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The mining sector in Zimbabwe and its potential contribution to recovery
Tony Hawkins, United Nations Development Program (UNDP)
July 24, 2009

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This paper is part of the Comprehensive Economic Recovery in Zimbabwe Working Paper Series

Executive Summary

Mining could become the lead growth sector in a post-crisis economy, though this will depend on global commodity market conditions as well as on the macroeconomic, fiscal and industry governance strategies pursued by the authorities. By global standards, Zimbabwe is not a mineral-rich economy, but it does possess resources, especially of platinum, gold, diamonds, methane gas, asbestos, nickel, coal and chromite, sufficient to generate export earnings in the region of US$2 billion annually over the medium term and upwards of $5 billion a year within 15 years, thereby ensuring that mining remains comfortably the country's largest exporter.

But because mining accounts for less than 5 percent of GDP and formal sector employment the sector's main contribution to growth and poverty reduction is likely to be indirect - in the form of gross capital formation via the construction industry during a post-crisis expansion period and over the long-term through its contributions to tax revenues and, most importantly, to foreign currency earnings as output levels increase. High - and increasing - levels of capital intensity, especially for major projects, mean that it will not make a significant direct contribution to employment growth.

For a quarter of a century, until the commodity price boom of 2002 to 2008, mining operations around the world destroyed rather than created value with the rate of return in base metal mining falling slightly below the yield on US government bonds. In other words, with the industry failing to cover the opportunity cost of capital, mining globally was not sustainable.

However, between 2002 and 2008, two developments changed the face of the industry. Metal prices doubled during the protracted commodity price boom (Figure 1) thereby reviving the industry's fortunes while, partly reflecting mining's renewed vigour, resource nationalism resurfaced leading governments, especially in low and middle income economies, to raise mining taxes and demand state participation in the ownership and development of mining properties.

Yet ironically, Zimbabwe's mining industry experienced the worst of all worlds in the sense that, with production volumes falling steeply, it failed to exploit the commodities boom. Simultaneously however, the government embraced resource nationalism, demanding majority 'indigenous' ownership of all mining ventures, including a 25 percent 'free carry' stake for the state. The combination of a deteriorating macroeconomic situation, the exodus of skills, infrastructural bottlenecks and policy unpredictability and uncertainty, ensured that investment in exploration and development has been minimal.

It is against this background that in a post-crisis situation Zimbabwe will have to craft a delicately balanced policy environment that fosters investment, domestic and especially foreign, while ensuring that 'mineral rents1' are not only captured but invested efficiently by the state.

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