Africa’s mineral-rich nations risk disallowed goals in their bid to win development match

Originally published by NewZWire

By Mukasiri Sibanda and Rangarirai Chikova

The global demand for critical minerals that are in short supply has been a major revaluation boon to Africa’s mineral wealth potentiated development. Fiscal and economic benefits are the two main development avenues cherished by the Africa Mining Vision (AMV).

The key questions to ask are; how fast and safely can Africa drive to reach the seeming mirage destination of sustainable development?

Benefits on the fiscal side are mainly driven by royalties and tax revenue that should boost government revenue and ultimately widen investment in public services and infrastructure provision. Further, these public revenue streams can be complemented by dividends where there is state ownership or equity participation in the mining companies. Resource Backed Loans (RBLs), while very risky, have also emerged as another resource mobilisation tool to front-load government revenue from mining.

Echoing this sentiment during the recently held Summit for a New Global Financial Pact, Akinwumi Adesina, the current president of the Africa Development Bank (AfDB) lambasted RBLs. He remarked, “Loans backed by natural resources (oil, gas, minerals) are toxic. They are non-transparent, unfair, corruptible, complicate debt resolution, and mortgage the future of countries. Africa must end all-natural resource-backed loans.

The AMV pillar on Linkages, Investments, and Diversification supports the development and strengthening of economic benefits from mining. According to the AMV, the two avenues for harness benefits from mining are not mutually exclusive. Although governments strive to maximise public revenue from mining, this must not compromise the other important goal of strengthening mining linkages with other economic sectors.

That is to say, the design of mining taxes and royalties must, where necessary, stimulate local value addition and beneficiation, from both a carrot and stick approach. A carrot approach gives tax incentives that are dependent on the extent of local value addition and beneficiation of mineral ores. The stick approach punishes commensurately punishes companies for exporting raw or partially processed mineral ores through the imposition of export taxes. In extreme circumstances outside the realms of the tax regime, outright bans of raw or partially processed mineral ores can be introduced.

In this article, the focus is on how African countries have responded to promoting industrialisation based on the opportunity presented by the global demand for critical or strategic minerals. Lessons are drawn from other countries’ experiences and the associated risks from a local and global perspective.

Zimbabwe and Namibia are two countries in Africa that have introduced export bans on raw lithium ores between December 2022 and June 2023 respectively. Bringing lessons from Indonesia’s success in banning exports of unprocessed nickel ores in 2020 might shed some light on what risks African countries must navigate to succeed. Indonesia produces nearly half of the world’s nickel supplies and its proximity to the market, China, gave it the market leverage to compel investments in value addition and beneficiation of nickel.

As a result, the value of nickel exports from Indonesia multiplied more than 4 times, from US$8 billion in 2019 to US$33 billion. While value addition played its part, last year commodity prices sharply rose in response to recovery from COVID-19. Nickel and other minerals — lithium, graphite, and cobalt are key components in the production of electric vehicle batteries.

Indonesia’s export restriction on unprocessed lithium ores was challenged at the World Trade Organisation (WTO) court and the country lost the case. They are currently appealing the ruling.

Reacting to a Twitter post on Indonesia’s plans to build on the success of banning exports of nickel ores, Isabelle Ramdoo pointed out that “… ultimately export restrictions in themselves are not sufficient for local value addition. Other key market conditions are important, such as the share of the country’s global production, sustainability of long term, proximity to the market, etc.” Isabelle Ramdoo is an economist, who specialised in trade, extractive industries, and economic transformation in and for Africa.

Botswana, a neighbour to both Namibia and Zimbabwe, was recently locked in a struggle to optimise benefits from its diamond wealth. By value, Botswana is the largest producer of diamonds globally, followed by Russia. This order is similarly invested when it comes to the global production ranking.

Most probably sensing the market opportunity stemming from the sanctions imposed on Russian rough diamonds, Botswana pushed for more benefits. The Russian diamonds were sanctioned by the West as part of the broader measures for punishing Russia for the war with Ukraine. Over and above taxes and royalties, the government of Botswana gets 25% of the rough diamond production and the rest is taken by De Beers.

Botswana was prepared to walk out of the arrangement with De Beers if it did not get what it wanted. Botswana has been hailed as a rare exemplary case study for ensuring that the sparkle of diamonds is enjoyed by citizens.

The Government of Botswana and De Beers have since made a public announcement displaying an agreement in principle for a 10-year diamond selling arrangement and a 25-year diamond mining lease. Always, the devil is in the details. Once the terms and conditions of these agreements are disclosed, it would be great to distill them to see how transformative they are for the benefit of Batswana — the people of Botswana.

Reflecting on the strong possibility of disallowed scores in the quest to catalyse broad-based socioeconomic development from critical minerals, several drivers deserve consideration. There are minerals where Africa is a dominant player in global production and export dynamics, offering greater opportunities for increased local value addition. Such minerals include cobalt in DRC, Bauxite in Guinea, Platinum, Palladium, and Manganese from South Africa.

Where African countries are small producers of critical minerals like lithium, whose production is dominated by Australia, China, and Chile, it is important to explore regional integration for the value addition of minerals. The AMV promotes the development of Regional Mining Visions that seeks to harness collective advantages to neutralise inherent weaknesses at the country level.

The reform of global economic infrastructure is fundamental. In Indonesia’s case, we see the WTO being used to deter the country’s measure to use export restrictions to spur local value addition. Reading the critical minerals supply chain strategies of the EU and the US, it is clear that they intend to use the rules-based order of international trade to guarantee supplies of critical minerals. Beyond the trade challenges, capital costs can be a major deterrent factor as most African countries are blighted by a sovereign debt crisis, leading to increased financing costs for mineral exploration, production, and processing. Critical infrastructure deficits like energy can also diminish the aspiration of African countries to move up the value chain.

From the above factors, a clear-eyed view of challenges may lead to the disallowed goals of resource-rich African countries in their quest to harness critical minerals for development. While the focus is on the possibility of disallowed goals, the own goals scored by the African government through corruption and a fragmented approach to value addition are significant factors that may steal the possibility of Africa winning the match on mining-hinged development. On a more promising note, DRC and Zambia entered agreed a memorandum of understanding to leverage on their comparative advantages to produce batteries required to power electric vehicles.