The central bank’s latest bid to deal with foreign currency shortages will hit hard Zimbabwe’s verdant mining sector, and has been described as ‘catastrophic’ by some industry players.
“With immediate effect, 80 percent of all foreign exchange receipts from Platinum Group Metals (PGM) and Chrome shall be transferred to the Reserve Bank Nostro Account on receipt,” reads a central bank directive dated August 8.
Previously, the miners were allowed to retain 50 percent of their foreign earnings, but the RBZ says its move will “ensure effective administration of foreign exchange, as well as spread liquidity to guarantee equity in the foreign exchange market.”
In return for their foreign currency the central bank will credit the miner’s local accounts using the Real Time Gross Settlement System (RTGS).
This has alarmed mining players, given the government’s abuse of the system.
Finance minister Patrick Chinamasa said in his 2016 budget review that government had issued Treasury Bills amounting to $2,1 billion last year alone to honour $1,7 billion legacy debt and to finance the previous year’s $356 million budget deficit.
In April, Chinamasa said the government had issued Treasury Bills totalling $4,417 billion since 2014.
There has been no Foreign Direct Investment (FDI) fillip to inject some cash into the economy. The country remains an FDI leper in the region, attracting $294,66 million in 2016 from $421,2 million in the previous year, reflecting worsening investor sentiment. By contrast, Zambia attracted investments of $1,8 billion in the first half of 2016, according to the Zambia Development Agency.
With falling tax revenues and little access to concessional lines of credit from international lenders, the cash strapped southern African nation has resorted to issuing Treasury Bills to finance its operations.
In a research note on Zimbabwe last year, leading research firm, Exotix noted that the government has effectively been using the RTGS system as some form of currency, using it to settle due payments without hard cash.
“As the principal and interest payments on these government securities are settled on the RTGS, it is clear that the government has been using the issuance of this debt to effectively print money. This money printed and placed in the RTGS has helped keep the RBZ liquid in local US dollars,” Exotix said.
This means that the central bank will give miners their dues in phantom money, putting the sector at risk.
Zimbabwe’s Chamber of Mines, a grouping of mining houses, is on record stating that production is already under threat because of delays by local banks to process payments to foreign suppliers.
In March, the mining houses told Parliament that they were facing delays of up to three months to make foreign payments despite being categorized as a high priority item on a list issued by the RBZ to local banks to manage allocation of the little available foreign currency. Given that some five months down the line the foreign currency shortage has become even much more severe, it is logical to assume that the payments are taking much longer to process.
The recent directive is reminiscent of similarly controversial policy initiatives made by the apex bank during the hyperinflation era when the then governor Gideon Gono centralised all Foreign Currency Accounts (FCA) directly putting them under the purview of the central bank. FCA’s belonging to corporates and non-governmental organisations were raided to fund ‘government programmes’.
It was a difficult time, the local currency was worthless, rules were broken, savings were lost, many companies went under and never recovered. Meikles is still in protracted battle with the RBZ over money that was looted during that period.
Some analysts point out that Zimbabwe’s mining sector has remained resilient, surviving the numerous headwinds bedevilling the country’s frail economy. Despite being starved of capital and being subjected to a brutal tax regime, high labour and power costs mining remains the single largest earner of foreign currency contributing 62 percent of total exports in 2016.