A useful summary of the last year and outlook for 2010. Nothing new but nevertheless useful for broad reference :
An uneasy transition, Raziah Khan, Standard Chartered Global Focus, Commentary (Restricted Access) :
Sound growth, but infrastructure and policy pose risks to outlook
Provisional 2009 GDP data reveals that Zambia was one of the few countries which grew faster in 2009 than in 2008, despite the crisis. While trend growth has been rising for some time (growth averaged 5.9% over the past five years, improving to 6.2% in the last three years), and despite otherwise-subdued activity on the copper belt, Zambia benefited in 2009 from the outcome of a multi-year investment cycle at its largest mine. As a result, mining is thought to have expanded by 21.4% y/y last year; construction (up by 15.5%) and a bumper maize harvest (agriculture rose by 7.1%) also contributed to growth. Yet despite this, few believe that Zambia is performing close to its potential.
For all of the success of Zambian tourism in recent years (due in part to a decline in visitors to neighbouring Zimbabwe), Zambia’s tourism sector is still growing more slowly than the African average, according to the World Bank. Zambian agriculture, too, is notoriously subject to boom-bust cycles, which are not helped by policy uncertainty over farmers’ ability to export their surplus. (Under the ’food security’ platform, decisions to either liberalise or ban exports are largely based on the current season’s grain surplus or deficit rather than multi-season planning, discouraging new long-term investment in the sector.) When exports are prohibited, food surpluses drive down domestic prices, acting as a disincentive to producers to invest in capacity. The stop-and-go nature of Zambia’s diversification means that export growth remains overly dependent on copper mining. As of November 2009, mining accounted for almost 90% of Zambia’s merchandise exports.
The mining taxation regime – an unstable equilibrium
While Zambia has emerged from the global crisis in better shape than most economies, helped by an early China-driven rally in copper prices, doubts persist about the sustainability growth and the extent of the trickle-down. Although copper output is expected to rise to more than 700,000 tonnes this year (comparable to levels last seen in the 1960s, prior to mine nationalisation), several factors may put this forecast at risk. A surprising feature of our discussions with mining companies in Zambia was the extent to which local factors – rather than risks to the global outlook and copper prices – appeared to dominate their worries. The top concerns included transport infrastructure, power supply, fuel availability, Zambia’s high-cost environment, the stickiness of inflation expectations, and wage demands, as well as the risk associated with the political backdrop and taxation of mining earnings. The authorities, long criticised for ’development agreements’ seen as overly generous to new private-sector foreign investors in Zambia’s mines, introduced a controversial price-based windfall tax on copper earnings in 2008. (The proposed tax targeted turnover rather than profitability and was seen to contravene tax holidays previously contracted with investors, only adding to the controversy.) In early 2009, in response to the global crisis and with mines threatening to shut down and large numbers of contract workers made redundant, the windfall tax was scrapped. Since then, copper prices have rallied much more than most had forecast.
With Zambia facing elections in 2011, and opposition centrists and leftists uniting through a new pact, the mining sector fears that the issue of the windfall tax may return and be politicised once again. Part of the problem is that the direct contribution of mining-related taxes to overall revenue is currently low, even with the increase in royalties from 0.6% to 3%. Mining companies point instead to the sector’s overall contribution to the economy; revenue from SMEs dependent on mining activity makes up a significant proportion of PAYE and VAT receipts. For much of Zambian civil society, however, this is not enough. Copper is not a renewable resource, and it is argued that much of the copper will be mined before the sector is taxed effectively. There are concerns about the extent of trickledown, the lack of significant revenue upside from rising copper prices, and a perception that the rest of Zambia’s formal economy faces a dispropotionately heavy tax burden because of inadequate taxation of mining. This makes it difficult to expand the tax base, with the informal economy resisting formalisation.
Given the strength of feeling on the subject, mining companies are now reacting to tax regime uncertainty by winding down investment activity. Plans made before the imposition of the windfall tax, where considerable capital expenditure has already been committed, are continuing. But new investment – which may be necessary even to extend the current life of more marginal mines – has stalled. This has created an uneasy equilibrium, with some mines behaving as though the windfall tax is still in place. Zambia is paying for the cost of this uncertainty, without necessarily seeing any revenue benefit. Given this sub-optimal equilibrium, further change is likely.