Is 100% forex retention doable?

By Almot Maqolo

HARARE – Zimbabwe’s mining sector is highly diversified, with close to 40 different minerals. The predominant minerals include platinum, chrome, gold, coal and diamonds. The sector contributes about 18% to GDP and provides essential raw materials for manufacturing and agriculture sectors.

The country’s enormous natural resource wealth creates significant opportunities and as the government continues to prioritize the sector, the few companies that are able to strike a deal with the administration of the President Emmerson Mnangagwa will be able to reap large profits.

On the other hand, the southern African nation is envisioning a US$12 billion mining industry by 2023. Of the $12 billion, gold, platinum diamonds will contribute $4 billion, $3 billion and $1 billion respectively. Chrome, iron ore and carbon steel will contribute $1 billion while coal and hydrocarbons will contribute the same. Lithium at $500 000 while other minerals will constitute $1.5 billion.

The mining sector is one of the major drivers of the country’s economy. It has become one of the leading growth initiators in the economy of this country with the government also focusing on mining as one of the vehicles of growth intended at transforming the economy.

Players in the mining industry expect to ramp up their production in 2022 but says loss of value on the surrendered portion of export proceeds is making it difficult for them to procure from local suppliers who use parallel market rates.

The mining sector currently retains 60% of export proceeds and sells the remainder to the Reserve Bank of Zimbabwe (RBZ) at the prevailing ruling rate.In the long run, this is not a sustainable situation which requires the government to consider an upward review of the foreign currency retention threshold in the gold sector to motivate gold producers to sell their gold through the formal gold market.

Mining firm RioZim frankly noted that the operating environment in 2021 was challenging. Like any other business, the miner was not spared from exchange rate volatility, power cuts and policy inconsistency which negatively impacted its operations.

“This not only reduced the value realised for the group’s gold produce but also negatively impacted on the timeous execution of the Group’s projects, which predominantly required foreign currency,” RioZim said in a statement accompanying its FY2021 results.

RioZim has been in the process of constructing its Biological Oxidation (BIOX) Plant to treat refractory ore.

“The commissioning of the BIOX Plant Project that was forecasted for Q4 2021 was delayed and postponed to Q1 2022.”

However, miners have engaged the RBZ to wholly retain its export proceeds as the local currency is no longer lucrative to them. The question still remains on whether the apex bank will allow that considering the need offoreign currency to procure fuel and other requirements for the economy to move forward. As if it was not enough, the Covid-19 pandemic presented further challenges to the already depressed macroeconomic environment as new variants emerged during the period under review.

Despite the stability of the interbank rate, the comparative rates in the alternative market traded at huge premiums above the interbank rate during the period. This continued to put pressure on RioZim’s profitability as inputs tracked rates in the alternative market.

“The combination of a challenging operating environment and the delays on the completion of the BIOX Plant Project due to inadequate foreign currency resulted in the Company incurring a loss for the year,” said the miner.

In 2021, the group operated Renco mine located in Masvingo, Dalny mine based in Chakari, Cam & Motor mine, One-Step mine and Empress Nickel Refinery located in Kadoma. On top of that, it holds a 50% interest in Sengwa Colliery Limited, a company with coal assets located in Gokwe North and a 22.2% interest in RZM Murowa Limited, a company with a diamond operation located in Zvishavane.

On operations, gold production declined by 7% from 1 205kgs recorded in 2020 to 1 122kgs in 2021.   Murowa Diamonds, formerly majority-owned by Rio Tinto until June 2015, produced 414 000 carats in 2021 from 579 000 in 2020.

The competitiveness of doing business for the mining sector has been negatively affected by the high cost of doing business in the southern African nation coupled by high cost drivers, poor infrastructure, unrealistic foreign currency controls accelerated by forex receipts retention, high tax burdens and policy flip flops.

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