ZELA’s Analysis of the Mid Term Budget and Economic Review
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 recover. The sector is capital intensive hence requires those productive interest reduced loans.
● Reduction of Statutory Reserve Requirements targeting banks. 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$4.2 Billion Karo deal is one of the deals that the government has signed under the Zimbabwe is Open for Business mantra. However, two years down the line, there is no information about progress and lack of it in terms of implementation. The Constitution, Section 315 (2) (c) requires an Act of Parliament to guide negotiation and performance of mining agreements to ensure transparency, honesty, cost effectiveness and competitiveness. Worryingly, the 2020 Midterm review did not mention anything in relation to these issues.
Recommendations
● The Government must speed up finalisation of the Mines and Mineral Amendment Bill and the mining cadastral system. The new Mines and Minerals Act intended to be put in place should be informed by the African Mining Vision ( AMV)
● Most of the EITI principles are covered in Zimbabwe’s local legislation. It is
important for the government to consider borrowing principles that are not covered in local legislation and formulate laws that speak to these. Mining contract disclosure should be a priority for Zimbabwe and this is covered in the EITI framework
● Government must take urgent steps to support parliament to conduct contract
performance monitoring.Parliament should play its oversight role and ensure that the laws that speak to transparency and accountability in managing resources are implemented including contract performance monitoring
● CSOs must push for the implementation of laws that speak to transparency and accountability in mineral resources management.
● Implementation
of the 12
Billion Mining strategy
should be anchored
on transparency and accountability. Government
must improve transparency and accountability in the use of 1 Billion
that was allocated. The government should be open on the formula it is using to
allocate the resources and the priorities both in the Large Scale and
Small-scale mining operations.
● CSOs must track the implementation of the ZWL$ 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//
For Further Information, Please Contact:
Zimbabwe Environmental Law Association, 26B Seke Road, Hatfield,Harare,Zimbabwe
Website |Twitter | Facebook| Linkedin | Tel: +263 242 573 601-3 |Toll free line-08080403
