Closure of diamond firms triggered cash shortages

Closure of diamond firms triggered cash shortages

Source: Closure of diamond firms triggered cash shortages – DailyNews Live

BUSINESS WRITER      15 April 2017

HARARE – The closure of diamond mining companies early last year has been
cited as one of the reasons for the current cash shortages, investigations
by the Daily News have revealed.

Confidential documents seen by the Daily News, which are also set to be
tabled before key government institutions, reveal that the formation of
the controversial Zimbabwe Consolidated Diamond Company (ZCDC) in February
last year coincided with the beginning of cash shortages.

Since ZCDC took over operations in the Chiadzwa diamond fields, chaos has
reigned supreme and production has dropped to catastrophic levels.

“Before the closure of mines, diamond firms were producing an average of
500 000 carats trading at an average of $50 per carat,” said people
familiar with diamond mining operations.

“This means that the country was earning at least $25 million – in cash –
every month, money which was helping to oil the economy. At the moment,
there is nothing the country is getting from diamond mining and indeed
from any other sector. Diamond mines used bring in cash, now look at this?

“It does not make sense to close the diamond firms which were bringing in
cash. How do you explain this, diamond firms were forcibly shut down in
February last year and within weeks, the country started experiencing an
acute cash shortage resulting in the introduction of bond notes late last
year,” said the source.

Information gathered by the paper indicates that before the disbandment of
seven mining firms – Marange Resources, Mbada Diamonds, Anjin Investments,
Diamond Mining Company, Jinan and Kusena – in Chiadzwa in February 2016,
the country was holding diamond auctions at least twice a month.

Zimbabwe, led by President Robert Mugabe since 1980, was forced to
introduce bond notes in November last year to ease a cash crunch after the
country had run out of United States dollars.

The debilitating cash shortage has also forced government to delay paying
salaries each month to civil servants and the military.

Another top government official who preferred anonymity told the Daily
News yesterday that Mines minister Walter Chidakwa should have dealt
cautiously with diamond mining firms.

“While everyone agrees that there were some leakages at Chiadzwa, the
minister should have consulted further and come up with a workable
solution instead of chucking out all the miners. This has had negative
repercussions on the country’s standing with foreign investors.

“The miners were supposed to be treated as individuals while they
continued to bring in cash. All he needed was to audit each and every firm
without necessarily disturbing production,” the official said.

Chidakwa is alleged to have refused to rope in globally-acclaimed audit
and advisory firms such as Ernst & Young and PricewaterhouseCoopers which
have a presence in Zimbabwe to draw a professional and water-tight model
that would take into consideration all the parties’ interests.

Chidakwa’s brain child, ZCDC was expected to be the game changer in
Chiadzwa after government did not renew licences of former miners on the
basis that they were producing way below projections.

Last year, ZCDC produced a paltry 924 388 carats of diamonds, 62 percent
lower than the 3,2 million carats produced the previous year by the
Chiadzwa miners.

Finance minister Patrick Chinamasa recently conceded that the government’s
decision to consolidate diamond mining effectively killed the sector.

“As of now, the diamond sector is dead. I used to visit Mutare during the
hype of diamond mining and one could feel the diamond money. We need to
come back to that situation again

“The issue that got the sector to collapse is essential that we felt this
sector was not contributing and we decided to consolidate it . . .,” he
said at a business meeting in Mutare.

Chinamasa also revealed that the government was trying to negotiate with
the Chinese companies who had been kicked out of the Chiadzwa area, in an
effort to make out of court settlements. The companies initiated legal
action against the government after they were kicked out.

Economic analyst Francis Mukora said while the genesis of the country’s
cash shortages were multifaceted – ranging from widening trade deficit to
declining metal prices and bad policies – the closure of diamond mines
significantly impacted on the economy.

“The controversial exit of foreign mining companies from Chiadzwa dented
the country’s chances of attracting foreign investments. Capital is a
coward and this is why Jinan relocated its mining equipment to the
Democratic Republic of Congo where investors are welcome,” he said.

Mukora indicated that Zimbabwe’s failure to build up a store of savings,
even during 2009-2012, when the economy doubled in dollar terms to $12
billion also contributed to the current liquidity crunch.

“So Zimbabwe has entered the low commodity price era, with inadequate wage
flexibility and virtually no government savings.

“As wages have remained too high, imports too have remained too high. As a
consequence, Zimbabwe keeps running a current account deficit and the
supply of physical dollars in the economy has continued to shrink,” he
added.

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