The 2022 Mid Term National Budget Review: ZELA’s views

It is that time of the year when the Mid-Term National Budget Review is presented. This analysis of the 2022 Mid Term Budget Review Statement presented by the Minister of Finance and Economic Development, Mthuli Ncube is based on the understanding of the importance of the Mid Term Review in informing discourse around the use of laws and policies to foster fiscal transparency, accountability, domestic resource mobilisation, and benefit sharing of the country’s mineral wealth.

On the 28th of July, the Minister presented the 2022 Midterm Budget in Parliament.  The National Budget statement guides the direction of policies, laws, and tax measures ventilating commitments by the Government to manage public resources for the betterment of the citizens’ social and economic welfare. The 2022 Mid Term budget reaffirms the central role and potential of the mining sector for the economic performance and social development of the country. The sector is expected to grow at 9.5% in 2022, largely on account of increased output in gold, platinum group of metals (PMGs), chrome, nickel, diamond, and coal as well as high international commodity prices and increased investments in the sector.

Upward Review of the Platinum Royalty Rate to 5%

The Government announced that it will increase the royalty rate from 2.5% to 5% in the platinum sector with effect from 1 January 2023. This royalty rate will also apply to the lithium sector.  According to the Mid-Term Budget, the Government considered the current royalty rate of 2.5% to be sub-optimal and is no longer fit to serve as a fiscal tool for maximising revenue flows to the fiscus. The Zimbabwe Environmental Law Association ( ZELA) commends the Government for finally owning up to its commitment to review platinum royalties upward. The royalty rate was reduced from 10% in 2015 to 5% in conformity with the court judgement of the case between ZIMRA and ZIMPLATS (HC 12292 of 2011, HH 169 of 2015) [2015] ZWHHC 169 (28 January 2015)[1]. ZIMRA made a move to charge ZIMPLATS a royalty rate of 10% in violation of the stabilisation agreement clause in the company’s Special Mining Lease (SML) which required the Government to charge a flat rate of 2.5% royalty over the lifespan of the SML. After the expiry of the SML in 2018, the Government made a commitment to review the royalty rates.

However, the Government has been reneging on its promise to review the royalty rates for platinum until now. The silver lining was the expiry of the  SML for ZIMPLATS. It is regrettable that there was no show on the part of the Government for over three years and huge amounts of potential revenue which could have been used to fund the COVID-19 recovery programme and limit debt financing were lost. Prices of Platinum group of metals have been on the upward trend even during the peak of COVID and the Government could have capitalised on this to review the royalty rates upwards. Nevertheless, the move to increase the royalty rate to 5% is commendable.

In practice, the Minister of Finance, and Economic Development has in the past issued Statutory Instruments or Regulations stipulating the rates of mining royalties, Duty and Fees e.g. SI 83 of 2021. There is an expectation that the Minister should utilize the same powers to effect the 5% royalty rate with immediate effect.   Beyond increasing royalty rates for platinum companies, the Government should also consider adopting a sliding scale for royalties for the platinum sector like what is existing in the gold sector.  In the gold sector, the royalty rates are differentiated by the prevailing prices of gold on the international market- the higher the price of gold on the world market, the higher the royalty rate.

Budget Transparency Ranking of 2021

According to the Mid Term Budget Statement, the country was ranked number three in Africa after South Africa and Benin, an improvement from the 6th position in 2019. According to the Budget Statement, this improvement is attributed to the comprehensiveness and timely publication of the key budget documents.  Access to information and participation are key in the Open Budget Survey (OBS) conducted by International Budget Partnership (IBP). The data disclosure measures adopted by the Government may have played a role regarding the performance of the country on the OBS Index.  The Government has been disclosing updated information on the tax revenue forgone through awarding of tax rebates or concessions in economic sectors, including mining. Countries that have reached the 61% mark on the Open Budget Ranking ( the minimum benchmark signifying that sufficient amounts of information are publicly available and can support informed public debate on the budget) have strengthened the content of budget documents by responding to the public’s demand for specific budget information. The disclosure of revenue foregone by the government through custom duty from January 2011 to May 2019 after the IMF’s Tax Administration Assessment Tool (TADAT) findings highlighted an “Absence of a tax incentives monitoring and evaluation framework (tax holidays, losses carried forward and VAT refund levels)” was a sign that government was moving towards better information disclosure.. This is particularly important in Zimbabwe where CSOs such as ZELA have advocated for a broader framework for disclosure and reporting on all the impacts of tax incentives awarded especially in the mining sector which is a major beneficiary of tax incentives.

Inadequacy of budget transparency

Where the Ministry of Finance and Economic Planning falls short on is comprehensiveness in terms of reporting tax expenditures and disclosure of estimated revenue forgone by the government due to tax incentives.  Whilst the national budget contains information of revenue forgone through awarding tax incentives (tax rebates and duty concessions), the Mid Term Budget Statement does not show a six month picture of the same information – a key gap in terms of reporting on tax expenditures. The Ministry of Finance through ZIMRA ( rebates and tax concessions)  is not the only government institution that administers tax incentives in Zimbabwe. Other players include the Zimbabwe Investment Development Agency (ZIDA), which oversees Special Economic Zones and the Ministry of Mines and Mining Development is in charge of special mining leases. There is a need to consolidate the different tax incentives offered by various government institutions to have a true and fair picture of tax incentives and their impacts on the economy.

Beyond improving tax expenditure reporting and accountability, there are other pertinent issues that the Ministry of Finance and Economic Planning needs to pay attention to in order to improve the OBS to even higher levels, the levels at which the OBS will positively correlate to increases in investment flows and positive developmental outcomes. Good as it may be, the current OBS ranking for Zimbabwe is a bit far from characterising a good natural resource governance framework that attracts the necessary investment flows into the country, especially in the extractive sector. The country is improving on the OBS indicators (budget transparency, participation, and oversight indicators) but is moving at a snail’s pace on mining governance reforms. The slow pace in the finalisation of the Mines and Minerals Amendment Bill, lack of public disclosure of revenue that mining companies are paying to local authorities and central Government, lack of beneficial ownership disclosure, and mining contract disclosure, all provide evidence of slow progress in mineral governance reforms. Government needs to consider adoption of the Extractive Industry Transparency Initiative (EITI) to accelerate reforms on fiscal transparency in Zimbabwe.

Special Economic Zones incentives

Through the Mid-Term Budget Statement, the Government observed that a number of companies licensed to operate in Special Economic Zones ( SEZs) are claiming tax benefits ( exemption of income tax for the first 5 years of operations, exemptions from non-residents tax on fees, dividends, and royalty and rebates of duty on raw materials) notwithstanding their failure to attain the Key Criterion of qualifying degree of exportation. According to the Mid-Term Budget Statement, ZIMRA and the Zimbabwe Investment and Development Agency ( ZIDA) will collaborate on the screening of corporates that benefit from the tax concessions. Tax incentives if not properly managed can be emitters of Illicit Financial Flows (IFFs). Efforts to identify loopholes in revenue resource mobilisation and put in place institutional capacity-oriented measures to plug these loopholes are commendable. There is a risk that the treasury could have been prejudiced against huge sums of money as a result of Special Economic Zones.

Review of Tax Incentives

According to the Mid Term Budget Review statement,  the Government will not hesitate to withdraw tax incentives where they fail to achieve their intended objectives which include lowering the cost of production and prices, promoting value chains, and creating employment. Much as the signal for tax incentive review in case of abuse is commendable, more can be done at the policy level to improve tax incentive governance. It is commendable that the Government’s commitment to review tax incentives is in line with the National Development Strategy (NDS)1 and is now consistent in budget statements that have been produced since the adoption of NDS 1.

However, the missing link is the Cost-Benefit Analysis of existing fiscal incentives to guide the review and streamlining of those that are found to be redundant or not serving their intended objectives. During the presentation of the 2022 National Budget Statement in November last year, the Minister of Finance indicated that the Government is carrying out a study to evaluate the Impact of Tax Incentives on Socio-Economic Outcomes in Zimbabwe starting with the manufacturing sector. There was an expectation that the Minister in the Mid Term Budget Statement presented yesterday was going to give an update with regards to this study. There is a need for accountability players to engage the Ministry of Finance and get information on the timelines of the study for the purposes of their participation.

Removal of  tax for export of beneficiated Platinum

The Government suspended the export tax on exports of platinum matter in view of the progress it made for the establishment of a platinum beneficiation plant.  The Minister proposed to align this policy change to the Value Added Tax Act. Without appearing to discount the public disclosure of information on the establishment of a platinum beneficiation plant, as a matter of policy, disclosure of guidelines that provide information on how the export tax on unprocessed platinum is implemented and the stage at which the tax is supposed to be suspended would have been needed This is important for public accountability, especially considering that the issue of improving value addition and beneficiation in the platinum sector has been on cards for a long period of time.

Mid-Term Budget Expenditure disclosure

There is concern that both the National Budget and Mid Term Budget statements do not go beyond the disclosure of budget allocations and expenditures to look at disclosure of the development outcomes intended to be achieved during the course of the budget or update on the realisation of development outcomes achieved. For example, when the Ministry of Mines and Development provides loans to the ASM sector to improve gold production, there is an expectation that the National Budget provides information on the number of ASM miners that are intended to be reached out with the resources and the Mid Term Budget statement provides an update on the miners that may have been reached in a six month period.  This information is available in different ministries and is computed during budget development.  However, as part of the Public Finance Management framework reforms and as a best practice, there is a need for a review of the national budget disclosure framework to incorporate development outcomes reporting in the National Budget Statements. This will help accountability stakeholders to check if public resources are utilised for the betterment of the country without having to labour on getting the reports from ministries. The National Budget is the silver lining that must be leveraged to stimulate accountability for the use of public resources.

Payment of mining royalties in local currency

The Government, in the interest of promoting the use of local currency, decided that royalties should be paid in both local and foreign currency in the ratio of 50:50. The Minister proposed to avail the necessary legislation in retrospect.  There is a general presumption against retrospectivity from a reading of the provisions of Section 17(1)(b)(c) and (d) of the Interpretation Act [Chapter 1:01] which brings to question the legality of such a move. Whilst Government policy to promote the use of the Zimbabwean dollar is understandable, payment of the royalties in local currency using the Government’s auction rate means that mining companies will be getting tax discounts as the inflation is continuously hitting the local currency. If this is the case that companies are paying the other half of their royalties in local currency at the auction rate, this means the Government is incurring tax expenditures which are a cost to the fiscus in terms of getting the real value of royalties. In the interest of transparency and accountability as enshrined in Section 298 of the Constitution, there is a need for the Minister to report and account for these tax expenditures since they have a bearing on the impact of mining revenue on social development.

[1] https://zimlii.org/zw/judgment/harare-high-court/2015/169