Thursday, September 24, 2020

Government casts doubt on mineral driven economy during NDP 10

Despite the “unusually high amount of prospecting activity” in the country, the government does not expect any “significant” mineral revenue during the next national planning cycle, says the NDP 10 draft.
“There is usually at least five years between the identification of a commercially viable ore body and mining production. Moreover, profitability may not be attained immediately, while capital expenditures can be written off against operating profit for a number of years. It is, therefore, unlikely that there will be any significant mineral revenue during NDP 10 from the currently ongoing mineral prospecting,” the draft says.

In 10 years, the diamond sparkle will wane. Projections are that from about 2018, mining of diamonds will shift from open pit to underground, which will lower mining output and increase production costs, thus reduce government revenue from diamond exports. Current forecast is that income for distribution to the government from diamond mining will fall by about 65 percent by the end of NDP 11 in 2022 and decline to near zero by the end of 2028.

“At that time, government expenditure as a share of GDP will have to be reduced to about 25 percent of GDP in order to avoid budget deficits. The necessary downward adjustment of government as a proportion of GDP could turn out to be later if technical and prospecting developments are favourable. It would be irresponsible though, to assume that mineral revenue will be significantly greater than the current projections, especially as the projections could turn out to be overoptimistic,” says the draft.

The argument presented for the downward adjustment is that evidence abounds from other African countries that postponing it has led to budget deficits, high rates of inflation, balance of payments deficits, shortage of foreign exchange, inability to pay for imports of consumer goods and industrial inputs, increasing debt and eventual inability to service that debt.

The draft says that the prospective fall in diamond production means that policy must be directed to the growth of other private sector activity that is less dependent on government expenditure than was the case previously.

On the back of demand driven by the boom of the Chinese and Indian economies, base metal prices have skyrocketed and according to one forecast, could triple over the next 25 years. That demand has enabled BCL, the copper-nickel mining company in Selebi Phikwe to meet its operational and project funding requirements and repay some of its debt to the government. The draft says that if the high copper-nickel prices are sustained throughout NDP 10, BCL would be able to repay its remaining debts and would also be able to pay some tax.

During NDP 10, development expenditure is projected to average 8.2 percent. The growth of recurrent expenditure is projected to average 12.4 percent, falling from 12.6 percent in 2009/10 to 12.1 percent in 2015/16.

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