Policy Inconsistency Bad for Mining Investments in Zimbabwe

Zimbabwe’s mining sector is a critical contributor to the country’s economy, with the government pushing to ensure the sector contributes significantly towards the achievement of Vision 2030, where Zimbabwe is expected to become an upper-middle-income economy by 2030.

By Rudairo Mapuranga

However, policy inconsistency, especially concerning currency regulation, continues to undermine investment confidence.

The recent call by former War Veterans Minister Ambassador Christopher Mutsvangwa for President Emmerson Mnangagwa to ban the use of foreign currency in favour of the Zimbabwe Gold Currency (ZWG) if implemented will be the latest in a series of policy shifts in past years.

Ambassador Mutsvangwa urged President Mnangagwa to “issue a Statutory Instrument (SI) making the local unit the sole legal tender.”

Addressing journalists at a Press conference yesterday, Mutsvangwa said the ZWG had to be saved through an SI making it the sole currency of trade.

“We are having a situation where on one side, I have my US dollars and on the other side, the currency is not the same,” Mutsvangwa said. “All these two currencies are mine. Then I cause inflation between the two currencies. I mean, what economics is that? What finance is that?

Such unpredictable changes have left investors and mining companies struggling to operate within an unstable financial environment, severely affecting mining profitability and long-term growth. More with the ZWG currency decline the future will not be so bright.

Currency Volatility and Its Impact on Mining

Zimbabwe’s frequent currency changes have worsened inflationary pressures, destabilizing the mining industry. After the Zimdollar collapsed under hyperinflation, the ZWG was introduced in April 2023. Yet, just a few months later, the ZWG has already lost 40% of its value, dropping from ZWG13.50 per US dollar to between ZWG25 and ZWG28 on the black market.

Mutsvangwa admitted that “people are trying to manipulate the system because the US dollars in the system are not a gift of the American government.”

This rapid depreciation has had a severe impact on mining companies, increasing the prices of essential goods and services. To avoid losses, many suppliers now demand payment exclusively in US dollars, adding further financial strain to the sector.

This environment is particularly difficult for mining companies like RioZim, which saw an increase in gold production of 1% in 2023 but still faced operational challenges due to currency instability. According to RioZim, despite their “improved gold production, operational costs remain high due to the unpredictable financial landscape.”

Forex Retention Policies – A Hindrance to Growth

The government’s foreign currency retention policy has been a significant barrier to growth in the mining sector. Currently, mining companies are required to surrender 25% of their foreign earnings to the Reserve Bank of Zimbabwe (RBZ) at the official exchange rate, which is far below the black market rate that some suppliers use to peg their equipment.

The Chamber of Mines Zimbabwe (CoMZ) has repeatedly voiced concerns over this policy, stating that it “severely impedes the growth of the sector,” as miners are left with insufficient foreign currency to cover operational expenses.

The discrepancy between the official and black market rates has left mining companies in a precarious position, forcing them to pay suppliers and service providers at inflated prices pegged to the black market rates. Despite generating foreign currency, mining companies struggle to keep up with the rising costs of wages, fuel, and equipment, resulting in reduced profitability and diminished capacity to reinvest in their operations.

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Power Supply and Tax Challenges – Compounding the Problem

In addition to currency volatility, the mining sector has had to contend with high electricity tariffs and unreliable power supply. The Chamber of Mines Zimbabwe recently engaged ZESA, the national power utility, to address these issues, as frequent power outages continue to disrupt mining operations. The chamber highlighted the need for “consistent power supply and affordable tariffs” to maintain profitability.

The mining industry has also urged the government to reduce taxes, stating that “the current tax regime places an unsustainable burden on mining companies,” further affecting their ability to operate efficiently.

The Inflationary Spiral and Its Effects on Profitability

The rampant inflation caused by the devaluation of the ZWG has eaten into mining profitability. Since its introduction, the ZWG has quickly lost value, exacerbating inflationary pressures and driving up operational costs. Suppliers, unwilling to accept the unstable local currency, have shifted to demanding payments exclusively in foreign currency.

Mutsvangwa, addressing the issue, stated that “there is an abuse of the system” as both US dollars and ZWG circulate simultaneously, creating an inflationary spiral.

Mining companies, burdened by these rising costs, have struggled to maintain profitability. For example, RioZim reported that, while gold production increased, “operational challenges related to inflation and currency instability persist,” making it difficult to plan for the long term. The industry as a whole remains vulnerable to further currency devaluation, leading to uncertain financial projections and undermining investor confidence.

Investor Uncertainty and the Way Forward

The unpredictability of Zimbabwe’s currency policies has driven investors away, with many expressing hesitation in committing to long-term projects. Mutsvangwa’s suggestion to implement an SI making the ZWG the sole legal tender is likely to exacerbate these fears, as history has shown that such interventions tend to aggravate inflation and deepen currency instability. RioZim warned that while they have managed to improve production, “sustainable growth will require a more stable economic environment.”

The Chamber of Mines Zimbabwe has also emphasized that “investors require policy consistency and certainty” if Zimbabwe is to attract significant investment in its mining sector. Without stable, long-term policies, Zimbabwe risks missing out on major investment opportunities, which are essential to developing its mineral wealth.

In closing

The proposed ban on foreign currency, if implemented, would likely deepen the challenges faced by mining companies, erode investor confidence, and stall progress made in boosting production. The government must prioritize creating a stable economic environment by addressing inflation, revising forex retention policies, and ensuring consistency in its financial regulations. Only through these reforms can Zimbabwe’s mining sector thrive, unlocking its full potential and attracting the long-term investments it desperately needs. It is unlikely that Zimbabwe will fully “ZiG” the economy.