15 October 2021
The National Budget consultation season is upon us again. The Finance and Economic Development Committee and the Expanded Sustainable Development Goals (SDGs) Committee have been conducting public consultations from the 11th to the 15th of October to solicit views from citizens on the 2022 National Budget. As the parliament solicits citizens’ views on the upcoming national budget, it is guided by the 2022 Budget Strategy Paper that was presented by Minister of Finance and Economic Development in July 2021 under the theme: Reinforcing Sustainable Economic Recovery and Resilience. The national budget consultations for the 2022 National Budget are coming at a time when the country is still grappling with the effects of COVID -19 across several social sectors, including education, social protection, employment, and ability to earn, and health. Domestic resource mobilisation is key as the country forges its economic recovery and sustainable development path especially in the wake of Covid-19. Part of ZELA’s work is to influence mining sector governance reforms that help to deliver greater transparency and accountability for improved community benefit. This work is premised on the fact that the government’s National Development Strategy (NDS)1 and the 2030 National Vision are anchored on the mining sector. The sector has massive potential to broaden government’s revenue base as it currently accounts for more than 60% of the country’s exports. In this brief, ZELA shares key areas that the 2022 National Budget must focus on to improve service delivery and fight escalating extreme poverty.
Budget allocations to social service sectors
The Government increased allocations to the health sector by 2.8 % in the 2021 National Budget. Whilst this was a commendable progress, the budget allocation was still below the Abuja Declaration target of 15%. In light of the further deterioration of the health sector by COVID-19, more resources should be allocated towards resuscitation of the health system of the country. In the education sector, the country is struggling to allocate 20% of the National Budget to basic education as required by the Dakar Declaration of 2000. In the 2021 National Budget, the health ministry was allocated about ZWL 54 705 000 million representing 12.9% of the National Budget whilst the basic education ministry was allocated ZWL$ 55,221,000 million representing 13% of the National Budget. It is important for the 2022 National Budget to lead the country in the COVID-19 recovery path by improving allocations to the health and basic education sectors in line with the Abuja Declaration and the Dakar Declaration targets, respectively. The 2022 National Budget must also allocate more resources to social protection programmes. According to the Social Policy for Africa (2008), 4.8% of the country’s GDP should be allocated towards social protection programmes.
Proposed Tax Measures and Policies to increase domestic resource mobilisation
The 2022 National Budget is expected to lead the country in the COVID-19 recovery path by reflecting reforms and measures to address the resource mobilisation challenges presented by COVID-19. Taking into consideration that Zimbabwe has got mineral wealth, domestic resource mobilisation from this sector deserves greater public attention in the upcoming National Budget. Below are the key tax mobilisation policy and measures that must be adopted for the country to use mining as a lever for domestic resource mobilisation.
Strengthen measures to curb smuggling of minerals
- Government must take concrete steps to curb gold smuggling which is currently draining the fiscus. Gold smuggling among other Illicit Financial Flows (IFFs) avenues continue to stifle government’s capacity to allocate adequate revenue to social services. In September 2020, Minister of Home Affairs, Kazembe, Kazembe revealed that Zimbabwe was losing at least US$100 million worth of gold every month which is smuggled out of the country. Basing on the 2021 allocation to the health sector, the government would have met the 15% Abuja Declaration by only saving half of the US1.2 billion that is lost annually due to gold smuggling. The mining royalties that the country rakes in from all minerals per year (approximately US$90million based on the 2021 Mid Term Budget performance) are far much below the revenue that is lost annually due to gold smuggling alone. Curbing gold smuggling and directing revenue to the health sector would help the country to fund pressing health care needs and cushion citizens from high out of pocket health spending which is pushing citizens into abject poverty. The 2022 National Budget should put more resources towards government departments that monitor smuggling of minerals such as diamond and gold. These include the Minerals and Border Control Unit.
Finalise the computerised mining cadastre system
The current discussions on mining transparency policy and legislative reforms within Government are centred on the computerisation of the mining cadastre system. Through the computerised mining cadastre system project, the government intends to create a database of information such as applications, licence holders’ rights, restrictions, sizes of mining claims and their geographical location among other issues. The computerised mining cadastre system is a great stride and efforts to finalise it are commendable. If fully rolled out and disclosure is provided for, the computerised mining cadastre system provides opportunities for addressing mine ownership disputes, loss of potential revenue from mining claims as awarding, administration, and security of mining titles especially in the ASM sector will be enhanced. This will also give government an opportunity to tax better the ASM sector which has been contributing more than Large Scale Miners in terms of gold deliveries to Fidelity Printers and Refiners. The 2022 National Budget should avail adequate resources towards finalisation of the computerised mining cadastre system. To improve resource mobilisation in the ASM sector, Government must consider integrating the computerised mining cadastre system into ZIMRA’s tax payers database.
Strengthen Tax Incentives Transparency and Accountability
- The 2022 National Budget is expected to strengthen transparency and accountability in the awarding of tax incentives in the mining sector. Government must engage the public on tax incentives. While the country is struggling to meet public health, demands exacerbated by COVID-19, the Government of Zimbabwe continues to award tax incentives in the mining sector. Commendably, the Government’s policy framework is alive to the negative impacts that tax incentives have on domestic resource mobilisation. In 2019, the government committed to “develop a tax incentive monitoring and evaluation framework to facilitate the management of timed tax expenditures as well as to inform Cost-Benefit Analysis of tax expenditures by Treasury, on an annual basis, with effect from 1 January 2019.” A sift through the Zimbabwe Revenue Authority (ZIMRA)’s Annual Report shows that a total of ZWL $ 111.55 Billion was forgone through tax expenditure representing 555.79% increase from the ZWL$ 17.01 billion forgone in 2019. A comparison of tax revenue forgone of ZWL$ 111.55 billion against the actual total revenue collected by ZIMRA in the year 2020 (ZWL$171.9 billion) shows that an equivalent of 65% of the total government revenue was gobbled by tax expenditures. Government’s efforts to improve public disclosure of the amount that is being forgone through tax expenditure are commendable. However, there is need for Government to engage the public on tax incentives since they have a bearing on domestic resources mobilisation and access to basic services by the citizens. It is also important for the National Budget to disclose revenue that is forgone through tax expenditures for public and parliamentary scrutiny. More importantly, the government must publicly disclose the cost benefit analysis that is being done to ascertain whether the tax expenditures are achieving their intended objectives.
Strengthen Gold Export Incentives Transparency and Accountability
- In June this year, the Reserve Bank of Zimbabwe introduced a new gold export incentive scheme in which gold producing companies which deliver gold quantities above their average monthly deliveries are entitled to a retention level of 80% on the incremental portion of the gold delivered to Fidelity Printers and Refiners (FPR). Gold producing companies were retaining 60% of their gold export proceeds in foreign currency before pronouncement of this new policy position. The 60% foreign currency retention was being applied irrespective of mining companies’ production levels. Miners were required to sell 40% of export earnings to the RBZ’s foreign currency auction system. Effectively, the 20% difference represents the amount of foreign currency that the government is forgoing on the incremental portion of gold that mining companies will deliver to Fidelity Printers and Refiners (FPR). It represents a loss in potential foreign currency that the government could use to fund the foreign currency auction system and improve procurement of essentials including drugs and fuel.
Much as it is commendable that the Government is committed to boost gold deliveries to FPR, significant gaps remain on the transparency and accountability of the gold incentives. Such incentives can be easily abused in a political and economic context where there is a transparency gap and where political actors may hold economic interests or intend to benefit from the incentives. There is no public disclosure of verifiable information on production by mining companies as the country does not have a comprehensive transparency reporting mechanism in the mining sector. Fidelity Printers and Refiners (FPR)’s production statistics are not aggregated to reflect production levels of each gold mining company. Citizens have access to production levels for mining companies such as Caledonia since it makes its financial statements publicly available. Beyond disclosure of production levels, the company also discloses the tax payments that it makes to governments courtesy of the Extractive Sector Transparency Measures Act (ESTMA). In the case for other gold producing companies, disclosure of production levels is ad hoc. In cases where the information is disclosed, it is difficult to verify the figures since the information is shared through the media. In June, the Herald published an article which indicated that Kuvimba Mining House’s gold mining asset, Freda Rebecca Mine broke a 20-year production record after it churned out 300kg of the yellow metal in May this year alone. To ensure transparency and accountability, it is important for the 2022 National Budget to publish information relating to the names of the companies that have benefited from the gold export incentive scheme thus far and the extent to which the gold export incentives are fulfilling the intended objective of improving gold deliveries to FPR.
Formalise the Artisanal and Small-Scale Mining (ASM) sector to improve domestic resource mobilisation
- Government must urgently formalise the Artisanal and Small-Scale Mining (ASM) to create an environment that allows its players to contribute more to the fiscus as well as facilitating their benefits from government programmes. More than 1.5 million in Zimbabwe directly depend on ASM, with three million people indirectly benefiting. Apart from creating employment, the ASM sector also contributes towards tax revenue mobilisation.
More needs to be done if the ASM sector is to significantly contribute to domestic resource mobilisation, poverty alleviation and sustainable development. As part of the formalisation agenda and measures to improve tax compliance, the Government must undertake consultations, education and training programmes targeting this sector. Resources must be channelled towards these programmes. A look at the 2020 ZIMRA report shows that ZIMRA managed to register 21,643 new taxpayers. The increase in the registration of new taxpayers was attributed to tax education and engagement programmes. However, there was no disaggregated information to show the number of ASM players who were reached out to by ZIMRA. Government must publicly disclose information relating to the number of ASM players being registered and make follow ups to ensure that those registered ASM players are up to date with their tax obligations.
More importantly, the overwhelming informality of the ASM in Zimbabwe requires comprehensive policy and legislative reforms in the sector. Government must quickly develop an ASM policy. The legality of the ASM sector must be addressed through the Mines Bill.
Budget support towards the ASM loan programmes
- The government’s ASM loan programme is very key to the contribution of the sector to the achievement of the US$ 12 Billion Mining Strategy by 2023. To improve transparency and accountability, the Ministry of Mines and Mines Development’s quarterly performance reports should disclose information relating to the beneficiaries of the ASM loans and their impacts on gold production and delivery to FPR.
Other Supporting Mineral Governance Reforms
Expedite finalisation of the Mining Policy
- Whilst the National Development Strategy (NDS)1 and the US12 Billion Mining Economy seeks to turn around the fortunes of the country at the back of mining, the country is operating without a mining development policy. Due to absence of a mining development policy in Zimbabwe, there is no clear overarching mining policy direction on exploration, production, beneficiation, marketing and transparency and accountability of mineral revenue. This has often created lots of policy and legal reversals and inconsistencies. A case in point is the Indigenisation and Economic Empowerment policy which has been subjected to several amendments since 2008 when it was launched. The Government of Zimbabwe overtime has been making efforts to develop a mining policy. However, these efforts have not yet led to a final policy being adopted and implemented. Finalisation and ensuring that transparency and accountability aspects are incorporated into the policy in line with the Constitution of Zimbabwe and International Best Practises like the Extractive Industries Transparency Initiative (EITI) will assist in defining Government’s overall intention, direction and measures that need to address cross cutting issues including Illicit Financial Flows (IFFs), shareholding arrangements and community benefit sharing. By finalising the Mining Policy and implementing it, the government will also be providing the basis of amending laws regulating mining in Zimbabwe.
Apart from the mining policy, there is need for the Government to develop policies for unique mineral value chains like gold and Gemstones. In the gold sector, there is no clarity with regards to government’s policy direction who should invest in the gold value chain, models of partnerships within the sector, accountability of gold including measures to curb criminality and illicit gold trade. The need for a Gemstone policy framework is evident. ZELA’s recent IFFs study in the Gemstone sector pointed that citizens, local authorities and the central government are not optimizing benefiting from the Gemstone value chain due to lack of clarity on policy and legislation on the production, trade beneficiation, model of partnerships among other issues.
Expedite the enactment of the Mines and Mineral Amendment Bill to promote transparency and accountability
- While the National Development Strategy (NDS)1 alludes to the importance of transparency and accountability as a prerequisite for achieving both the US12 Billion Mining Economy and the target to turn the country into a middle-income country by 2030, the 2022 National Budget Strategy does not mention the need to adopt a comprehensive policy framework to address the opacity in the mining sector. Zimbabwe has not adopted EITI despite Government of Zimbabwe’s renewed interests to join EITI as expressed in the 2019 and 2020 National Budget Statements. The amendment to the Mines Act Mines which provides opportunities for the country to strengthen transparency and accountability in the mining sector is yet to be finalised. During the Mid Term Budget Review presented in July, Minister Mthuli indicated that the Bill was being discussed at cabinet level.
The Extractive Industry Transparency Initiative (EITI)
- Whilst the computerisation of a mining cadastre system is a move in the right direction, there is need for Zimbabwe to adopt a long-term mining governance framework to the transparency bottlenecks in the mining sector including expediently taking the necessary steps to join EITI. There is an expectation that the government will include the EITI roadmap in the 2022 National Budget.
Mineral Revenue Transparency and Environmental Budgeting
- It is evident from the Mid Term Budget Review presented in July that the country’s social and economic development prospects is anchored on Domestic Resource Mobilisation (DRM). As expected, the Mid Term National Budget Review disclosed what the government earned between January and July, in both ZWL$ and USD$. The cumulative revenue collection for the period January- June amounted to ZW $ 198.2 Billion against a projection of ZWL$ 182.1 Billion resulting in a positive variance of 8.8%. The total revenue collection includes a net cumulative foreign currency revenue collection of US$ 698.5 million (against a target of US$ 660 million). There is an expectation that the National Budget discloses the contribution of mining to the tax revenue that is generated both in foreign currency and ZWL$. Currently, the budget discloses separately the tax revenue that is being generated from the mining sector through mining royalties. The Mid Term Budget Review revealed that the country managed to rake in ZW$ 7,698,897,054 from mineral royalties between January and June. However, from the Mid Term Budget Review statement, it is difficult for the public to know how each mineral is performing on all the tax heads including mining royalties. Government must disclose disaggregated information on the contribution of mining to the fiscus for public scrutiny and parliament oversight.
Also, given the environmental debt gap being incurred through mining, it is prudent for the national budget to set aside funds for environmental rehabilitation.
Zimbabwe Environmental Law Association
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