• Government implements zero-rating policy on gold deliveries
• Move aims to incentivize producers, especially small-scale miners, to sell through regulated channels
• Policy shift follows recent downward trend in gold deliveries, concerns over smuggling

Harare- The government has implemented a zero-rating policy for gold deliveries to Fidelity, the state-owned gold buying entity. This policy change comes after gold deliveries have been sustaining a downward trend since last year.

The zero-rating means that gold producers no longer have to pay any value-added tax (VAT) when delivering gold to Fidelity. The goal of this policy shift appears to be encouraging more gold sales to the official refinery, rather than potentially through informal or unregulated channels.

Prior to this change, the Zimbabwe Revenue Authority (ZIMRA) had been charging a 15% VAT on gold sales, retroactive to January 1st. This meant gold producers were required to pay this 15% VAT in addition to the existing 5% royalty that large-scale gold miners already pay.

This was more severe to small scale miners who operates on tight profit margins compared to large-scale producers. Combined with the existing 5% royalty, this dramatically squeezed the profitability of small-scale miners. The retroactive nature of the VAT implementation would also have created major cash flow challenges, as small miners would have had to pay significant back-taxes. This could force some small miners to sell gold through informal or unregulated channels to avoid the high tax costs, further complicating their operations.

With this, the zero-rating of gold deliveries to Fidelity is likely an attempt by the government to boost gold sales through the official channel and increase gold reserves, especially given the recent downward trend in gold deliveries.

The cumulative impact of these changes seems to be that the zero-rating of deliveries to Fidelity is intended to make selling gold to the state-owned buyer more attractive for producers, by reducing their tax burden.

The net effect is likely an attempt by the government to exert more control and capture more revenue from the gold mining sector, which is an important part of Zimbabwe's economy. The zero-rating of deliveries to Fidelity appears aimed at incentivizing more sales through the official channel, after the retroactive VAT increase had substantially raised the tax costs for producers.

The zero-rating may provide some relief going forward, but the retroactive VAT likely caused significant financial strain for gold producers in the earlier part of 2023.

In 2023, government expected 40 tonnes of gold, only to obtain mere 30 tonnes due to gold smuggling and a toxic operating environment that discouraged operations at high level.

Last week in our addition of The Axis, we highlighted that one of the retrogressive factors leading to poor gold output was a hawkish tax environment exacerbated by high production costs in the form of electricity bills and sales costs due to rapid plunge of the local currency.

In the latest May precious metals delivery data, both large-scale and small-scale mining operators in the jurisdiction experienced a significant decline in gold deliveries. Large-scale producers delivered 1,056 kg, a 1.3% decrease from the 1,070 kg they had produced in the prior year's May period and a 9.6% decrease from the 1,168 kg they had delivered in the preceding April. Smaller mining concerns, who comprise the majority of the nation's gold output, sold 1,678 kg in May. This represented a 7.1% decrease from the 1,806 kg they had sold in May 2022, but a 38% increase from the 1,218 kg they had delivered in the prior month of April 2023.

On a year-over-year basis, aggregate gold deliveries declined by 5%, dropping from 2,876 kg in May 2023 to 2,734 kg in May 2024. This shift in the precious metals supply dynamic has resulted in nickel mattes overtaking gold as the primary headline export for the first time.

Estimates suggest over $1 billion in mineral revenues are being lost annually due to corrupt practices, with approximately $100 million of that stemming from gold-related activities. The Al Jazeera documentary "Gold Mafia" has exposed the scale of this issue, revealing that millions of dollars are being siphoned off in a matter of weeks, not just annually, implicating high-level political elites and authorities in these illicit schemes.

In response to the substantial impact of gold smuggling, the government announced plans to implement a comprehensive traceability system. This system will trace the supply chain of gold, tracking it from the mine site to the broader market. This initiative is expected to be launched on September 30, 2024, with the goal of curbing the rampant gold smuggling activities that have been plaguing the industry.

The proposed gold tracking policy may have ostensible merits, but its efficacy is contingent upon equitable implementation devoid of preferential exemptions for influential stakeholders. The empirical evidence suggests that the primary perpetrators of gold smuggling are not the economically disadvantaged artisanal miners, but rather the well-connected and politically-affiliated individuals.

If the gold tracking mechanism lacks robust third-party auditing and verification protocols, it becomes highly susceptible to internal collusion and corrupt practices. Government oversight agencies may be vulnerable to political influence or conflicts of interest, consequently rendering them ineffectual in their enforcement capacities. In such scenarios, the tracking system will be largely impotent against the very actors it intends to monitor and regulate.

Therefore, we anticipate the combined mine to market and low tax band to increase gold deliveries going forward.

Equity Axis News