via Mining can trigger major economic growth – The Zimbabwe Independent January 3, 2014 by Eric Bloch
The last instalment of this column highlighted that, given the right government policies and actions, agriculture can once again become a major contributor to Zimbabwe’s economic recovery and growth.
The main sector which has nosedived is manufacturing. Zimbabwe must urgently address its prolonged economic meltdown. A viable economy can be realised, notwithstanding that achieving such a feat cannot be instantaneous for Zimbabwe has stubborn economic ills that will take time to cure.
This is especially so because of Zimbabwe’s pronounced lack of fiscal resources, including investment funding and technological skills (many of which have been lost to the diaspora during the many years of Zimbabwe’s economic morass).
Among the several key economic sectors that can drive Zimbabwean development is the mining sector. The country is fortunate to have vast and diverse minerals, most of which are of exceptionally high quality.
The country has substantial reserves of gold, high quality platinum, nickel, chrome, asbestos, iron ore, coal, diamonds, lithium and much more. Although mining has been a major economic activity for many years, the extent has been very limited compared to the available potential.
Increased exploitation of mining potential would be the generator of massive inflows of funds, assuring Zimbabwe of a favourable balance of trade as currently imports greatly exceed exports.
Larger scale mining would result in the creation of much needed employment which would, over and above many of the operational inputs of the mines, stimulate increases in downstream spending into the economy, stimulating the wellbeing and growth of the manufacturing, distributive and service sectors.
Concurrently, the weak financial sector would be strengthened, which would not only boost economic stability and wellbeing, but stimulate yet further economic development. The economic upturn would also greatly benefit Zimbabwe’s cash-strapped fiscus.
However, to realise the tremendous benefits which the mining sector can generate a near total change in government perceptions, policies and actions is a prerequisite. Government is right when it states the vast potential wealth which will flow from the mineral resources must accrue to Zimbabwe, for it is wholly a Zimbabwean resource.
However, their demands that all the revenues from the mineral resources, without exception, must accrue to Zimbabwe are unrealistic and counterproductive. President Robert Mugabe has been adamant that not less than 51% of every mine must be owned by government or Zimbabwean nationals.
However, recently he has changed his stance and now contends that 100% of revenues must be for the exclusive benefit of Zimbabweans.
This stance contemptuously disregards two key issues. In the first instance, exploiting the mineral resources requires much funding. From the initial costs of prospecting to find the resources, to the fees payable for registration of the mining claims, to the comprehensive amounts that must be expended on capital equipment and the great labour and other costs of sinking the mining shafts, accessing of energy resources, construction of housing for the mines’ labour forces and much more, generally requires many millions of dollars.
Government, by its own admission, does not have the available resources. Therefore, the reality is that the state cannot fund any meaningful exploitation of Zimbabwe’s tremendous mining wealth. Tragically, because government has destroyed most of the economy over the past 16 years, the availability of private sector investment is very limited and grossly inadequate for substantive exploitation of the country’s minerals.
Therefore, if Zimbabwe is to access the considerable wealth from intensive mining it has to attract major investment from sources outside government. But such investment will not be forthcoming if there is no investment security and prospects of meaningful revenue flows (through dividends or otherwise) as a return on the funds invested. In most instances, assurance of investment security and adequate revenues accruing necessitates that the investors hold at least 51% of the equity in the mining venture.
Secondly, government constantly overlooks the magnitude of revenues flowing from mining ventures, irrespective of whether or not it holds any investment in the mines. Over and above the initial prospecting licence fees, claim registration fees and other initial governmental imposts, substantial royalties accrue to the fiscus from all minerals produced and sold. Income tax is payable to the fiscus on the mines’ profits and thereafter when the profits are distributed, withholding taxes are payable thereon.
In addition, income tax is receivable on the salaries and wages of the mines’ employees, and VAT is earned on much of the employees’ expenditures from their income. Concurrently, their expenditures and those of the mines enhance the revenues of commerce and industry, and the services sector, which revenues again attract direct and indirect taxes.
Thus, the reality is that mining contributes substantially to fiscal inflows and a substantive development and growth of the mining sector would considerably increase those fiscal inflows, without the state being owners or partners in the mines.
Government must recognise reality and change for the mining sector to create a conducive and secure investment environment.
It should pursue substantial investment, abandoning the present demands for major state equity holdings in the sector and for entrenched Zimbabwean rigid and excessive controls. This would result in fairly rapid economic recovery.