Zimbabwe: 'Gold Output Decline Won't Worsen Forex Crisis'

23 January 2020

The decline in gold output last year will have minimal effect on the foreign currency situation in the country, including availability of hard currency on the interbank market because the largest fall was among small miners while better prices in 2019 may off set the volumes drop.

Latest statistics show that gold deliveries to the country's sole authorised buyer, Fidelity Printers and Refiners, fell 16,8 percent in 2019 from 33,2 tonnes to 27 tonnes in the prior year comparative in 2018.

Deliveries to Fidelity from small miners went down to 17 tonnes from 21,7 tonnes last year while the decline among the large-scale producers was only marginal, totalling 10,1 tonnes last year from 11,5 tonnes in 2018.

Reduced deliveries to Fidelity were mainly as a result of lower volumes received from artisanal miners who may have smuggled most of their production amid reservations over the portion they get paid in US dollars.

Analysts said since decline was mainly a result of smuggling by informal miners, who are not happy with the Reserve Bank's foreign currency retention thresholds for the sector, the proceeds of their sales remain in Zimbabwe.

Both large-scale and small-scale miners last year expressed reservations over the Reserve Bank of Zimbabwe's policy of paying them only 55 percent of their proceeds in hard currency while they get the balance in RTGS dollars.

The miners wanted the threshold to be increased to 70 or 100 percent, but the central bank stuck to its guns, arguing what it pays in line with global practice and that it also needs hard currency for many critical imports.

Bullion exports earned Zimbabwe about US$1,3 billion in the 12 months to December 2019, but after the country missed its target of 40 tonnes on account of weak bullion deliveries in the first quarter of the year.

Between them, gold and platinum account for over 60 percent of Zimbabwe's total annual export earnings. Tobacco, the second largest export earner for Zimbabwe, at its height, rakes in nearly US$1 billion annually.

Concerns over the potential negative impact of reduced gold deliveries stemmed from the fact that gold is Zimbabwe's single largest foreign currency earner, followed by tobacco and then platinum group metals.

Gold accounted for US$1,2 billion in annual forex receipts in 2018, translating to close to a third of total export earnings. But analysts have allayed fears that the decline in deliveries may have any significant impact on availability of foreign currency, especially on the formal market, or the foreign currency situation in the country.

Zimbabwe faces an acute foreign currency shortage for critical imports like fuel, power, grain and medicine, due to poor performance of the economy, low exports and low productivity, while the country depends on imports.

Harare economist Brains Muchemwa, said the impact of the production decline will only depend on where the largest decline in deliveries was registered; adding if it was small scale there would be no impact on forex at all.

The reason for that, he said, was regardless of where small-scale miners sell their bullion, the money still ends up being spent in Zimbabwe and or circulating within the economy, even if they smuggle out the gold.

"Gold has small scale and large scale, it depends on which sector the major decline was because if it was small-scale miners, it's not consequential because they sell on the parallel market and the money remains in Zimbabwe," Mr Muchemwa said.

"The issue is that if its small scale, the money may not find its way into the formal market but it will be circulating in Zimbabwe."

Economist and former legislator Eddie Cross, shared similar sentiments but proffering a different perspective that gold output could in actual effect be higher than is officially reported, only that the bulk of it is possibly being smuggled out.

"I don't think we are producing less than 70 or 80 tonnes. I think (production) is going up. The majority of informal miners export illegally, that is the problem.

"This is after the RBZ reduced miners' retention levels from 70 to 55 percent," he said.

Mr Cross also said the gold price was higher in 2019 than in 2018 and that would partially offset the decline in production. As a result, he said if the fall in deliveries will have any impact, the effect would be minimal.

In 2019, one troy ounce of gold had an annual average price of US$1 392,60.

From 2012 to 2018, the annual average gold price dropped from US$1 668,98 per troy ounce to US$1 268,49 per troy ounce.

The former legislator also pointed out that the influence of gold on the formal market was minimal. The central bank only gets 45 percent of the about 10 tonnes large-scale producers deliver while the rest goes to miners' personal use.

Government had set a target of 40 tonnes for 2019 up from 33,2 tonnes in 2018, which by historical measure was a record high.

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