75/25 foreign currency retention policy impeding mining sector growth
It is crucial to protect miners from losses stemming from the nation’s unstable monetary policies, which expose them to foreign exchange risks.
By Rudairo Mapuranga
The current 75/25 foreign currency retention policy is impeding the growth of the mining sector and fails to meet the demand for an 80% retention rate, which seems to be a better option for miners to sustain their growth.
Recently, the volatile exchange rate ate into Caledonia Mining Corporation‘s profits. The company reported a foreign exchange loss of US$4.1 million in the quarter ended 31 March 2024, compared to a foreign currency gain of US$1.5 million in Q1 2023.
What is the Foreign Currency Retention Threshold in Zimbabwe?
Last year, the central bank raised the foreign currency retention threshold for exporters to 75%. Previously, exporters were only allowed to retain 60% of their foreign currency earnings, leading to challenges in accessing forex for vital capital expenditures and operational financing.
Is the Forex Retention Feasible for Miners?
Miners argue that the forex-deprived economy forces exporters to convert a portion of their earnings into local currency at an official exchange rate, which often results in losses due to the significant disparity with the black market exchange rate. With over 70% of transactions in Zimbabwe now in USD, meaning suppliers are now charging in forex, mine executives had expected the central bank to either raise the retention threshold more or drop it entirely.
An industry report published by Zimbabwe’s Chamber of Mines says the sector will experience a slower 7% growth in 2022, down from a projected 8% last year. Mining costs are projected to increase by 15% in 2023, with energy being the main driver, the report said. ZESA tariffs for miners, paid in USD, went up by 40% last year, increasing forex pressure on the industry.
Gladys Mutsopotsi-Shumbambiri, an economist with extensive experience in monetary policy, emphasizes the importance of understanding the dynamics at play. She said the demand for forex can lead to inflation, resulting in miners losing their local currency portion to inflation.
“Lower forex retentions mean reduced inflows of foreign currency into the economy. This places the burden on the RBZ to source local currency to fulfil its obligations, potentially leading to increased money supply and inflationary pressures,” she explained.
What is Sustainable for Miners?
Last year, the Chamber of Mines, which represents the country’s major mining firms, lobbied for retention levels to be moved to at least 80%.
“Given that the multicurrency system was embedded into law, we are of the view that there is a need to review the foreign exchange retention framework in line with the new policy changes. We are proposing an upward review of the minimum retention from 60% to 80%.
“Information gathered from mining houses shows that mining companies now require at least 80% of their foreign currency earnings to meet the increased demand for forex and fund their operational requirements and expansion projects,” the Chamber of Mines said in proposals to the Ministry of Finance.
The Gold Miners Association of Zimbabwe CEO, Irvine Chinyenze, commented on how the introduction of the 75/25 per cent policy to the artisanal and small-scale gold miners was going to affect the economy. He said the 75% forex retention was going to incentivize smuggling.
“There was a danger that smuggling was going to be rampant as miners were going to look for more lucrative markets where they get value for money rather than lose value in the process.
“This was going to reduce production at an alarming rate as miners were going to diversify to other sectors that wholly give earnings in US$. Though we can’t quantify criminality, the country was going to lose over US$2bn in revenues if the current policy direction was not reversed,” he said.
“This was going to see a great deal of forex being externalized beyond the country’s borders, thereby losing massive revenues along the way. This was going to create an influx of gold mafia gangs as the authorities created a thriving environment for them to smuggle and externalize United States dollars through illicit deals.”
What Should the Government Do?
The repercussions of lower forex retentions extend beyond the realm of monetary policy, permeating various sectors of the economy. A decrease in the availability of foreign currency can hinder import-dependent industries, leading to supply shortages and price hikes. Furthermore, the depreciation of the local currency against major currencies can erode purchasing power and diminish consumer confidence.
In response to these anticipated challenges, the government must adopt a multifaceted approach that addresses both short-term exigencies and long-term structural reforms. Enhancing export competitiveness and fostering a conducive business environment is essential.