This study seeks to deepen the understanding of the trends, drivers and implications of fluctuating commodity
prices on government revenues, economic development and social investment in the Southern Africa Development Community (SADC) region, using platinum in Zimbabwe as a case study. The following are the key findings of the study:
Drivers of platinum price fluctuations
Platinum price fluctuations have been underpinned by several factors which include demand for industrial, jewellery, chemical, petroleum, electrical, glass, investment, and automotive uses. Global economic expansion driven mainly by China, the world’s largest consumer of platinum and less attractive returns on stock and bond markets saw platinum prices souring over the period 2003-2008.
However, the global economic crisis encountered in the middle of 2008 resulted in platinum prices plummeting in six months by almost 60% from a peak of US$2052.45 per ounce in May 2008 to US$840.30 per ounce in November 2008. The slowing down of the world economy over the recent past, combined with the decline in the auto catalyst demand for platinum, appreciation of the USD, expectations of U.S. interest rate increases, and lower financial risks associated with declining oil prices reduced investor demand for platinum and helped lower platinum prices. On the other hand, the supply of platinum has been rugged over the period 2008 to 2016, owing to supply constraints such as erratic electricity supply, industrial actions, safety shutdowns, skills shortages and bad weather which affected South Africa, the world’s major platinum producer. These constraints have depressed supplies, creating deficits in the market and consequently driving prices upwards. The net effect of these downward and upward pressures generally explains the fluctuations that have been observed over the past decade.
Impact of platinum price fluctuations on government revenues in Zimbabwe
In Zimbabwe the impact of platinum price fluctuations on government tax revenues tends to be muted because the contribution of platinum to total tax revenue is small; less than 3.5% of total tax revenue. In addition, platinum mining companies have adjusted their procurement policies to effectively exploit VAT refunds on local procurement, thus effectively reducing tax revenue due to government. The other reason for the low contribution to total government revenue is that platinum produced in Zimbabwe is not fully processed, hence fetches less on the market.
Econometric estimation of the impact of platinum price on tax revenue indicates that platinum price does not influence government revenue in the short-run, but its volatility negatively affects government revenue in the short-run with lags. Specifically, an increase in platinum price volatility of 1% is associated with a 0.274% decline in the tax revenue as a percentage of Gross Domestic Product (GDP) a year later after the increase in volatility, and a 0.158% decline two years later. However, in the long-run, platinum price volatility does not have a statistically significant impact on tax revenue collections, while platinum price has a significant negative impact of 0.789% on tax revenue as a percentage of GDP.