PRESIDENT Emmerson Mnangagwa recently blocked Finance minister Mthuli Ncube’s 10% tax on mining exports to pay arrears on the country’s debt overhang — which makes it difficult for the government to borrow more money — fearing that it might lead to a sudden dwindling of exports and resultant revenues drop.
This would have worsened the country’s foreign currency shortages and liquidity problems. Although Zimbabwe generates a lot of foreign currency, it is always gripped by a liquidity crunch.
Zimbabwe’s exports increased to US$554.6 million in April from US$515.3 million in March of 2023.
Last year the exports were US$6.6 billion.
The country’s export basket is dominated by primary commodities, in particular tobacco, platinum group metals, gold and industrial diamonds, which contribute more than three quarters of export earnings.
Notably, tobacco exports contribute the most, particularly during the last quarter of each year due to the cyclical nature of the product.
Official sources say last month when Ncube proposed the 10% tax on mining exports, Mnangagwa consulted and was told that it would have a disastrous impact on exports, worsening the liquidity situation, amid renewed macro-economic instability ahead of general elections in August.
The sources said Ncube had proposed the tax to Mnangagwa during the African Development Bank (AfDB) meetings which ran from 22-26 May in Sharm El-Sheik, Egypt, where there was a day reserved to assess Zimbabwe’s debt resolution and clearance strategy.
However, when Mnangagwa came back home to urgently tackle economic issues, some of his advisers told him that the 10% mining export tax would be economically harmful as it might compel exporters to reduce or stop selling their commodities in protest to the new fiscal measure or wait for the right opportunity.
If the decrease in the quantity of exports happened, export revenues and foreign currency inflows would also dwindle.
“When Mnangagwa came from Sharm El-Sheik around Africa Day, he had bought into the 10% tax proposal by Ncube, but upon consultations he was told that the measure could be a double-edged sword or harmful,” one official said. “There were fears of exporters withholding their commodities, under-invoicing or smuggling.”
The source continued: “Already we are battling with illicit financial flows connected with corruption, crime, and tax evasion in Zimbabwe. While tax fraud and evasion clearly fall within the definition ‘illicit’, several arguments have been put forward for widening the term to also include legal behaviour which reduces tax payments. Rationales for this include the definition of ‘illicit’ and existence of enforcement uncertainty. One of the most practically compelling arguments has been that there is a large ‘grey zone’ reflecting an absence of clear defining lines between legal tax planning and tax evasion.
“This is often linked to transfer pricing and trade mis-invoicing which are areas of overlapping practice, especially by multinational companies that engage in illicit financial flows.”
Soon after Mnangagwa came back from Egypt on 25 May, he began dealing with the tax issue amid a fight between fiscal and monetary authorities over it.
One of Mnangagwa’s advisers told The NewsHawks: “This issue was recently hotly-debated. Mnangagwa and Ncube discussed paying debts and arrears in Sharm El-Sheik where there was a day reserved to assess Zimbabwe’s debt resolution and clearance strategy.
“Ncube and his economic advisers then lobbied the President in Egypt to charge a new 10% tax on mining exports to pay arrears. The President then rushed back home to discuss the issue further and other economic problems. He summoned ministry of Finance and Reserve Bank of Zimbabwe officials to meet him over the issue. That was on 25 May.
“During the meeting, there was no consensus on the 10%. In fact, there was a dispute. Authorities argued over the wisdom and impact of the tax. Ncube and his officials tried to justify it, while RBZ officials attacked it. Those who wanted it said it would generate money to pay arrears, while those opposed to it said it would create havoc in the export and foreign exchange markets in an already volatile economic environment.”
Fearing dire unintended consequences of the move, Mnangagwa then ordered his officials to consult further and discuss among themselves before meeting him for briefing at State House on 28 May.
“At the 28 May meeting, Mnangagwa took the position that the 10% proposal shouldn’t be implemented. He was strongly supported by the RBZ officials,” a source said.
“In reaction and in anger, Treasury seized the 25% foreign currency surrender receipts from RBZ. Ncube went on to issue a statement saying government shall create a debt redemption fund to service other external liabilities in line with the arrears clearance programme.
“Since Treasury had no budget for this, it said the new arrangement will be funded through new levies and other resource mobilisation initiatives. This means banks can no longer go to the RBZ to get cover and forex to pay their foreign obligations, but to the ministry of Finance even though the issue is under the central bank’s jurisdiction. This disrupts banks’ foreign loans obligation payment plans and other financial arrangements.”
Bankers said they did not have the Zimbabwe dollar budget to pay for the 25% forex surrender requirement. Ncube said he would raise the money through new taxes, which means taxing Zimbabweans to the bone.
A banker said: “Ncube also came up with other supportive policy measures for immediate implementation. Now all export proceeds that remain unutilised after 90 days will be liquidated onto the interbank market. The weekly auction will be limited to a maximum of US$5 million. All public foreign currency debts will be contracted by government and will be the responsibility of Treasury.
“This is problematic. The 90 days given to exporters to utilise their forex, for instance, means that the money is now transitory. This will fuel liquidity problems. It will also promote financial disintermediation, among other things.”
Mnangagwa is under pressure to contain the current economic tailspin and service Zimbabwe’s debts and arrears, especially now given the ongoing debt resolution and clearance negotiations and the upcoming general elections on 23 August.
In December last year, the government established a structured dialogue platform with all creditors and development partners to institutionalise talks on economic and governance reforms to underpin the arrears clearance and debt resolution process.
Zimbabwe’s total consolidated debt stands at US$17.5 billion. Debt owed to international creditors is US$14.04 billion, while domestic debt is US$3.4 billion. Debt owed to bilateral creditors is estimated at US$5.75 billion. Multilateral creditors are owed US$2.5 billion.
The country is in arrears for servicing its debt, with arrears to multilateral development banks, including the African Development Bank (AfDB), the World Bank, and the European Investment Bank. Zimbabwe has paid its arrears to the International Monetary Fund.
Zimbabwe’s debt clearance process is being championed by AfDB president Akinumwi Adesina and former Mozambican president Joaquim Chissano, who has been designated as high-level facilitator.
The two were in Harare for a high-level debt resolution forum on 15 May led by Mnangagwa.
Mnangagwa appointed Adesina as the champion of the process in July 2022.
The debt forum has been focused on three policy reform matrices, presentation of the way forward and a tentative roadmap.
Several meetings have already been held to deal with the issue, including some at Sharm El-Sheikh.
Zimbabwe featured prominently at the AfDB meetings as delegates discussed its debt resolution and clearance strategy.
On 24 May, Mnangagwa addressed delegates at a roundtable meeting on Zimbabwe’s debt and arrears issue. He also spoke to the media about the issue on Africa Day — 25 May – before heading home.
Mnangagwa said in February his government is committed to a plan to clear more than US$6 billion external debt arrears which are a drag on the economy and are hindering Zimbabwe’s access to badly needed new funding and lines of credit.
Zimbabwe, whose foreign debt is over US$14 billion, has not been able to secure financing from international financial institutions, including the International Monetary Fund, World Bank and AfDB, in more than two decades due to its arrears and Western financial restrictions.
While in Sharm El-Sheikh, Mnangagwa and Ncube had discussed how to service the country’s debts and arrears.
Ncube had suggested imposing a new 10% tax on mining exports to raise money to repay foreign obligations, which was rejected.