Zimbabwe’s prospects of attracting new mining investment inflows have been dealt a crippling blow by the government’s decision to sweep aside international agreements that permitted a major platinum producer to use its current export earnings to help fund its continuing capital developments.
On February 28, platinum producers lost their rights to hold the proceeds of their mining activities in Zimbabwe in offshore bank accounts. Producers have been instructed to transfer all balances held in offshore accounts to foreign currency accounts with Zimbabwean banks. In order to access these foreign currency deposits, they will now have to comply with the country’s draconian Exchange Control Act and function within a slow and erratic payments pipeline.
The new measures have already been declared unacceptable by the larger of Zimbabwe’s platinum producers, Zimplats. To help Zimplats succeed, Zimbabwe’s government agreed to a need for formal agreements that would permit Zimplats to retain direct control over its foreign earnings while even larger expenditures on imports were still needed for the development of the mine.
With this agreement in place, Zimplats’s output of platinum-group minerals has increased Zimbabwe’s production from about a ton to 10 metric tons a year over the past three years. Zimplats’s expansion plans had been fully accepted by the government and are already in operation. But the uncertainty caused by the Zimbabwe government’s abrogation of the financing agreement will almost certainly force the suspension of these plans.
The plans depended upon purchases of an imported plant, equipment and specialised services that would have absorbed the mine’s total current foreign exchange earnings plus additional amounts from Impala Platinum (Implats), the principal shareholder. The revoking will be treated seriously, especially as the South African and Zimbabwean governments were also signatories to the Impala Platinum- Zimplats agreement.
Zimplats is now likely to lose crucial cash flow assistance that it enjoyed from Implats.
Mounting levels of panic appear to be the driving force behind this and other foreign exchange-related measures taken recently by the Reserve Bank of Zimbabwe. It has waged war on inflation in the past year by holding the exchange rate almost constant. Inflation would have been higher without the enforced exchange rate stability, but the country paid a high price in lost exports and lost export capacity.
Falling foreign earnings from tobacco, beef, cotton, sugar and a wide range of consumer goods have badly impacted on an economy that now needs to import more than half its basic food requirements. With an election less than a month away and one of the world’s worst credit ratings, Zimbabwe now has an urgent need for foreign cash to pay for imported food.
Platinum proceeds appear to have been identified as the one significant untapped resource, but instead of offering some relief to a beleaguered government, the decision to capture platinum earnings seems likely to arrest the one significant investment programme that was actually working.
Repercussions are likely to be felt in many directions. Proposals by other companies to go ahead with other mining developments, notably diamond mining, are likely to be put on hold, as will job creation and training opportunities, increased taxable earnings and the higher foreign earnings inflows that would have resulted from the developments.