Zimbabwe's Mining Sector Is Moving in a Pro-Business Direction

7 MINS READMar 25, 2019 | 09:30 GMT
Miners walk near a mine shaft at Manzou Farm, owned by Grace Mugabe, wife of former Zimbabwean President Robert Mugabe, in Mazowe, Zimbabwe, on April 5, 2018.

Miners walk near a mine shaft at Manzou Farm, owned by Grace Mugabe, wife of former Zimbabwean President Robert Mugabe, in Mazowe, Zimbabwe, on April 5, 2018. New President Emmerson Mnangagwa has been implementing policies to spur foreign direct investment in the mining industry.

  • The planned removal of the "indigenization rule" from Zimbabwe's diamond and platinum mining sectors will make the country more attractive as a destination for foreign direct investment.
  • Diamonds and palladium — a platinum group metal — are currently in short supply globally, meaning Zimbabwe's regulatory adjustments further increase the likelihood of attracting investments in these sectors.
  • The changes will boost investment in the mining sector and improve the economy, but they will be unable to turn around Zimbabwe's trade deficit while the country is extremely dependent on imports.

Zimbabwe's mining sector is critical to the country's economy. Reserves of gold, platinum group metals and diamonds combine to form Zimbabwe's largest export — and thus its primary source of foreign currency. The sector has become even more important recently due to Zimbabwe's systemically failing economy. The country is struggling to maintain sufficient foreign currency reserves, while also desperately requiring investment and expansion to compete. Stringent regulations have discouraged many potential investors from pursuing opportunities in Zimbabwe's mining industry in the past. But President Emmerson Mnangagwa has begun making decisions to spur foreign direct investment in the mining industry, likely spelling a long-term shift to more pro-business policies within the Zimbabwean government.

The Big Picture

Even before Zimbabwean President Emmerson Mnangagwa removed Robert Mugabe from power, there were expectations that he would normalize Zimbabwe's relations with the West and open the country up to foreign investment and trade. So far, economic woes and a natural disaster have restricted his ability to do this, but his country's foreign currency crisis is now encouraging a pro-business stance.

Open for Business

Finance Minister Mthuli Ncube announced Zimbabwe's most significant new regulatory change during a March 6 interview with Bloomberg: The country will lift its so-called "indigenization rule" for mining operations in the diamond and platinum group metals sector. The rule is a legacy from the Mugabe-era Indigenisation and Economic Empowerment Act, which stipulates that indigenous citizens must hold a majority stake in all companies located in Zimbabwe, severely limiting foreign investors' control over their operations in the country.

The government had been slowly adding exemptions to the rule for various sectors of the Zimbabwean economy, including gold mining in April 2018. But Zimbabwe's leaders insisted they would not relax regulations to include the platinum and diamond sectors, in part due to the personal involvement of individual members of the Zimbabwean government in relevant mining operations. However, now that the country is fully enmeshed in a foreign currency crisis that emerged in late 2018, the government appears ready to make some big changes. (Already, it has approved the adoption of a new currency, in the hopes of stabilizing the exchange rate with the U.S. dollar.)

This map shows the location of gold, diamond and platinum reserves in Zimbabwe.

By allowing foreign-owned entities to assume majority ownership and — according to initial statements — up to even 100 percent ownership of mining operations, Zimbabwe is making its mining sector much more attractive. The announcement of these planned regulatory changes comes as Mnangagwa is very visibly courting foreign mining companies. During a recent trip to Moscow, for example, Mnangagwa spoke to Russian state-owned diamond miner Alrosa, which had previously insisted it would only consider doing business in Zimbabwe if it could acquire a majority share in an operation there.

For Zimbabwe's diamond mining sector, the change comes ahead of an expected fall in the global supply in the coming years due to the depletion of large existing mines. By boosting the attractiveness of its diamond mining regions, which are considered some of the few that remain under-exploited, Zimbabwe could play a critical role in industry attempts to boost supply. Similarly, in the platinum mining sector, consumers continue to scramble for palladium, which Zimbabwe also possesses. The metal is projected to spend eight years in market deficit, and as emissions requirements become more stringent, demand for palladium, a catalyst in gasoline-powered cars, is increasing. Impala Platinum Holdings, which already operates several platinum and palladium mines in South Africa and Zimbabwe, recently announced plans to establish a new palladium mining operation in Zimbabwe that could start producing as early as 2024. Zimbabwe's proximity to South Africa, where a robust supply chain for platinum group metal mining already exists, makes it even more attractive to potential investors in the sector.

This chart shows the global demand and supply for palladium.

Zimbabwe is also using other means to try to boost investor interest in its mining sector. On March 16, Mnangagwa announced that his government would increase pressure on foreign mining companies that hold claims in the country but have not yet begun to develop them. Under this new "use it or lose it" policy, even companies that pay the annual fees on their claims risk losing control of them if they don't start developing. Additionally, in the face of nationwide fuel shortages resulting from the foreign currency crisis, Zimbabwe's government has exempted mining operations from normal state-organized fuel import procedures. Allowing them to directly import fuel eases the pressure on mining operations and helps shield them from the effects of the ongoing crisis.

Not Exactly Out of the Woods

Despite the Zimbabwean government's new pro-business policies for its mining sector, foreign-owned entities will still face barriers. One major one, which the mining sector in Zimbabwe has been contesting heavily, is the foreign exchange (forex) retention system that fuels the Zimbabwean central bank's foreign currency needs. Under this system, the recipients of Zimbabwean exports use foreign currencies to pay for such goods, but the actual farmers or miners in the country do not receive payment in those foreign currencies. Instead, the government retains a percentage of the foreign currency and pays the exporting company in the equivalent local currency.

Currently, this forex retention threshold stands at 70 percent for the mining industry, meaning that just 70 percent of the value of exports is paid out in foreign currency, while the remaining 30 percent is paid out in the local real-time gross settlement (RTGS). In an attempt to boost its foreign currency reserves, the government even slashed this threshold for small-scale mining operations to 55 percent, although this has forced many of those same miners to sell their products on the black market to avoid the forex retention scheme entirely. Even though larger mining operations still enjoy the 70 percent threshold, they are also increasingly opposed to the retention system, as their ability to directly purchase fuel from foreign markets requires more foreign currency.

New investment in the mining sector is likely to lead to a healthier economy in the longer term, but it alone will not free Zimbabwe of its recurring foreign currency shortages.

The Zimbabwe Chamber of Mines' success in earning wage increases of up to 80 percent — in part to account for rising costs of living associated with the national economic crisis — has also increased the cost of mining operations in local currencies. This is one of the primary consequences of Zimbabwe's economic crisis for mining companies, as many of them were already struggling to make a profit under existing wage agreements. (The increasing wage costs are offset to some degree by reduced electricity costs since 2018.)

The Zimbabwean government's focus on reviving investment in the mining sector is likely to lead to a healthier national economy in the longer term, but it alone will not free the country of its recurring foreign currency shortages. Increased investment in the mining sector could boost the value of mining exports or, at the very least, sustain their powerful position in the Zimbabwean economy as current large mines are depleted, but Zimbabwe still faces a significant trade deficit due to import dependencies. To reduce those import dependencies, the country will need a kick-start in other sectors such as agriculture; currently, tobacco is a successful export crop, but food production still falls significantly short of domestic consumption.

While the Mnangagwa government's handling of the economic crisis in Zimbabwe is not an immediate fix, its willingness to counter or eliminate Mugabe-era limitations on developing the mining sector indicate that more substantial and impactful national reform in other sectors is possible.

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