Zim’s precarious perch: reliance on commodities as revenue crisis looms

Zimbabwe’s overdependence on mineral export revenue leaves it vulnerable to fluctuations in global market prices, compromising the government’s revenue position.

The country produces a number of mineral commodities, which are, in many instances, exported in their raw form.

Recently, commodities such as platinum group metals (PGM), nickel, and lithium, which are key revenue contributors, have been declining, resulting in some companies posting losses while others have suspended expansion projects while others dismissed workers.

Analysts who spoke to Business Weekly contend that the recent decline in commodity prices and the projected drop in tobacco revenue pose a significant threat to the government’s short- to medium-term revenue generation.

“This is going to be a tough year for revenue if action is not taken to correct the imbalances in monetary policy.

“The present situation is creating very difficult trading conditions for the formal sector, which is the main tax payer.

“Exports will also suffer because of the very poor agricultural season and the decline in some global commodity markets.

“However, the gold price is at record levels, and if we liberalise the market for this commodity, it will curb illegal trading and increase our foreign exchange receipts very substantially,” Eddie Cross, an economist, told Business Weekly.

Already, according to the latest data from the Zimbabwe National Statistical Agency (ZimStat), export revenues were down by 19 percent to $540,3 million in January 2024 from $550,6 million in December 2023.

This is largely attributed to a slump in global commodity prices, which has raised significant concerns for economies’ reliant on these commodities.

The country’s export portfolio is dominated by primary commodities such as nickel and gold. Over the course of 2023, nickel prices on the London Metal Exchange saw a substantial 48 percent decrease, falling from $31 200 per tonne in January to $16 300 per tonne in December.

The data shows that the top three exports in January 2024 were tobacco, semi-manufactured gold, and nickel ores and concentrates, accounting for 24,5 percent, 24,2 percent, and 11,9 percent of exports, respectively.

Investment analyst, Enock Rukarwa, said it is unfortunate that mineral exports contribute circa 77 percent to total merchandise exports in the country.

“On the other hand, agricultural production for the 2023–24 agricultural season will be weighed down by El Nino-induced effects. A strategic imperative for the economy to derisk low foreign currency receipts from agriculture and mining will be to enable and promote other potential sectors like tourism and remittances,” he said.

He added that discouraging imports will also be a key enabler in unlocking foreign exchange revenues, especially at a time when export receipts are forecast to be depressed.

Zimbabwe’s biggest platinum producer and mineral revenue contributor, Zimplats, posted a rare loss in a decade, reflecting the worsening pressure of weakening PGM prices.

The company reported that it increased output by 9 percent and boosted sales by 10 percent to 320,196 ounces in the six months to December 2023; however, that was not enough to offset the impact of a sharp fall in metal prices and rising costs.

Victor Bhoroma, another economist, said the fall in commodity prices, especially PGM metals and tobacco, has a huge negative impact on the economy.

“As you are aware, taxes on mining, such as royalties, constitute over 5 percent of government revenues, and the same applies to excise and sales tax revenues on tobacco, which also have a significant contribution.

“This means there will be a sizeable drop in government collectable revenues and a widening of the fiscal deficit,” he said.

He added that the consequences in terms of the drop in government revenues are that the government will look for new tax heads, especially on consumer products that they feel are moving into the market.

“The fast-moving consumer goods, or wholesale and retail, sector is actually the biggest sector in the economy now, so it is likely that the government will levy more taxes on consumer goods in order to cash in on the growth in that particular sector, which obviously will have a significant impact on inflation, demand in the economy, and disposable income for the end consumer as well,” he said.

Dr Prosper Chitambara weighed in, saying that widening the tax base or even increasing taxes further will not be feasible given that the tax burden is already high following the increase in taxes and the new taxes that the government has come up with.

“The budget deficit is going to widen because there is going to be a lot of pressure on public spending given the draught, so social protection spending is going to increase as the government is going to import maize to improve the limited supply locally, causing spending to increase further than the government has anticipated,” he said.

However, Malvin Chidzonga, Chief Investment Officer at Nivteil Capital, said while widening the tax base presents a potential solution, it needs to be implemented strategically to avoid hindering economic growth.

He said diversifying the export base, improving domestic revenue collection and fostering public-private partnerships are all crucial steps towards building a more resilient and sustainable economy for Zimbabwe.

“The future of the nation’s finances hinges on its ability to move beyond its traditional reliance on commodities and embrace a more diversified and robust revenue generation strategy,” he said.

He said tobacco has traditionally been a significant contributor to Zimbabwe’s foreign currency earnings; however, with the El Nino-induced drought, growing international anti-smoking campaigns, and a shift in consumer preferences, the demand for tobacco is expected to decrease.

“This decline will create a significant gap in government coffers, further straining its ability to meet financial obligations.

“These converging factors paint a worrisome picture for Zimbabwe’s short- to medium-term revenue generation. The government faces a potential scenario where its primary sources of foreign currency income are simultaneously under pressure. This could lead to a shortage of hard currency, hindering essential imports such as fuel, medicine, and raw materials. Additionally, a decline in government revenue will likely curtail spending on critical social programmes,” he said.

Chidzonga said that beyond simply widening the tax base, exploring alternative revenue streams is crucial for Zimbabwe’s economic future.

This includes diversifying the export base, which implies moving away from an overreliance on a few commodities by promoting the export of manufactured goods and value-added products.

He said the government should also promote public-private partnerships by engaging the private sector in infrastructure development and other key areas and leveraging private capital to bridge the infrastructure gap and create new revenue streams.

Zvikomborero Sibanda, a Harare-based economist, said in the short to medium term, the government will not likely collect revenues that meet the demands at hand.

“Considering the fact that the Treasury actually assumed or took over all the contingent liabilities on the RBZ balance sheet, it means that all those debts must now be paid through the national budget.

“This will drive a budget gap in terms of what is needed to cover the difference in tax collections,” he said.-ebusinessweekly