Burdened by persistent foreign currency shortages, government has had to look everywhere for the scarce commodity. Revenue collected through the Zimbabwe Revenue Authority (Zimra) is a major source of foreign currency but as we all know, is not enough. Endowed with vast mineral resources and arable land, the country is well positioned to export minerals and agricultural produce and earn considerable amounts of foreign currency. Some of that foreign currency is being kept by government to augment what they get through Zimra. Only a percentage of it goes to rightful owners, the exporters. This article looks at the exporter retention limits for businesses in Zimbabwe.
The foreign currency retention threshold for mining companies was recently increased from 30% to between 50% and 55%. While some welcomed this increase, many still argue that it is not enough to drive growth and production in the current inflationary environment. For example. At 50% foreign currency retention, a mining company which sells gold for US $10 000 receives US $5 000 in foreign currency, the other $5 000 is paid in Bond/RTGS. Using a exchange rate of 1:3.5, the RTGS $5 000 is equivalent to US $1 429. This means the exporter receives US $6 429 for gold worth US $10 000. This amount translates to around 64% of what they should actually receive.
Gold is the second largest foreign currency earner in the country. Platinum, Diamonds and Chrome also contribute considerably to the country’s forex earnings. Some have argued that giving them 50% to 55% foreign currency is not a fair return on investment. It should be noted that mining is a capital-intensive industry. It is highly mechanized and heavily dependent on imports like explosives and other materials. All this needs foreign currency, a lot of it, especially for the large mining companies. However, with the Reserve Bank of Zimbabwe withholding some of it, many find it hard to pay dividends to their shareholders despite mining enough. Deputy Minister of Mines and Mining Development Polite Kambamura has already called on RBZ to increase the forex retention to 65-70% if the Transitional Stabilisation Programme (TSP) targets are to be reached. “The Transitional Stabilisation Programme key performance indicators state that we need to reopen closed mines, reclaim and start working on dumps, we need to expand on existing mines, all these things needs a chunk of foreign currency given the state of our economy currently,” he said, speaking at the State of the Mining Industry 2018 report launch. Recently, Rio Zim, a major operator in gold mining, closed three of its mines, Cam and Motor Mine, Renco Mine and Dalny Mine. They were citing foreign currency challenges. Although they subsequently reopened after discussions with the RBZ, this should not have happened if they had been receiving 100% of their forex earnings.
It is not surprising that there have been allegations that some mining companies have resorted to under declaring their output. Some are said to be passing on their gold to small scale miners who then sell for more foreign currency. Small scale miners get 70% of their dues in foreign currency. However, we need to note there are no specific cases of under declaration or private marketing of minerals that have been reported yet.
Tobacco and cotton farmers
Tobacco and cotton farmers get 20% of their proceeds in foreign currency. The fact of the matter is, foreign currency challenges have led to price distortions and basic farming inputs like fertilisers and agro chemicals are now more expensive within Zimbabwe. It is cheaper to buy in neighbouring countries and foreign currency is needed. Again, if we look at real US dollar value, a farmer who sells for US $10 000 only gets US $2 000. The other $8 000 comes in RTGS and this translates to US $ 2 286. As a result, the farmer is actually getting US $4 286 which is only 42.86% of what they should be getting. The question of whether the 20% forex retention is adequate can only be fully answered in the next harvesting season when we look at actual production figures.
Why forex retention?
Government is in need of forex. The surrogate bond currency is losing ground against the US dollar and other currencies. The brave declaration that it is 1:1 with the US dollar can no longer be justified for a number of reasons. Firstly, banks were recently directed to open separate Nostro FCAs on top of the normal RTGS accounts that we previously had. This is an admission that what was in our normal accounts is not at par with the US dollar which will now be deposited into the new Nostro FCAs. Secondly, government introduced payment of import duty for vehicles and selected goods in foreign currency. Why not take bond duty payments if the two are at par?
Let us not forget that government needs to do a lot of other things which need forex. Apart from importing fuel, medicines and farming inputs, Reserve Bank of Zimbabwe Governor John Mangudya says,
“If miners are allowed to retain 100 percent of their forex, how will these MPs import their vehicles, which they so wish and which they call ‘tools of trade.”
While this sounds noble, taking the forex from exporters does little to motivate them to keep exporting through the legal channels. The risk is high that they will resort to other ways of marketing their minerals and commodities which pay them accordingly. Government is not protecting the goose that lays the golden eggs.
The current situation is difficult. Government needs to support the fuel and pharmaceutical industries but, doing so at the expense of exporters is counterproductive. It decreases their capacity to grow and produce more. Maybe government needs to look elsewhere. No one exports in order to feed others. This arrangement is not sustainable for businesses.