term  Budget  Review,  the  government  indicated  that  ZWL$453  million  was  transferred  to Local  Authorities  under  the  devolution  fund  but the  target  was  ZWL$733  million.   Due to COVID-19 mitigatory measures, government has directed that resources under devolution be channelled  towards  COVID-  19  related  facilities  such  as  water  and  sanitation,  isolation, quarantine and treatment centres. It is important that communities where these funds were said to  have been  directed to reflect the extent to which the money that has been disbursed and  the developmental outcomes that have been gained  on the ground. This fund is not immune to corruption.  

There  is  a  need  to  ensure  that  there  is  transparency  and  accountability  in procurement of different goods and services to guard against corruption and mismanagement of funds.  The recent COVID-19 funds scandal in which the former Minister of Health and Child Welfare, Obadiah Moyo was implicated should be an awakening call for the government and the citizens. The  National  Development  Strategy  (NDS)  (2021-2025):  The  Government  makes  a commitment to implement the Devolution Agenda as per Section 264 of the Constitution By repealing the Finance Act during the 2019 Mid Term Budget Review, the government put to  death  the  operation  and  funding  of  Community  Share  Ownership  Schemes  (  CSOTs). Through the presentation of this year’s Mid Term Budget Review, the government makes  a commitment   to  implement  the  Devolution  Agenda  as  enshrined  in  the  Constitution  of Zimbabwe (Section 264).

According to the Mid-term Review, the government is in the process of developing a National Development Strategy (NDS) (2021- 2025) which is the first of two medium term development plans to guild the country’s development trajectory towards Vision2030. Devolution is one of key aspects that the National Development Strategy will focus on under  its  Environment  Protection,  Climate  Resilience  and  Natural  Resources  Management pillar.  According  to  the  Mid  Term  Review,  the  government  is  committed  to  support communities  to  manage  their  own  affairs,  drive  development,  and  ensure  lower  tiers  of Government  do  not  rely  on  the  goodwill  of  the  Central  Government  for  resources.  This  is something  that  resonates  with  the  broader  Devolution  Agenda  that  section  264  of  the Constitution  talks  about.   However,  constitutional  alignment  is  needed  if  Devolution  is  to become  a  reality  and  citizens  are  able  to  hold  the  government  to  account  on  Devolution commitments. Section 264 of the constitution speaks of devolution, but there is no devolution Act at the moment. What the government is currently referring to as devolution is the revenue sharing arrangements that are provided for under section 301of the constitution. One hopes that the enactment of the Devolution Act will be among the key priorities that the government will focus on in the near future so as to ensure that mining rich communities  benefit from their resources.

Revenue measures Targeting The Mining Sector

One of the key questions that can be asked is “Are there any special tax/revenue measures for the mining sector?” There are no specific tax benefits for the mining sector stated in this budget except that the government affirmed that, no beneficiation or processing costs are deductible from the gross mineral proceeds when calculating mineral royalty payments. Such costs will only be deductible when taxpayers are self-assessing for taxable income. This was done to ensure uniformity in the assessment of mineral royalty payments and promote equal treatment of mining companies. Once again, ZELA noted that the treasury continues to renegade on its promise to review platinum royalties, which then does not promote equal treatment of mining companies. They have failed to honour a commitment made in the 2018 National Budget to review platinum royalties in August 2019. This affects revenue that can be mobilised from the mining sector to improve the welfare of the society. It is important to note that in November 2019, the Minister reinstated deduction of mining royalties that was repealed by the Finance Act of 2013, but the reinstatement took effect from 1 January 2020. Although  there  are  no  specific  tax  benefits  for  the  mining  sector  in  this  budget,  from  our viewpoint the sector can still benefit from the following measures;

  • Government relaxed import duty on selected raw material imports for the three quarters up to the end of 2020 to cushion producers. Miners need to check list and take advantage of importing the raw material (if any) to their sector duty free.
  • A Tax Credit for COVID-19 Donation up to 50% of expenditure was instituted and this will enable businesses/companies to have funds, which can be invested back to boost the working capital in order to sustain operations. A number of mining companies have been making COVID-19 donations and they may need to check if the donations qualify for tax credits and take advantage of them.
  • Productive interest reduced to maximum of 20% and loans were restructured to allowbusinesses to    The  sector  is  capital  intensive  hence  requires  those  productive interest reduced loans.
  • Reduction of   Statutory   Reserve   Requirements   targeting      This   was   also implemented in order to release ZWL$2 billion of liquidity to increase the capacity of banksto lend to productive sectors. This may improve the mining sector’s access to loans.
  • Government further suspended duty and tax on the following list of goods: COVID-19 test kits/Instruments  and  apparatus  used  in  diagnostic  tests,  protective  garments  , thermometers,  disinfectants/sterilisation  products,  other  medical  devices  and  Medical Consumables. In the event that players in the mining sector intend to import the above, they should take note of suspended duty and tax.

Conclusion

The  Mid  Term  Budget  Review  presented  by  Minister  Mthuli  confirms  the  reality  that  the COVID-19 has impacted negatively on  the  mining sector.  Hence the talk of the  Economic Stimulus Package and other measures to revive production in the sector and ensure that the achievement  of  the  12  Billion  Mining  strategy  is  on  track.   The  Budget  Review  makes references to the transparency and mining policy reforms that the government commits to put in place to support the realisation of the 12 Billion Strategy. However, the government needs to walk the talk when it comes to commitments it pronounces. There was an expectation that the government would disclose the progress or lack of it in terms of the implementation of some of contracts that it has signed with foreign investors in the last three years under the   Zimbabwe is “ Open for Business Mantra. In 2018, Zimplats released roughly 24 000 hectares of platinum claims to the government. The government awarded the mining rights of the 240000 hectares to Karo resources, a foreign investor.  The US$4.2 Billion Karo deal is one of the deals that the government has signed under the Zimbabwe is Open for Business mantra. However, two years down the line, there is no information about progress and lack of it in terms of implementation. The Constitution, Section 315 (2) (c) requires an Act of  Parliament  to  guide   negotiation  and  performance  of  mining  agreements  to  ensure transparency, honesty, cost effectiveness and competitiveness. Worryingly, the 2020 Midterm review did not mention anything in relation to these issues. Recommendations

  • The Government must speed up finalisation of the Mines and Mineral Amendment Bill and the mining cadastral system. The new Mines and Minerals Act intended to be put in place should be informed by the African Mining Vision ( AMV)
  • Most of  the  EITI  principles  are  covered  in  Zimbabwe’s  local   It  is important for the government to consider borrowing principles that are not covered in local legislation and formulate laws that speak to these.   Mining contract disclosure should be a priority for Zimbabwe and this is covered in the EITI framework
  • Government must  take  urgent  steps  to  support  parliament  to  conduct  contract
  • performance monitoring. Parliament should play its oversight role and ensure that the laws that   speak   to   transparency   and   accountability   in   managing   resources   are implemented  including contract performance monitoring
  • CSOs must push for the implementation of laws that speak to transparency and accountability in mineral resources management.
  • Implementation of   the   12   Billion   Mining  strategy   should   be   anchored   on transparency   and      Government   must   improve   transparency   and accountability in the use of 1 Billion that was allocated. The government should be open on the formula it is using to allocate the resources and the priorities both in the Large Scale and Small-scale mining operations.
  • CSOs must track the implementation of the ZWL$ 18.2 Billion Economic Stimulus package. Special attention should be given to tracking transparency and accountability in the use of the ZW$1 Billion that is being allocated to the mining sector
  • Expedite alignment of the constitution with existing laws. The government shouldcome up with a Devolution Act.
  • Government should expedite development of a mining fiscal regime that allows the country to generate maximum tax revenue from mining activities and citizens to benefit from both backward and forward mining linkages.
  • Government must improve the connection between mining and social development.
  • The government indicated that revenue from the 2% Intermediated Money Transfer Tax (IMTT)  will   be   fenced   and   channelled   towards   COVID-19   related   mitigatory expenditures. In the same  vein,  the government should ring-fence royalties towards funding specific development needs  in local communities
  • The upcoming  National  Development  Strategy  (NDS)  should  be  subjected  to vigorous sectorial consultations. Since the 2030 vision is hinged on mining, the NDS should be pivoted on mining governance reforms. ENDS// www.miningindex.co.zw

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