Mthuli Ncube in catch-22 situation

THE provision of subsidies to small-scale gold miners in defiance of advice from the International Monetary Fund (IMF) has left the government in a quandary amid a rapidly deteriorating economy.

Last week, Fidelity Printers and Refiners announced a 100% foreign currency retention threshold for small-scale miners and 70% for primary producers. It, however, remained mum on how long the incentive will remain in place.

The government promised the IMF that it would stop the small-scale miners' gold incentive that was being funded through the printing of money, thereby stoking inflation.

Money from the gold scheme was being used to service an Afreximbank loan which was collateralised through current gold production.

Analysts say the government is worried that if the incentive is removed, small-scale gold miners will divert gold to the parallel market, resulting in the Reserve Bank of Zimbabwe (RBZ) being forced to breach the terms of the Afreximbank loans (of just above US$1 billion).

Given that the IMF told the RBZ that if Afreximbank loans continue, Zimbabwe should forget about debt relief talks with the Bretton Woods institutions and the Paris Club of creditors, the central bank is now caught between a rock and a hard place.

Analysts, however, point out that government put itself in a difficult situation by mortgaging the country's mineral resources in a desperate quest to secure lines of credit using instruments such as gold incentives, against international best practice, hence the IMF's misgivings.

Trade economist Gift Mugano told the Zimbabwe Independent yesterday that in as much as Zimbabwe has to comply with IMF demands, the country still has an obligation to service the Afreximbank debt as the continental financier has been an all-weather friend. Afreximbank has funded Zimbabwe at a time when the country was being shunned by other creditors.

"On this basis, if I were to reason logically from the government's perspective, I see the government ignoring the IMF advice and going ahead to print money to support gold production. This action comes with negative consequences of inflation and drought of financial support from the IMF and other multilateral financial institutions," Mugano said. "This will have serious implications on the economy because Zimbabwe is in dire need of fresh capital to mitigate the negative effects of the coronavirus. In short, we are heading for a disaster."

According to Mugano, if the country continues to print money, there will be heightened economic instability characterised by exchange rate spikes and inflation, the very same problems the IMF is trying to address in the SMP. The SMP is an informal arrangement between the government and the IMF to monitor the implementation of key economic programmes in the country.

"The disaster I am talking about is economic collapse. The economy right now, in its state, is like a bus going down the hill with no driver. The only given outcome is an accident," Mugano pointed out. "So, we have taken out the driver of our economy through the seed of poor governance, abuse of human rights which impede efforts to raise money from the international markets, corruption and excessive printing of money. All these things are happening when the economy has been hit hard by coronavirus."

Financial analyst George Nhepera, however, said the removal of subsidies would be a step in the right direction, but striking a balance between honouring Afreximbank obligations while adhering to IMF recommendations would be the challenge for policymakers.

"While there could be delays in servicing some of our debts with our creditors due to current challenges, the government is still committed to making good on its part. Our failure is not due to unwillingness to pay, but due to our incapacity to pay as a result of our current economic problems, induced both by recession and Covid-19," Nhepera said. "We hope our creditors will fully understand this position and rightfully do the correct thing which, in my view, is granting us unconditional debt relief."