ZIMBABWE UNDERGROUND ECONOMY - THE INVISIBLE DRIVER OF THE ECONOMY

A glimpse at the dashboard of policy makers usually reveals a full host of tools and instruments they can employ to manage and guide the economy. It is so good and proper when the monetary and fiscal policy tools and/or instruments can detect the drivers of the economy and moderate them to avoid stagnation or overheating whilst balancing the broad objectives of maintaining price stability, promoting sustainable income growth and creating employment that narrows income inequalities. The Zimbabwe Revenue Authority year end report detailing the tax revenue heads contribution to the total tax revenue for 2012 reveals the shadowy underlying drivers of the economy that are beyond the control of most of the policy makers tools and instruments. And that creates a difficult economic management challenge for policy makers as the economy operates on more or less a self-determined auto-pilot mode. That probably explains some of the policy challenges we have been facing like, for example, the under performance of economy vis-à-vis most of the Medium Term Plan targets of economic growth, employment levels, saving and investment rates, among other targets.  

The Zimbabwe Revenue Authority reported that of the total gross revenue of $3.45 billion for 2012, Value Added Tax contributed the most at 33%, followed by Individual Tax at 21%, Corporate Tax 14%, Excise 12% and Customs 11% and mining royalties at 4%, among others. An analysis of these revenue heads' contribution to total government revenue reveals a worrying policy phenomenon. The fact that the individual tax is much lower than VAT contributions reveals a lot of structural deficiencies, mis-alignments and the existence of a strong and vibrant shadowy or underground economy that is pulling the strings, more or less like the Zambian economic management model where trade taxes targets for 2012 were 37.5% of total expected revenue –thus about 6.5 trillion Kwacha. Generally, aggregate VAT collections should be less than the individual tax collections because of the basic reasoning that VAT is charged on expenditures propelled by income that would have been taxed already. 

Considering that in Zimbabwe most basic food stuffs, exported goods and agricultural inputs and implements being zero rated, it should even make much more sense that individual taxes should be significantly higher than VAT. More often than not in normally functional economies, governments collect more of individual taxes than VAT. In South Africa for example, Individual taxes contributed 33.7% of the total tax revenue of R742 billion for 2012, compared to 25.7% for the VAT revenue head. In more developed countries like the UK for example, VAT contributed 15% of total revenue in 2009 compared to the direct individual tax at 29%. The fact that VAT and customs duty (trade taxes) contributes $750 million more that individual taxes points to the existence of a combination of significant external funding and a strong underground economy that is able to generate foreign exchange but going under the radar of the taxman, and indeed the latter can easily be explained by smuggling of minerals exports and commodities. 

The existence of external funding sources is always good to have for any country, and certainly the external loans from the likes of PTA Bank, Afrexim and so on have been handy in providing a window of finance for various corporates in Zimbabwe during this very important revival and recapitalisation stage in their business life-cycle. Equally and in addition to the cross-border loans, the remittances from the Diaspora, estimated above $250 million a year, have been forming a very important pillar is bolstering domestic demand and financing the current account. Although external loans and Diaspora remittances can explain part of this huge worrying disparity between individual taxes and VAT, the fact remains clear that these two sources of external funding are quite small and cannot even explain even a fifth of this wide variance. 

It leaves little doubt that smuggling of minerals and other commodities out the country could be one of the major sources of domestic wealth that is contributing to there being an amusing revenue structure for the government. Unfortunately this has been creating a host of challenges for the policy makers as the economy sets itself on some self-determined auto-pilot mode, rendering most of the policy tools and instruments less effective in determining the desirable economic course. 

What could even be more puzzling is the country’s balance of payment position. Zimbabwe has been running massive negative balance of payment positions since the early 1990’s. Combined with the large budget deficits that were being financed largely via seigniorage revenue, exchange rate management became a big headache for policy makers and a host of foreign exchange controls were instituted to manage the ever depreciating exchange rate. The dollarisation of the economy in 2009 resolved these exchange rate management challenges but the extent of the balance of payment position since then has been posing more questions than answers on  exactly what is it that could be financing it. The negative balance of payment position has cumulatively exceeded $7 billion since 2009. 

Although there could be merit in believing that the local banking sector has been financing this negative BOP position, the fact that only $4 billion deposits exists in the banking sector means that this claim is grossly over-exaggerated and cannot explain how this country continue to import more than it is generating from exports at a time the government is not in a capacity to print money. On the hand, there is not much in capital investments by foreign mining and manufacturing companies that could be explain how this country continues to afford importing more goods than it is exporting without the help of the government money printing press. Upon evaluating the foregoing and after netting off the potential influence of Diaspora remittances, a careful conclusion could be drawn that Zimbabwe is generating a lot of unrecorded exports that are financing the imports.

This foregoing analysis about the puzzling source of financing for BOP position mirrors equally the amusing government revenue structure where VAT contributes more than individual taxes. Of course there are other valid arguments that arise in attempting to explain why the individual taxes would generally be low in Zimbabwe. One such is the deep-seated high unemployment level estimated above 80% that has been a major policy challenge for a long time. This high unemployment level seriously undermines the ability of the taxman to raise more of the individual tax head. Although the unemployment rates have been historically high for the past decade, the dollarisation of the economy in 2009 ushered in new challenges for the many corporates that had survived hyper-inflation under the shield of implicit subsidies that emanated from the excessive seigniorage revenue accruing to the central government. 

The dollarisation and subsequent de-monetisation that wiped savings eroded these subsidies and with the corporates having to survive on their own in face of global competition, hard times began to bite. Today most big companies, save for a few in food and beverage industries, have had to downsize their employment levels. A sizeable number had to close and that has thrown a lot of workers onto the streets. Even the mining sector that looks glittery, all is not rosy.  Although mining sector raked in $1.86 billion in exports last year and is the biggest foreign currency earner for Zimbabwe, some big mining and mineral processing companies have not been spared the post-dollarisation challenges that have been affecting the rest of the economy. The likes of Bindura Nickel, Rio Zim and Zimasco, Monacrome and  Zim Alloys, among others, are having operational challenges that have definitely affected their ability to employ more or retain employees. 

This high unemployment level, in the absence of a comfortable social safety net where there are unemployment benefits, has created a vibrant category of self employment in many forms, from vegetable vending to small informal cottage industries. Although these activities generate income that sustains the livelihoods of many, the incomes are not taxable and even if they would register to pay taxes, it is most likely the majority of these would fall within the tax-free thresholds.  Whatever arguments can be put across to explain why the VAT collections are much more than the individual taxes cannot exactly be backed by known facts, save to make informed assumptions that the underground economy in Zimbabwe that is below the taxman’s radar is very big and vibrant and indeed has been the driving force behind the financing of the BOP position and all other trades as evidenced by the huge VAT collections. Considering that the economy is dollarised and that this shadowy economy generates foreign currency, it wouldn’t be further from the truth that the activities involve smuggling or under-invoicing of mineral and commodities exports. Until such time that such activities are exactly known to the policy makers and can be brought into the formal sphere, influencing key macro-economic variable would always remain a big challenge for policy makers.

A WASTEFUL ECONOMY - ZIMBABWE CASE

Those riding two-wheel bicycles know well that it is more stable and easy to manoeuvre when it is in good speeds of around 20 km/h. The moment the bicycle stops, only gymnasts will be able to remain on top of it without tipping over, at least for a very short while. The Minister of Finance, at a crucial moment in coming up with the national budget for 2013 and holding onto the controls of an economy that is losing stream after 3 years of strong growth momentum, has to be a gymnast to continue propelling it before it tips over. At such a crucial time where monetary policy cannot be employed to jump-start the economy because of the dollarisation, fiscal policy, through directing expenditure multipliers where they are needed the most, becomes the most important instrument to keep the growth momentum.

The signs that the economy is losing steam are glaring. Government revenue is growing at a worryingly decreasing pace since 2009, and so are other key indicators such as public and private sector consumption. Government revenue, which grew 141% in 2010, 25% in 2011 and expected at 16% for 2012, is likely to grow only 6% in 2013, if at all it grows. Both private and public sector wage growth have hit a plateau, dealing a worrying blow to domestic demand.

The weak and misdirected domestic demand is a huge cause for concern for the government that finds itself having a people with no capacity to drive growth from within. The options to boost domestic demand are few. Reducing interest rates, if it were at all possible, would not alter domestic demand that much because the majority of consumer demand and private sector investments are not bank financed as in most of the major economies around the world where tinkering with the interest rate levels impact on long-term aggregate demand. Reducing the taxation levels is not an easy option either considering that the central government finances are already in critical state and treasury cannot sacrifice present day priorities by gambling for long term benefits which no one knows if they will ever materialise.

It is very important to analyse domestic demand in Zimbabwe in the context of the balance of payment position. The huge trade imbalances are a huge cause of concern and impact on the effectiveness of domestic demand’s ability to drive internal growth. An analysis of the balance of payment position for manufactured goods for the six months to June shows that for every $1 worth of exports, Zimbabwe imports about $5.5 dollars worth of goods. A casual conclusion would therefore be that Zimbabwe’s consumption of manufactured foreign goods is sustaining more jobs in SA and elsewhere than at home. 

However, a more detailed analysis would show that this huge appetite for imported goods is killing more jobs at home that it is creating abroad! The poor productivity of Zimbabwe’s manufacturing industry employees arising out of inefficient production processes could be seeing Zimbabwe losing at least 10 jobs locally for every one job created abroad. The inverse relationship should be easier to comprehend. Zimbabwe has not been investing in technology and infrastructure upgrades for over a decade and that makes Zimbabwe employee productivity very poor compared to its well-off neighbours such as SA and many other global trade powerhouses such as China. 

Zimbabwe therefore needs more people to produce a similar unit of output than the Chinese and South Africans.  And for any one job that is created in an automated factory in SA due to our demand for imports, Zimbabwe could be creating 10, if not 15 at home to produce the same units of goods due of our outdated production processes. In China for example, the Asia Productivity Organisation estimates that industrial output that needed about 100 employees in 1990 now needs less than 20 employees to produce due to increasing productivity arising out of huge investments in technology and infrastructure. It is not Zimbabwe alone that is suffering serious job losses from the effects of trade. The Americans, according to the Economic Policy Institute, have lost 2.1 million manufacturing jobs between 2001 and 2011 due to the growing trade deficit with China.

Considering that Zimbabwe imports manufactured consumer goods of about $1.3 billion per annum, which is about 36% of government expenditure, the ability of domestic demand to therefore influence internal growth is very limited. Rather, the jobs are created in such countries as SA and so are the income multipliers. This therefore creates a challenge for the policy makers to attempt to anchor gdp growth on  fiscal expenditure multipliers, among other strategies. 

But is there real everyday evidence in the lives of ordinary Zimbabweans of this excessive dependence on imports? Tracing the day’s journey of a working Zimbabwean urbanite reveals a very sad picture of the true income leakages and jobs losses through imports. One’s day starts with a bath where the soap, towel, perfumes, toothpaste and toothbrush are all imported products from SA, including as well the water treatment chemicals for the water being used. The breakfast cannot be any better. Save for the locally made Dairibord milk and eggs from local suppliers, the imported sugar, teabags, cornflakes or bread made from imported flour are all signs of income leakages through imports. And of course 80% of all cooking utensils and accessories making breakfast in Zimbabwe are imported, from the light Chinese spoons to SA stoves! 

One’s journey to work is by means that is all imported, from the fuel in the vehicle to the tyres. The only thing Zimbabwean in any car on Zimbabwean roads is the person behind the wheel, and probably an exide battery and water in the radiator! Although Zimbabweans’ evenings are usually anointed with the staple sadza made largely out of maize grown locally, the last poor cropping season means most urbanites don’t even realise they are eating sadza made out of largely Zambian maize. The relish’s cooking oil, salt, spices and more ludicrous, the toothpicks, are mainly imported goods from SA. The foregoing analysis clearly shows how the everyday expenditures of Zimbabweans are sustaining foreign jobs than they are creating and sustaining at home. Save for the fresh air, sex and beautiful weather, Zimbabweans are surely spoilt for foreign goods and indeed the domestic manufacturing industry has failed to provide competitive alternatives. This explains the reason why the unemployment rate, income inequalities and poverty levels have remained high in Zimbabwe notwithstanding the economy having been registering impressive gdp growth since 2009.

Policy makers would need to be decisive at such times to ensure that the economy changes its course of direction. The government, with such as structure of domestic demand that sustains jobs abroad and having no capacity print money to directly influence growth in key areas, can only use its expenditure targeting as one very important driver of growth. But when faced with the current scenario where more than 70% of government expenditure goes towards recurrent expenditure, the expenditure will continue to be directed towards imports and indeed the economy will continue losing steam. Therefore what policy alternatives exist in ensuring that the government fiscal multipliers drive growth from within? The ongoing budget consultations should strive to provide answers to such. 

LIQUIDITY, LIQUIDITY – WHAT A CRUNCH!

The happenings on the economic front in Zimbabwe are reminiscent of horror movie scenes. Every other policy or public official announcement on key aspects, save for inflation figures, points towards more disaster. The government revenue collection figures are very disappointing and having been missing its revenue targets by about $30 million every month this year, the government is fast running broke. On the back of unemployable expenditure reduction and switching alternatives to manage our huge appetite for imports, the trade figures show that the negative balance of payment position is shooting through the roof and unless the figures are incorrect, and indeed they could be, managing liquidity and creating jobs will remain problematic for a long time.  

Statistics from the banks are revealing household indebtedness that is rising at alarming pace! And worse, even nature doesn’t seem to sympathise as below average rainfall is forecast for the 2-012/2013 agricultural season. The biggest of all, the liquidity crunch, does not seem to be ameliorating and has reached worrying levels. It is now being blamed for everything wrong in the economy, just like the shortage of foreign currency, price controls and high inflation were the scapegoats for everything wrong prior to dollarisation in 2009. If Zimbabweans were like the Greek that have taken full time jobs in street strikes and demonstration against austerity measures being undertaken by its government, by now we would have been fed up of demonstrations against the liquidity crunch. 

Save for a few giants in mining such as the diamond, platinum and gold mines, and a handful of companies focusing on fast moving consumer goods and services such as Delta, Innscor and Econet and a few isolated others, the liquidity crunch has had its fair share in battering the economy into bad shape and signs of worse things to come are there for everyone to see. The mid-year results from the banking sector, which are generally the barometer to gauge the healthy state of the economy, are far less impressive and reveal a troubled economy underneath that needs more collective efforts from policy makers and politicians than before to steer it into the right direction.

But sustaining the argument that the liquidity crunch is the cause of most the challenges facing the economy is very flawed, at least from a fundamental perspective. Rather, it is important to note that the liquidity crunch is a product of largely bad decisions by economic agents that have been draining away the massive liquidity flowing into the economy since dollarisation.  There is abundant evidence to prove that the overall nominal liquidity position in the economy has been improving significantly since dollarisation and the structural economy-wide rigidities that make the liquidity untenable needs more of policy coherence and meeting of minds among the policy makers and politicians than focusing solely on liquidity as if it’s the most important economic variable.

The growth in broad monetary aggregates, a good proxy in measuring the general liquidity position, has been impressive since dollarisation in 2009. Banking deposits, which stood at $475 million in April 2009, leapt to a billion dollars six month later in October of the same year. By December of 2010, deposits stood at $2.5 billion and presently there are estimated around $4 billion. An informed conclusion would therefore concede that broad money supply, and indeed private sector credit expansion,  have been skyrocketing at a break-neck speed.  

Another indicator that can shed more light on the directional aspect of the economy-wide liquidity position is the cost and structure of credit in our market. In line with the massive growth in the quantum of liquidity in Zimbabwe since 2009 and rising loan-to deposit ratios, the cost of credit has been coming down sharply, from the highs of over 100% per annum just after dollarisation to the current rates of around 25% per annum. Equally, from a structure perspective, the tenors of credit facilities being offered in the mainstream financial services sector has improved markedly from just 3 months, which was the norm in 2000-2010, to around 1 year in best case scenarios presently, and indeed much better for mortgages finance. All these aspects clearly buttress the notion that the liquidity position in the economy, by and large, has been improving markedly.

On the other hand, evaluating the behavioural aspects of the lenders and borrowers can equally give a good picture on the status and transition of the economy’s overall liquidity position. An economy that is enjoying considerable amounts of fair and easy flowing liquidity is usually characterised of banks lending expansively, whilst borrowers, because of the existence of easy credit, pile up loans quickly and unreasonably. The US sub-prime mortgage market crisis of 2008 has its root problems from this phenomenon. It is much easier to draw a casual link of similar nature in Zimbabwe.

The increasing monetary aggregates since 2009 tempted and indeed misled both lenders and borrowers that the ‘good times would roll forever’. The resultant increasing bank loan-to-deposit ratios, which leapt from 33% in April 2009 to a peak of 87% in December 2011, provide evidence of the lending over-drive by lenders and on the other side, the speedy gearing or indebtedness on part of the borrowers. This reason behind this is quite easy to comprehend though. The abrupt dollarisation of the economy in February of 2009 wiped all the working capital of domestic companies and the need to borrow became so urgent and the only way to survive was through borrowing not only to produce, but equally to pay wages and salaries as the companies had lost everything to inflation, save for physical capital. Yes, the massive gearing of balance sheets by companies was for a noble cause since the dollarisation, without international support, created havoc and indeed the banks need to be applauded for having been lending generously. But, still, not sufficient restraint was employed by the borrowers and lenders.

Therefore the liquidity crunch which has been building up in the economy is in actual fact, emanating from the reality that the many borrowers have lost money on their balance sheets and cannot repay the banks to enable continuos flow of credit in the economy. The problem, as has been explained before, is easily traced to the avalanche of liquidity flowing through the economy since 2009 which, unfortunately, intoxicated weak business models via loans they accessed from banks. The swelling liquidity rivers of life that borrowers jostled to drink from have unfortunately turned to become the same rivers that devour most of those that recklessly drank from them. And the messengers of court and deputy sheriff, who are the undertakers and executors of estates of those that get intoxicated by drinking from these assumed rivers of life, have been very busy. Indeed if these were a business to be listed, the share prices and certainly the dividend payouts would not disappoint for the next three years or so!

Policy makers have attempted to intervene in the crisis. There has been talk of ZETREF and DIMAF funds to improve liquidity and revive financially distressed companies. Inasmuch as it is a good policy to ease pressure off the balance sheets of these distressed companies by pumping cheap and long term money into these weak balance sheets, the fact that the funds are targeting financially distressed companies means that the money is most likely to be lost. One of the most plausible consequences of this intervention is that the companies that will access these loans will simply re-finance their existing loans and at the best case, remain in their current situation awaiting bankruptcy. And for a broke government that is battling to balance key emotive day-to-day survival priorities with such economic interventions, the execution of such decisions will be slow and very painful, if at all they live to be executed.

The foregoing analysis clearly points out that the fundamentals of our economy are quite bad and it is difficult to ascertain the amounts of liquidity that would need to be pumped into this economy until it starts to tick sustainably. Most of the business models that companies are running on are beyond their sale-by date and no matter how much money is pumped into their balance sheets, they will continue to struggle. Given these many liquidity-sapping corporate dinosaurs that litter the economic landscape and the fact that Zimbabwe is dollarised and has no capacity to quantitatively ease the markets, the liquidity crunch is definitely going to stay for another long, long season.

Elsewhere, quantitative easing seems to be the only consensus in stimulating growth that has become very elusive. US Fed announced on Thursday last week that, in the name, letter and spirit of quantitative easing, would start pumping $40 billion monthly in the economy buying mortgage backed securities for an indefinite period until it starts witnessing improvements in the labour market. And interest rates would be kept low until mid 2015! 

SETTING UP OF SMEs STOCK EXCHANGE CRITICAL

The establishment of an SME Stock Exchange has been a subject of debate for a very long time. The policy makers, as usual, have paid little attention to it, rather preferring not to be seized by ‘small issues’.

Evaluating the path the economy has taken since 2009 provides a fresh understanding of why the Ministry for Small to Medium Enterprises and SME business associations such as ZNCC need to devote much attention towards creating market-based funding solutions for SMEs. And equally important would be the need for policy makers to understand that SMEs are not only the market stalls at Mupedzanhamo, Siyaso, grinding mills or other small groceries,  clothing and cellphone shops operating across the country. Yes, this segment is important as it captures the “S” part of the SMEs and provides employment and convenient service to the economy which the big corporates can never match. But the “M” segment equally needs an enabling platform to raise capital as this sector has capacity to generate exports and sustain vibrant labour force.

A closer look at the happenings on the Zimbabwe Stock Exchange, the capital raising market for the big guns in town, shows that indeed much more needs to be done for the SMEs in a market where even the big corporates are struggling. Raising fresh equity has been a nightmare for the ZSE listed companies. About 15% of the ZSE listed companies embarked on rights issues since dollarisation, and save for OK Zimbabwe’s and one or two others, most of them were not successful as anticipated. Some planned right issues for CFI and Steelnet for example, could not even take off as shareholders understood, albeit lately after having shown intention to do so, that they had no money to follow their rights. A poorly subscribed African Sun’s $10 million right issue left some underwriting bank in serious trouble as it found itself with a commitment it could not fund.

The answer behind the poor subscription of the rights issues is found in our history. Current local shareholders of companies in Zimbabwe had their savings and part of capital wiped out when the economy dollarised in 2009. One can surely not fault them for failing to inject fresh equity into most struggling companies. Amid the hyperinflation, it was almost impossible for corporates to have savings in foreign currency. The many exchange control regulations that existed then made it almost a criminal office to have savings in foreign currency. One’s holding of foreign currency could not escape criminal charges relating to externalisation, illegal possession, failure to acquit export earnings or simply accusations of economic sabotage. Hence all honest Zimbabwe businesses and shareholders lost significant portions of their capital to inflation. The need to recapitalise came immediately after dollarisation and expecting existing local shareholders to inject fresh capital into their struggling businesses is a very tough call. They simply do not have the money because the operating environment and dollarisation made it mathematically impossible to defend not only capital positions, but more importantly, cashflows.

The debt route became the most obvious way towards funding businesses and indeed today we see most companies struggling with debt acquired post dollarisation. At least the listed companies have distinct advantages over the unlisted ones in accessing credit. To some extent lenders accept the shares of listed companies as collateral and until lately, the basic belief, among lenders was that listed companies are blue chip and could even be lent money without collateral. Most of the credit in the market was therefore flowing towards listed companies at the expense of SMEs. Most SMEs therefore find themselves on the peripheries of the credit markets where high cost of debt, stringent collateral demands and very short tenors are the rules of the game that have been affecting their ability to grow businesses beyond hand-to-mouth.

Belatedly, the deteriorating balance sheets of listed companies that have resultantly exposed most lenders in the market has changed market perception about the bankability of the SME sector. Most lenders have burnt their fingers on lending to listed companies, more so when they held the shares as collateral.  CAPs, Steelnet, Rio Zim among others, are clear examples of listed companies that have taught lenders the basics of lending. These lessons have opened up opportunities for SMEs as most banks are now focusing on SMEs as a more attractive and manageable asset segment.

Notwithstanding the shift in focus from the lenders to target more of SMEs, the debt route is not the most optimal funding solution for SMEs. Equally important to note is that the stringent collateral requirements imposed by the lenders means that some SMEs with good business models will fail to take off as they fail to access credit. For example, raising $100,000 is extremely difficult for a small or medium sized company in Zimbabwe. With lenders on average requiring collateral twice as much as the value of the loan, this level of borrowing requires immovable assets in excess of $200,000. This figure is not small for what would be called SMEs in Zimbabwe and therefore most of the SMEs, no matter how good their business models are, still fail to access credit in the market. For the few lucky ones having the collateral, the loan tenor is usually shorter than desirable as most credit facilities are at best 6 months.

The working capital cycles therefore become seriously compromised and most SMEs in manufacturing and sourcing inputs from as far as China will find it almost impossible to repay their loans on time. It is therefore not surprising that, notwithstanding the lenders seeking stable asset classes in lending to SMEs, foreclosures rates on SMEs are increasing at an disturbing rate. Almost every other day one reads from the local newspapers sizeable numbers of properties going under the hammer as the Deputy Sheriff auctions properties for those who would have failed to repay their loans with lenders.

The SME model is therefore under threat. A platform in the form of an SME Stock Exchange has to be created where strong SME models can tap into the market and raise capital. From a logical perspective, investors with surplus cash would most likely create value when investing in smaller and efficiently run companies than most of the ZSE listed companies that have big inefficient and rigid operational structures that are no longer relevant in this environment. The market has sufficient capacity and depth to support an SME Stock Exchange, with the big pension funds such as NSSA needing rather to focus on supporting IPOs of small efficient companies than keep sinking money in right issues of dead listed companies that will not resurrect.  Some few honest listed companies have been honourable enough to say the truth about how difficult the operating environment has become and discontinuing operations. 

Chemco, notwithstanding the parent company having reasonable access to funding, is closing some of its manufacturing business units because they cannot produce at competitive prices. It will instead start ‘trading’, buying from low cost producers abroad and selling locally. Apex has shed some of its foundries amid viability concerns. Other stubborn listed companies unwilling to face reality and cut losses short much earlier struggle on until the day they will most likely collapse, but in spectacular fashion. When listed companies with relatively easy access to debt are finding it tough, the writing is therefore clearer on the wall that the SMEs are likely to struggle much more.

The policy makers, for being what they are, will never champion the formation of the SME stock Exchange. Such associations as the ZNCC have to seize call and lobby aggressively with the relevant ministries to ensure that the setting up of a secondary bourse comes to being a reality. Of course it remains fact that merely raising fresh capital from the stock market is not what will make SMEs vibrant. A host of all other challenges such as poor public infrastructure, weak domestic market, power challenges and inefficient supply chains, among others, will continue to pose challenges on the competitiveness of the SME models. But nevertheless, an efficient platform has to be in place for SMEs with viable models to tap in to the capital markets and expand their businesses. And it is the creation of a secondary bourse will achieve that for a sector that feels neglected. 

Soft Infrastructure Critical For Success of Small Scale Miners

Harare Shamva road is largely a quiet road when compared to other busy inter-town highway. Those that drive down the road will, with no doubt, enjoy the pothole free highway. Driving with a relaxed mind, one has good chances to marvel at some beautiful hills and pollution-free man-made small dams that adorn the snaking road.  

About 80km from Harare towards Shamva, there is some activity to the right side of the road where Shamva gold mine has been operating for many years.  Just across Shamva gold mine, about 4 km away in a very bad dusty road, lies the famous Tafuna Hills. From the main road, Tafuna Hills looks serene and just like other ordinary hills in the area.  The very steep slopes and ordinary looks would, under normal circumstances, not entice a person driving down the highway to cast a second glance. Rather, the collapsed Shamva gold mine shaft that is visible from a distance may be a more intriguing attraction.

Tafuna Hills however offers much more than what meets the eye from a distance. A snaky and gullied dust road from the highway takes one to the foot of these hills and, all of a sudden, there are signs of concentrated human settlements, including shacks.  A further drive up the hills would herald the start of small scale gold mining activities. The many small scale miners that form part of the envied Tafuna Hills mining community have one thing in common – good ore yields around 8 grams per tonne and lack of mining equipment. The latter is a big problem.

The small scale miners, working in groups popularly known as syndicates, use hammer and chisel to dig into earth in pursuit of lucrative gold reefs, largely known as ‘bandi’. Very few have capacity to hire or buy compressors to drill and blast the very hard blue stones that characterise the area. Equally, an even fewer number has slurry pumps to pump out water from the shafts as they encounter more underground water the deeper they go. With this very manual and painful way of extracting gold ore from underground, many of these small scale miners end up hauling out, at best 4 tonnes of gold ore per week. The average weekly earnings therefore converge around $180 per week for most of the syndicate partners. Considering the very low alternative returns from other rural activities such as farming, this reward for labour is very high and addictive that it keeps attracting the small scale miners to shed sweat in the unsafe underground work environments. This tale is common for most small scale gold miners across the country. 

Small scale gold miners, whose definition expands to capture as well these non-mechanised producers, contribute about 50% of the total gold production in Zimbabwe. Zimbabwe gold exports rose to $627 million in 2011 and may surpass the $900 million mark in 2012. The sector is therefore very crucial after diamond and platinum mining and the government needs to do much more for the small scale gold mining sector to transform its image and improve output. A number of small scale gold mining associations have been regularly calling on the government to come up with schemes that provide funding and equipment to the small scale miners. 

The government has a history of bailing out big corporates and farmers by giving concessionary credit facilities and equipment. The small scale miners believe they deserve the same treatment because of their unquestionable contribution to GDP and exports.  These calls are genuine and seek to address the inconsistencies on part of the government market interventionist policies. But a more objective assessment of the small scale mining industry reveals that they do not need active government assistance in terms of cash hand-outs and equipment. Rather, the small scale miners need to lobby the government, through the Ministry of Mines and Mining Development, to establish efficient soft infrastructure that allows the private sector financiers to find reason to finance the rather lucrative sector. 

The mining registers at the Ministry of mines are not easily verifiable and involve huge hassles in ascertaining ownership. It takes a lot of time to establish who owns what claims, and equally, the claims are not easily transferable. The Ministry of Mines and Mining Development needs a very efficient mining register system that allows easy cross-referencing,  traceability and transferability of ownership. The absence of this soft infrastructure at the Ministry of Mines has been a major source of conflict in many mining transactions and leaves the system subject to manipulation. The Zisco-Essar deal is one such deal that has been subjected to controversy and the root cause can be easily linked to absence of efficient soft infrastructure that allows easy verification. The recent Kwekwe gold rush that grabbed headlines got more exciting not only because of the easy find, but because a number of people had ‘genuine’ certificates proving legitimate ownership of the said gold claims. 

The Zimbabwe Government and ACR disputes over diamond claims in Chiyadzwa can as well be easily linked to inadequate information systems at the Ministry of Mines. And there are many other disputes revolving around ownership of claims that emanate from the inefficient soft infrastructure that exists at the Ministry of Mines and Mining Development. 

Private sector financing mechanism thrives mainly when the underlying collateral is marketable and not easily susceptible to disputes over ownership. The inability of the small scale miners to attract private sector funding is, to a large extent, a result of their inability to prove undisputed ownership of their claims. Zimbabwe has a thriving small scale mining sector and there is no reason why the mainstream lenders should shun this for other sectors of the economy whose prospects may not be even as bright as those of the small scale mining industry. 

The government recently hiked the mining registration and renewal fees to deter speculative holding of claims by individuals and corporates who, according to the government, are disrupting the intertemporal distribution of natural resources wealth. The overall objective is right, but the government has to equally consider sanitising the soft infrastructure aspects relating to ownership verification and transferability of mining claims so that the private sector finance mechanism can easily find small scale miners a good market for lending. 

The local banking sector, sitting just around $3.3 billion deposits and riding on a precarious loan to deposit ratio of around 81%, has no meaningful capacity to finance big mining transactions off the domestic balance sheets. The big mining projects have always been and will, for some time, continue to rely on offshore financing arrangements to fund their requirements. The small scale miners are very much localised in nature and have not capacity to attract off-shore funding and therefore would need to rely on the local banking institution for funding. Expectations by some of the small scale miners associations that the government should provide sustainable funding and equipment purchase schemes for their members are justified, but far fetched. 

Yes, the government has done that before but the scale, reach and success remains very limited relative to the demands of the small scale mining industry. Working towards attracting domestic financiers to finance small scale miners should be the utmost priority for the government and small scale miners associations in search for a sustainable funding solution. And invariably the issue of soft infrastructure becomes the most important aspect that needs to be addressed by the government, without which the small scale miners will remain largely without access to finance.

Small is beautiful after all!

Zimbabwe’s big corporates have hit hard times. Profits are hard to come by, a clear sign that the high gearing levels will persist much longer than desirable. About 36 percent of the listed companies made losses last year, and this year there is no evidence that the situation is going to be much better. In any case, the outlook for this year is much worse than was much anticipated. Cumulative corporate losses have surpassed $710 million since 2009, a frightening figure considering the very low GDP of about $7 billion and the fact that these losses came from companies that contribute less than 10 % to GDP. This revelation should be a clear sign to policy makers that the growth path of this country cannot be pinned on the big corporates alone.  The German and Chinese growth models are now an envy of most countries the world over, and the Zimbabwe government, coming from hyper-inflation, needs to consider the Ministry of Small to Medium Scale Enterprises as the pivot from which sustainable long term growth of economy will emanate from.

A recent report from China reveals that 90% of the private sector businesses that contribute 70% of employment are family owned enterprises. They further contribute 60% to GDP growth and about 50% to tax revenues. The German Mittelstand industrial model, based on small SMES, have provided anchor to the German economic model and today German is one of the strongest economies in the troubled Eurozone. The case for the small companies to champion growth is easy to follow. The SMEs are more efficient in terms of operational structures and can produce, with minimal equipment, goods at lower per unit costs than the big behemoths. 

This past week I visited over 10 SMEs in Chinese light and heavy duty equipment manufacturing companies in the Shanghai and Haining industrial areas in China. I have come to understand the most important dynamic that is at the centre of successful SMEs – thus the ability and flexibility to operate efficiently with minimal multi-skilled labour force and of course optimal investment in equipment. Eight of these companies, with sales averaging around $60,000 per month each, are all export oriented and have never supplied their domestic market notwithstanding operating in very humble premises and committed multi-skilled labour force.

Because of the fierce competition that exists within China itself, most companies thrive to provide goods and services at the most competitive price in order to remain in business. China, which exported good worth $365 billion to the USA in 2010, attributes its success, to a large extent, on the resilient small companies that have not only managed to have an influential depressive role on the national wage rate, but have equally provided the most competition to the big established companies in China. This is the competition that has seen Chinese companies reaching out to the global market for survival and China has since surpassed Germany as the world largest exporter. For the first quarter of 2012, Chinese exports of goods stood at $430 billion.  

Coming back to our domestic investment markets, it is the end of the first quarter and about 46 out of the 76 companies listed on the Zimbabwe stock exchange are trading below their 01 January 2012 prices. Considering that about 36% of the companies listed on the Zimbabwe stock exchange made losses as of 31 December 2011, it therefore becomes comprehensible why the market sentiment is very negative about the prospects of the Zimbabwe Stock Exchange in generating value for investors. There are, of-course, pockets of optimism in the economy but generally when more than a third of listed companies fail to generate positive earnings in an economy that is bullish about recovery, then it is a good cause for concern for investors. 

Notwithstanding that most of the companies are trading below their historical P/E ratios and at about a third of the average P/E ratios of their regional counterparts, the bearish trends are expected to characterise the Zimbabwe Stock Market for the greater part of 2012. The current government of national unity in Zimbabwe has differed over a number of key policy aspects, with the discord growing louder as the talk of elections this year gets momentum. The stock market is the most timid of all investment markets. Its fortunes swing on the extremes of the information continuum. It has the most efficient and equally as well, the most irrational way of transmitting information into pricing of stocks. 

The bickering policy makers in the government of national unity have been sending conflicting signals over the management of the economy. With the talk of elections gathering momentum, the differences are going to be getting sharper and to some extent, will be deliberately over-exaggerated as policy makers wear their political hats and toe party lines religiously in order to retain their ministerial and more importantly, party positions. The Zimbabwe stock market performance for 2012 becomes more sentiment driven under such circumstances and will therefore most likely remain bearish.

The money market average yields during the first quarter of the year, around 15% per annum, are most likely to remain attractive for the greater part of the year. From the market data coming through, banks are most likely to be more liquid this year than they were in 2011 considering that banks controlling about 34% of the loanable funds in the market have indicated that they are engaging in massive slowdown in lending. This move should, under normal circumstances, leave more liquid assets on bank balance sheets and may reduce the banks’ appetite to engage in aggressive funding of short positions that had been keeping the money market in Zimbabwe very lucrative for the past two years as banks competed for scarce liquidity. Notwithstanding the above that points to more liquidity likely to accumulate in the market, the money market is forecast to generally remain in deficit, which deficit, when compared to the aggregate demands of industry, will likely sustain yields of above 10% per annum for investors on the money market. 

Mining and national emotions - the difficulty of separating the two

The extractive industry has become very emotive the world over. It has becomes  so to the extent that even the first world economies such as Australia that would naturally be mistaken to have soft and liberal investment regulations and taxation have taken aggressive steps towards claiming a larger share of from the extractive industry. On 19 March, the Australian Parliament, amid protests from the big mining companies, passed a mineral resource rent tax that will hit hard on coal and iron ore miners, their biggest exports. At 30% of profits, the new taxation laws are expected to rake in $11 billion for the next three years for the Australian government. 

Nigeria, faced with unstable exchange rate at a time its crude oil exports are expected to hut 2.1 million barrels per day starting May, is mooting renegotiating contracts of oil mining companies. The government believes that it is not getting the best value and renegotiating the terms would improve the fiscal revenue for the West African country that is mired in growing conflict over the distribution of oil windfalls.  Ghana, which produced 2.97 million ounces of gold in 2010 and is the second biggest producer of gold in Africa, will this year see its gold miners paying corporate tax at 35% from 25%. An additional 10% tax on windfall profits will be charged. 

Those countries with monopolies on certain commodities have equally joined the fray. Guinea is home to the world’s largest bauxite reserves, and has an estimated 4 billion metric tonnes, which is about half the estimated global reserves. In September 2011, its legislative body approved a new mining code that sees mandatory nationalisation of a 15% shareholding in mining projects, with the government still having an option to buy an additional 20%. The accompanying increases in royalties will see bauxite miners now paying up to $14 per tonne from around $3. 

Zambia, which expects to export copper worth $8 billion in 2012, resolved to double royalties on copper exports to 6%. Julius Malema and his nationalisation anthem may have been discarded from mainstream politics of South Africa, but his scent still pervades the corridors of power, with debates now centering on a proposed 50% windfall tax on super profits, among other proposals such as the 50% capital gains tax on sale of mining claims.  Zimbabwe has stuck its guns on 51% shareholding on all mining activities, with the biggest mining companies such as the mining giant, Zimplats, reported to having complied with the directives. Alluvial diamond mining in Zimbabwe has been solely reserved for the state. The rationale behind these moves by the various countries to gain a bigger share from the exploitation of natural resources is understandable, and to a larger extent, justified. 

The race for global supremacy has, until recently, been championed by technological advancement. Economies that ran ahead the pack with advanced technologies in production of good and services became wealthier and exerted more influence on global order. Commodities, on their own without much value, became very valuable when processed into final consumer and industrial goods. And those countries with advanced technology that could turn commodities into usable consumer and industrial goods enjoyed massive economic growth that transformed societies into what today is referred as the highly industrialised world. That was the industrialisation race. The period spanning between 1990s and 2000s has dramatically changed the shape of global influence as rapid technological advancement and adaptability, combined with the ease of labour mobility have all combined in stealing the competitive advantages of economies such as Japan, the US and Britain, among others, that had run ahead of the pack because of technological advantages. 

Companies in the West and US, have now relocated overseas to position themselves in close proximity to resources and cheap labour. Apple has moved its factory to China in search of cheap labour. Countries endowed with natural resources now understand that they can extract more benefits from whoever is extracting them, and that those companies extracting the resources have little choice but to comply with whatever laws are put in place. This has created a huge opportunity for resource rich countries who now can load huge taxes on mineral exports. The mining companies such as Rio Tint and Xtrata in Australia, Konkola Copper Mines in Zambia,  Gold Fields Limited in Ghana, Zimplats in Zimbabwe, among others, have little choice but to mourn and eventually comply. 

On a related note, Zimbabwe recently mooted plans to compel mining companies to bank locally, and as expected, there are divided opinions. The mining companies are not happy, and they are right.  Coercing mining companies to bank locally may not achieve the desired results on its own. Mining sector requires long term capital that is reasonably priced, especially at a time as now when some mining companies in Zimbabwe missed out on a global commodities boom that ran for seven strong years to 2007.  This was again a time when a global liquidity glut saw easy credit becoming easily available, and indeed the mining industry in Zimbabwe missed both ends due to non-progressive exchange control regulations that disincentivised production. 

Today mining companies need long term capital that is not available locally as bank loans rarely go beyond one year. Moreso, the dollar cost of capital in Zimbabwe is 3 times more expensive compared to the global average. The mining companies therefore desperately need their offshore accounts to secure offshore loans and embark on production. On the other hand, the Zimbabwean government has not been very clear regarding its policy position on the tenure of the multiple currency regime. Long term loans need predictability especially on the currency of settlement. It would be disastrous for mining companies that would have plunged into huge long-term loans to then realise they cannot meet their debt obligations after a currency may affect their ability to get foreign currency on the open market to settle their obligations. It has happened before and the risks recount fresh memories of the serious foreign exchange challenges that this country faced in the five years to 2008. 

But a closer look at all these problems facing the mining sector reflect again the behaviour of economic agents, and indeed policy makers need to start correcting the fundamental policies for a sustainable future.  The banking sector, sitting on only $3.3 billion, is impoverished liquidity wise because the mining companies, among others, have chosen to bank offshore. Zimbabwe mineral exports are in excess of $2 billion annually, and most of it never comes back. The only way to harvest these outflows and create a robust financial market is to compel the mining companies to bank locally. Zambia has a similar challenge. It exports over $6 billion worth of copper annually yet its financial markets sit on only $3.8 billion worth of deposits. And because of this, it has always fought battles with a volatile exchange rate and very high cost of credit above 25% per annum. 

These fundamental challenges need to be addressed in many African countries rich in mineral endowments, and compelling mining companies to bank locally in Zimbabwe is a step in the right direction. The decision however has to balance with other objectives that should ensure that the mining companies retain part of their proceeds to meet external loan obligations since the domestic financial markets, at least for now, remain weak to fund the mining sector

Discounted opportunities on the Zimbabwe Stock Exchange! Really?

The Zimbabwe stock exchange has had a very bad patch lately, very bad indeed. Since the beginning of March, the industrial index has retreated by 4%, whilst the mining index has slipped much more, having lost a whooping 8%. The losses are huge, more so considering the very stable inflation outlook and the good stream of December 2011 results that are coming into the market. Fidelity Life, Dairibord, Pearl Properties and Innscor, among other companies, have posted impressive results that should have ordinarily had lifted the market. But negative sentiments largely emanating from bickering policy makers on key policy aspects continue to cast a big shadow on the future ability of corporates to continuously generate good earnings.

Analysts and investors would generally converge in wide ranging opinions that a handful of the companies on the stock exchange are trading below their net asset values and when evaluated against the tight liquidity conditions in the market and heightened negative sentiments, these opinions could be true. Discounted opportunities can be found here and there, but the general opinion that the market is trading at huge discounts could be, but just faulty.

Pearl Properties, currently trading at a market capitalisation of $41 million is an interesting counter on the stock market! Its December 2011 balance sheet depicts a strong property portfolio of $110 million up from $86 million in December 2010, thanks to some aggressive mark-to-market gains of $20 million. Its net asset value is very strong at about $107 million. The share price, according to these figures, is therefore trading at a huge discount considering that the market values it at $41 million vis-à-vis the net asset value of $107 million. Who would not want to buy $1 by just paying $0.38 on Pearl shares? But a closer look at the income components, especially the fair value adjustment gains, reveals a weak link on the strength of Pearl’s revenue generating model. Yes, the company has done well under the circumstances to achieve an occupancy rate of 78%, but the net income from the core business translates to a P/E ratio of only 10x. The huge asset portfolio of $110 million can therefore only be valued to the extent to which it generates positive net cash flows for stock holders.

Thus, the ‘discounted’ opportunities in Pearl Properties are only on paper as its true ability to generate tangible earnings remains constrained by the state of the economy and quality of the property portfolio. The market valuation of Pearl Properties can therefore be assumed to be fair and reasonable, and the same applies to many other listed companies on the market that, at face value, may appear to be trading at huge discounts.

Whilst investors remain The money market remains the best investment choice in Zimbabwe at the moment, with cumulative yields in excess of 63% since dollarisation in 2009. The persisting liquidity challenges, which to some extent have been compounded by the deteriorating asset quality within the banking sector as noted by the RBZ, continue to sustain the high investment interest rates of around 16% per annum that are obtainable in the market for those with huge parcels of investible funds.

Recent results from listed banking institutions reveal the tight net interest margins that are prevailing in the sector around at 50%, a revelation of the very stiff competition for liquidity among the banks especially at a time the market had been without efficient inter-bank transactions due to the absence of quality paper to use as collateral. These prevailing high money market yields put Zimbabwe’s money market among the best yielding markets in the world in dollar terms. However the ability of the market to continuously attract more offshore funds chasing these high returns remains constrained by policy uncertainty, especially regarding the tenor of the multiple currency system.

Whilst money market investors continue to bask in the glory of good returns, the borrowers have been finding the cost of funding balance sheet very high and unsustainable. Zimbabwe needs continuous fresh capital inflows to fund the recover process of the economy, and indeed the existing high interest rates on the money market should act as good enough an incentive in attracting high risk capital inflows from financial centres around the world where interest rates remain very subdued around 1% per annum. On the contrary, the much desired economic recovery cannot be achieved with the existing high rates of borrowing, especially for industry that is willing to embark on long-term capital projects.

A balance would therefore need to be struck to ensure that the investment interest rates remain attractive to the global investors, whilst at the same time ensuring that the pass-on rates to the borrowers do not over-burden an already fragile economy. A policy framework that is predictable, transparent and consistent would usually provide the anchor upon which the important market variables will converge to create a vibrant efficient market mechanism that promotes growth.

New Mining Fees - Noble Intentions, But...

The recently gazetted mining regulations under statutory instrument 11 of 2012 have instigated constipation. And many miners, mostly the small scale indigenous miners feel the government is misdirected and has abandoned them. They are justified, to some extent. To successfully register an ordinary gold claim measuring 10 hectares, small scale miners would need to part with $500 for the prospecting licence, $20 for the map, $200 for the claim certificate and anything up to $500 for the prospector. The total would be at the minimum, $1,200. For chrome, small scale miners will need to pump at least $2,600 in regulatory fees before registering an ordinary block. Small as the figures may seem, the background of those that get into small scale mining relegates them to a position where they may not be able to venture into mining legally again. Very few new small scale miners will be able to register claims.

By the stroke of a pen, the lives and livelihoods of many small scale miners and their wider communities in Makonde, Mt Darwin, Sanyati, Shamva, Mazoe, Gwanda, among other areas, have drastically changed for the worst.

Not only are the small scale miners going to find the heat unbearable, but the big mining companies as well. The platinum claims application and registration fees have been hiked significantly to $3 million! The diamond sector sees one needing at least $6 million to register claims. A quick scan of Zimbabwe Stock Exchange listed companies' balance sheets reveals that no more than 5 companies (excluding banks) have net cash positions exceeding $6 million. In any case, most corporates are highly geared and cumulative losses since dollarisation in 2009 top $710 million. It is therefore obvious that more than 90% of listed companies on the ZSE cannot raise $6 million in free cash flows and therefore may not participate in the diamond mining even if they had interest to diversify into the same.

Right issues have performed dismally in the past, and local shareholders have no capacity to raise cash to fund their existing businesses. Therefore given the scenario where the new regulations are barriers for even listed companies to take part in alluvial diamond mining in Zimbabwe, the most plausible explanation for those that will undertake and indeed pay the $6 million largely point to cunning indigenous investors that do not mind being fronts and stooges of foreign capital as long as it take them into the lucrative alluvial diamond mining. And life goes on!

The notion that diamond mining is capital intensive is only a myth as far as alluvial diamond mining is concerned. Ordinary people with sticks and shovels could discover alluvial diamonds in Chiadzwa, mine them illegally and make fortunes, of course with little benefit to the wider society of Zimbabweans as a whole! The government can therefore not argue that the hike in fees is to screen investors and afford those with capacity to mine to take part, at least for alluvial diamond mining.

The government has therefore created huge barriers to entry largely across the board in mining and the majority of indigenous people, whose wealth was destroyed by a decade of hyper-inflation, will be at the worst footing to enter into mining. And indeed the whole aspect of indigenisation, according to those feeling left out, becomes a zero sum game. The BEE programme in SA has largely failed in the mining sector as it created a few island billionaires who many believe are indeed fronts and stooges of foreign capital. The indigenisation of the mining sector in Zimbabwe, unfortunately, will get the same tags.

But the government’s overall motive is not at all wrong. The mining sector in Zimbabwe, in particular coal, dolomite, platinum, natural gas and others, are largely in the hands of largely. The nation continues to suffer critical power shortages when many coal concessions have been granted. But again the fact that the exchange control regulations and the restrictive pricing regime of the last decade made it difficult for long-term investors to pump money into large scale projects, especially energy projects, cannot be ignored. Nevertheless it doesn’t take away the fact that the majority of those granted concessions the last few years have not been speedy enough to begin meaningful utilization.

Makonde, for example, is known for good quality gold and most of the mountains in the area have old German gold mines with very deep, dangerous but lucrative shafts that were abandoned around the late 1930’s when German miners responded to the WW2 call up. However most areas around Gambuli extension are in the hands of speculators that pegged huge blocks they are not utilising, denying other serious miners that may be interested in doing meaningful gold mining and contributing to the good of the economy. The annual ground rental fees at the ministry of mines had gotten so low that people did ‘air pegging’, ending up pegging pieces of agricultural lands and dams because the cost was very negligent.

The recent move therefore to hike fees in the mining industry is, to some extent, a step toward the right direction. The government should in fact consider increasing the ground rental fees as these are largely linked to production and would deter investors from being largely speculative by holding on to mining claims they have no capacity to utilise. Had the government not taken the steps to dispossess De-Beers of the Chiyadzwa claims countrywide, up to this day no alluvial diamond mining would be occurring in Manicaland. De-Beers would still be holding onto its EPOs and treasury would not be getting the annual $600 million in budgetary support from ZMDC, the government company that is partnering with private investors in diamond mining.

The annual licence renewal fees for gold miners, be it small scale, at $400 per claim, are not too huge after all to cause massive outcry. A small scale gold miner on 10 hectares and doing mining should honestly afford $400 licence fees per annum, just one third of an ounce or rather 10 grams of gold. Miners doing gold mining and not affording to extract 10 grams of gold per annum to afford them to meet the annual ground rental fees should quit and rather try tobacco farming. Mining, being an extractive industry, is not for the lazy and laid back. Pretenders should therefore leave space for serious miners who have capacity not only to make money for themselves, but create significant employment opportunities and contribute considerable amounts to the fiscus in royalties and corporate tax.

The government stance to put pressure on miners to encourage production should therefore be applauded. Although the government recently hiked royalties on platinum and gold, and has huge interests in diamond mining, all these come to nothing if the overall mining output remains very low. Mining sector in Zimbabwe contributes to about 6% of GDP and 65% of total share of exports. To industrialize and graduate to being a developed country, Zimbabwe needs to harness its mining activities and graduate from most of the hand-to-mouth mining activities scattered around the country. Shamva, Zvishavane, Hwange and Redcliff are all towns that came out of successful mining companies that employed thousands of people and transformed the lives of many more Zimbabwean through direct and indirect linkages to the economy. It is high time therefore that the mining sector is corporatised to set a good foundation for growth and accelerate the status of Zimbabwe to being a developed country.

In general the mining game has changed the world over, with countries such as Guinea, Australia, Zambia, Ghana, Namibia and Zimbabwe all now wanting a bigger share and say in how their resources are exploited. This has come in the form of increasing taxes such as in Australia and Ghana. In Australia, that is expected to rake in an addition $8 billion this year. Others have hiked royalties such as in copper rich Zambia, from 3% to 6% on copper mining, whilst Zimbabwe and Guinea are garnering for shareholding in mines at 51% and 15% respectively. The Zimbabwe government nevertheless needs not be too overzealous to the extent of pushing out indigenous miners and pave way for foreign capital, crooks and mafia in an unjustly way. Although the mining sector earned $4.6 billion in export earnings since 2009 and can do more should many serious players come in, most of the money remains banked off-shore and Zimbabwe continues to suffer liquidity challenges that have slowed economic recovery.

The majority of the policy makers do not understand that the big figures of mining exports do not necessary translate to increase in GDP as the mining sector contributes only a paltry 6% to GDP notwithstanding exporting over $2 billion per annum. A very balanced approach needs to be struck that should see speculators relinquishing their speculative positions to enable serious players to embark on meaningful mining activities whilst at the same time not creating a situation that chases indigenous miners out of mining and paving way for destructive foreign capital made up of crook, thugs and mafia.

ZISCO - ESSAR DEAL A MONUMENTAL MESS

Since August of 2011 when the Zisco-Essar deal was announced in the various media, there have been many conflicting media reports regarding the actual status of the deal. Essar Africa Holdings Limited (EAHL) is reported to have committed an investment of approximately US$705 million into, among other things, relieving ZISCO of its liabilities. This, as reported, forms the basis of the Zisco-Essar deal (the “Transaction”).

Media reports further state that two new entities would be created, the NewZim Steel Private Limited (NZS) and NewZim Minerals Private Limited (NZM). These, we are told, will be owned 40%:60% and 20%:80% by the GoZ and EAHL respectively. This transaction violates the indigenisation laws of the land but however, with good reason, many Zimbabweans would not have bothered much as long as it furthered their interests in a transparent and beneficial manner.

Zimbabwe boasts of abundant mineral resources. We have the second largest reserves of Platinum in the world. Equally, at an estimated 33 billion tonnes, Zimbabwe has arguably the largest iron ore reserves in the world. The government has been progressive in private-public sector partnerships lately. We see the indigenisation of the diamond sector set to bring about $600 million into the government coffers in 2012, an immense benefit to ordinary Zimbabweans coming out of the mineral resources that, if left entirely in private hands, would not be trickling to the benefit of every Zimbabwean. Similar initiatives in the mining of platinum and indeed localisation of the smelting will surely bring immense benefit to Zimbabweans.

Gone are the times when the IMF and World bank wood-winked resource-rich third world countries into giving up their resources almost for nothing to developed countries under the false pretence of being progressive. The crisis in the developed world today confirms beyond doubt that indeed economies that do not produce real goods cannot sustain themselves for a long time. It is getting clearer each day that indeed human beings on earth live on goods and commodities everyday, and the service industry is just there to smoothen the production and availability goods and commodities to ensure the survival of mankind.

As such, every transaction of national importance involving mineral resources should be given proper and due consideration to ensure that the interests of Zimbabweans and indeed the future generations are safeguarded to avoid any potential prejudice. The fact that Zisco has been lying idle for a long time should never be used as an excuse by the government to deprive Zimbabweans of their right to fair disposal of the underlying assets.

Three key aspects are very important about the deal. Firstly, the deal is the biggest disposal ever concluded by the state post independence. Secondly, it was negotiated at a time when the government had full knowledge of the various indigenisation initiatives currently underway in the mining sector. Thirdly, ZISCO assets are largely national assets that serve the very broad interests of Zimbabweans whilst being represented at the shareholding level by the state.

Given the above submissions, the disposal of any government shareholding in ZISCO, more so a majority shareholding, should be systematic and transparent to ensure that the interests of all stakeholders are appropriately safeguarded. A transaction involving the disposal of a significant shareholding in a deal where the underlying assets involve an estimated 33 billion tonnes of iron ore (above $100 billion) surely needs some high level of transparency and accountability. Indeed there should be a deliberate effort by the Minister responsible, Professor Welshman Ncube, to make public all the key elements of the transaction so that Zimbabweans can, with full information, adjudicate if indeed their interests have been safeguarded. Common sense says that it is virtually impossible to get unanimous approval of the deal from all Zimbabweans, and all the same, it would be unreasonable to call for a referendum on the same. But nevertheless, a transparent framework of the bidding process and subsequent disposal of national assets should be made pubic at one point in time. Confidentiality and non-disclosure aspects that generally accompany such similar transactions can surely not be used to deny the public the right to know how national assets are being disposed of, and in whose benefit.

The media has been full of the dark side of ZISCO pertaining to how much it owes foreign banks, local banks, employees, Zimra and so on. Zisco, so it has been painted, and rightfully so, is in trouble and needs to be resuscitated. But one thing has never been made public, and that relates to the assets of ZISCO. The injection from Essar, we read, will assume all the debts of ZISCO in exchange for shareholding, plus some cash injection that takes the total consideration to $705 million. Common sense says that a company cannot be sold on the strength of its liabilities, and as such, the over-emphasis of ZISCO’s liabilities and the subsequent disposal of Government shareholding on that strength raises more questions than answers on the whole transparency and fairness aspects of the deal.

Zimbabweans need to be furnished with at least three independent valuation reports of the iron ore and limestone reserves that are owned by ZISCO directly or otherwise at Ripple Creek, Mwanesi and Buchwa and other related mining claims owned by Zisco. The disposal of any mining assets cannot be done without geological and valuation reports of the ore reserves. Rivesdale Mining Limited, listed on the Australian Stock Exchange, prospected for coal in Mozambique and ascertained 13 billion tonnes of coking coal reserves in Benga and Zambezi. Tata Steel, Rio Tinto PLC and CSN, among others, bid up to $4 billion on the IPO in 2011. These companies bid up to $4 billion for the Mozambican coal reserves because they knew there was 13 billion tonnes of coking coal at stake. What iron ore reserves are we talking about at Zisco? Does it need to be a secret to a few cabinet Ministers when the owners of the assets, Zimbabweans at large who are the ultimate beneficiaries of the government shareholding in Zisco, are in the dark?

Of course without making the assumption that no drillings were done to ascertain the reserves during the Transaction, it is very important that independent valuation reports of the ZISCO mineral reserves and other assets be made public for Zimbabweans to understand the value being given up in ZISCO in return for the cash injection and debt assumption by Essar. That forms the basis upon which a conclusion can be reached on whether the deal was reasonable, fair and transparent. From a casual analysis, Essar, with their massive experience in the steel business, definitely knew what they were buying into by assuming significant shareholding in NewZim Minerals Private Limited and splashing $705 million into the deal. But there are huge doubts on whether indeed the Government of Zimbabwe, on behalf of Zimbabweans, acted on correct information in agreeing to the deal. If it did, then surely it has to be made public.

There are media reports that a 260km long slurry pipeline would be build from Chivhu to Mozambique to pump iron ore. There is potential prejudice to Zimbabweans in terms of loss in Value Added Tax, Corporate Tax and Pay-as-you-earn running into hundreds of millions of dollars every year if this is allowed to be an integral part of the Transaction. Equally, the valuation of unprocessed ore is very subjective and there are potential loopholes that could allow transfer pricing, resulting in Zimbabwe potentially losing billions of dollars. Whilst it is common knowledge that selling unprocessed iron ore to the Chinese is a very lucrative business the world over, many questions therefore arise on whether the Government of Zimbabwe could equally not just have sold part of the iron ore reserves to extinguish debt and later court partners from a point of strength.

Taxation aspects are a big issue in such big mining transactions. The explicit and implicit taxation concessions granted under this Transaction need to be made public as well. Resource rich countries such as Zimbabwe, Zambia, Nigeria and so on continue to lose billions of dollars in potential revenue from unbalanced tax concessions that do not take into account the depletion of the natural resources. Even nations such as Australia, whose markets and business laws are viewed by many as progressive, have lately been reviewing their taxation levels on mineral resources.

A number of media columnists and ordinary Zimbabweans, through the various media houses in Zimbabwe, have questioned the fairness of this deal, but unfortunately no official response has been given. Of course it is not that persons appointed to public office respond to all concerns that are raised in the media, but surely concerns involving 33 billion tonnes of iron ore belonging to Zimbabweans deserve a formal response, failure of which recourse to the courts of law may be the only way to elicit responses on such matters of utmost national importance and prejudice.

Big deals, big mistakes

The year 2011 has been a year of big deals. One of the biggest deals, the Essar deal, remains in controversy to this date. Having gotten 54% of Zisco in a special bargain, well above the 49% shareholding that is normally reserved for foreigners, Essar believes it can get more. There are reports of its planned iron ore slurry pipeline to be built from Chivhu and Kwekwe all the way to Beira. Why would Essar want to pump unprocessed ore out of Zimbabwe at a time players in the chrome industry are being forced to add value? How much will the country lose in terms of VAT, income tax, jobs and so on if iron ore is going to be processed outside Zimbabwe?

How does one put market value to unprocessed ore being pumped out of Zimbabwe for taxation purposes and do we have capacity to deal with transfer pricing issues that could potentially prejudice the country of billions of dollars? Does it ever make sense that big mining companies do not pay that much in corporate tax in the country they extracts the resource, whilst the tax is paid elsewhere? In the US, GlaxoSmithKline PLC, a UK drug maker, settled $3.4 billion for its transfer pricing sins, and the US government is always taking to court suspects of prejudicial transfer pricing. Zimbabwe could do much more for its minerals that are exported with very low values. If the values of the ore reserves of Zisco are in excess of $50 billion, why therefore would Essar get 54% in the first place as a special case in violation of the indigenisation laws? There are just but many questions on the Essar deal that remain unclear and indeed the deal is big, with big mistakes as well on part of the Zimbabwe government.

Steal from me and I will fix you!

Having well understood and appreciated the contribution of the diamond revenue in transforming the Zimbabwean economy, Minister of Finance made two important decisions in the last budget. The first was to acknowledge that indeed the diamond revenue in Zimbabwe, just like in Namibia and Botswana, is very critical in determining scope and direction of GDP via the government revenue route. He revised the revenue estimates upwards by $600 million to $4bn. If diamonds bring $600 into the fiscus, what is the government getting directly from gold and platinum whose combined exports are estimated over $1.6 billion annually?

Hiking royalties, according to Hon Biti, could bring the desired cash into government coffers since the government has no notable shareholding in the mining of these two key minerals where not much accrues to the government as compensation for the depletion of the natural resources other than the obvious PAYE and corporate tax. He hiked royalties from Gold and Platinum to 7% and 10% respectively as if saying ‘steal from me and I will fix you’. In Zambia, copper exports are expected to top $8.4 billion this year, but the mining sector contributes a paltry 11% to GDP. Worse still, bank deposits remain below $5 billion whilst cost of credit has remains very high above 30% per annum on the back of a volatile exchange rate.

These factors put Zambia in a difficult scenario of failing to finance infrastructure projects to develop the country yet it will export copper worth over $20 billion in the next 4 years. The fact that the copper exports proceeds remain offshore is the major curse of Zambia, and indeed it will remain poor a country notwithstanding the huge resource endowments in copper. Zimbabwe and Zambia may need to borrow a leaf from Austria. In Australia, 85% of the mining industry is foreign owned. To compensate the Australian for the depletion of resources, the Australian government imposed new taxation levels that, in effect would take the cumulative taxation levels to as high as 57%, making Australia miners the highest taxed in the world. Surplus profit will be charged at 30% beginning January 2012. That is expected to add an additional A$4bn every year, which money will go towards infrastructure projects and pension.

The Chamber of Mines in Zimbabwe has a different idea. It opposes the increase in royalties and believes the mining sector is contributing more to the economy through investment in health, education and housing. That fact is not deniable, but does the Chamber of Mines believe that building toilets and schools in the remote areas for their employees’ benefit is good enough to off-set the royalties? If a big mining company sets up operations in the bush and builds a road to get there so that they can extract the resources, and equally builds a clinic so that their sick and injured workers get attended to as per the law, would one honestly call that ‘significant’ in contributing to the development of the economy?

That a very sick argument, and indeed the President of the Chamber of Mines, Mr Chitando needs to understand that royalties address the wider spectrum in the distribution of national income from key resource endowments as opposed to localised benefits to a few people. The government will be receiving at least $100 million each year from the recent hike in royalties from Gold and Platimun, and surely the mining sector, on its own volition through building classroom blocks, toilets and clinics, cannot be expending as much annually for the wider benefit of the economy. Indeed the Minister of Finance was spot on.

Mathematics, a difficult subject after all

The last person you expect to get numbers wrong is the accountant, moreso the Ministry of Finance lest other ministries are allocated disproportionately higher votes in error. The economy is growing, no doubt about it. Economic growth is estimated at 8.1%, 9.3% and 9.4% for 2010, 2011 and 2012 respectively, so the official position stands. GDP tops $8.3 billion, $10.1 billion and 11.9 billion for 2010, 2011 and 2012 respectively. These figures from the budget do not tally at all, so will all the statistics that use GDP as the base reference. The mathematics is very bad, even if the nominal GDP figures are deflated using the average inflation. The ordinary person does not need to know the implicit GDP price deflator that is used to arrive at the GDP figures, but the bottom line remains that the figure as published in the budget are somewhat not correct unless what we refer to nominal GDP is probably GDP at purchasing power parity.

Nominal GDP growth from $8.3 bn to $10.1 bn is 22%. What is the figure of the real GDP in billions that then that gives us the official growth position as stated of 8.1%? Taking the 2009 GDP estimate to be correct, would it not be the correct position to say our GDP as a country is $7billion for 2011, not the $10.1 billion we are getting from the Ministry of Finance? Mathematics has always been a very difficult subject since the beginning of time, and indeed when it comes to national statistics, more attention needs to be given to such so that planning becomes much easier for everyone.