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Monday, 8 December 2014

Mining companies stampede on Zambia

Finance Minister Alexander Chikwanda, who has been busy quietly doing his job in the middle of the collapsing governance of the country under Scott's watch, has finally spoken on the pressing mining tax issue that is threatening the viability of the 2015 budget.

Chikwanda says he has successfully resisted the “stampede” by some companies trying to force amendments to his taxation plans: “[the mining tax changes] will pass through in its current form...These people don’t allow us to think about our own ideas, they just want to think for us...some mining companies want to stampede us to change the tax regime”.

It will be interesting to see whether that bold declaration does stand. It has not been easy for Chikwanda. Mining companies led by Barrick Gold have been heavily lobbying Vice President Guy Scott to force through the changes. They have also lobbied opposition parties, many who are already in the pocket book of mining companies.

But Chikwanda, a key member of the Cabinet team now aligned to the new PF President Edgar Lungu MP has been resisting, with strong support from the rest of the team. This is Chikwanda reborn because he has been known to be a darling of the mining companies. Indeed he once called people calling for a windfall tax “lunatics”.

There were fears in some quarters that the death of President Sata may see a reversal of taxation policy in favour of big foreign companies aligned to Vice President Scott. There were reports that Government was backing away from plans to impose a 20 percent royalty rate on open pit mining and 8 percent on underground mining, as part of the abolition of a two tier system.

But as we noted last month, one reason why the new fiscal regime is likely survive is that any reduction in taxation will almost certainly plunge Zambia in further fiscal problems. Money would need to be found somewhere - possibly by increasing taxes on ordinary Zambians through a new emergency budget.

The 2015 Budget is already very tight and with the elections coming we expect more leakage and wider economic challenges. It would be economic folly to reverse it only to borrow more or face a fiscal crunch. We think it makes absolute sense for Chikwanda to stick to this taxation framework and only review it in the next Budget cycle, if necessary.

The mining companies have raised some good points this should be part of a general debate not through covertly corrupting politicians to achieve a one sided aim. We need a top down review of mining policy as a whole. Not just on taxation. The biggest problem in Zambia is fundamentally how policies are done. That is what needs to change.

The other reason the tax regime may survive is that mining taxation issue has now become an election issue. PF is betting that Zambians still have fresh memories of Rupiah Banda’s first act when he got elected. He went on to immediately abolish Mwanawasa’s windfall tax. Rupiah Banda is not coming back, but what is clear is that whoever is president in January 2015 will have a big say on what happens to the taxation regime.

Chikwanda and his PF colleagues have calculated that it is politically safer to keep the regime, rightly or wrongly. They are likely to make the argument to the Zambian people that if you elect a new party after the presidential by-election in January 2015- they will need an emergency Budget and all questions will be re-opened. It is not too tricky to guess who mining companies want in Plot 1. That will be their argument. The opposition have so far not articulated a position that anticipates this argument.


Do you support the new mining taxation regime? Or should the next president abandon it? Who do you think is likely to keep it? Should it be kept at all?

Chola Mukanga
Copyright © Zambian Economist 2014


  1. Thank you editor for this interesting article. It is entirely predictable that the Minister of Finance will go ahead with the MRT increases - its clearly an issue which is popular with the electorate, and even if it wasn't, the climb down necessary in making such a change would be too difficult in the present political environment.
    However, its worth unpicking the messages a bit: the present system of taxing mines in Zambia is amongst the highest in the world. There are significant mines in Zambia that pay all of those taxes and so one should perhaps ask where that money goes or has gone. Add to that the effects of VAT Rule 18 - and I note that in the recent rush of instant justice from the legal system, neither of the two cases against the ZRA has shown any sign of life - and the imposition of onerous MRT system, and potential investors will be looking at Zambia and shaking their heads. You will ask why Zambia needs new investors? Why can't the mines be taken on by Zambians? If that was feasible - enough skilled Zambians with access to the necessary capital - it could have happened already. It hasn't. Perhaps a good moment to recall the precipitous decline of the mines under UNIP, and the consequences of that?
    What of the mines that aren't paying the already onerous taxes you might ask? Indeed. They are either truly burdened with expensive operations, or they are practising tax avoidance. If the latter then the ZRA needs to deal with it, using their own staff, and the Norwegian auditors that are implanted. If they are truly expensive, then understand that and appreciate the employment and local procurement that they bring. Its important in the areas around the mines.
    The mines that claim they will close must do so - unless they see running at a loss as a temporary blip, then they simply have to close. They are all companies owned by shareholders, and the shareholders will demand that they cut their losses.
    Whats the answer? Celebrate success. There are two of the biggest and most highly taxed mines in the world in Zambia! Review the mining taxes and through meaningful consultation,reach sensible decisions that will impress Zambian voters and potential new foreign investors. At the same time, any fiscal expert will tell you that to protect your revenues, you should broaden the tax base. Don't just focus on the mines, look at all of the other potential taxpayers in Zambia who are not presently paying their taxes - and not pursued by the ZRA either. There is not only a lot for the new Minister of Finance to do in post-election 2015, there is much that he or she can do to take Zambia forward. We all wish them well and hope that they know how to milk a cow without killing it!

  2. Chikwanda’s 2015 Budget – Zambia’s darkest hour looms
    The greatest threat to Zambian security over the next year is not the threat of another rudderless Government. Rather it is the Government‘s proposed mining tax in the 2015 Budget; this regressive policy will have a deep-impact on Zambia, including the suspension of major mining operations with the concomitant loss of jobs, foreign investment and tax revenue. It is clear that Zambian Ministers, in particular the Minister of Finance, the septuagenarian Alex Chikwanda, either don’t understand or else refuse to understand the full impact of their latest fiscal experiment. This has been borne out by the closure of the Lumwana copper mine in the Northwest Province with the loss of 4 000 jobs. The warnings were loud and persistent but ignored.
    The proposed tax system sees a significant increase in mineral royalty tax from 6% to 8% for underground mines and to a whopping 20% for open-pit mines; all profit tax is to be expunged – thereby denying Zambia of any exposure to the long-term upside that most analysts predict for copper prices. Zambia will be the only jurisdiction in the world to implement such a risky, novel and exotic tax system. Foreign investors and independent commentators all agree: now is not the time for experimentation.
    The consensus amongst Zambian mining experts (including the more moderate and informed members of the Zambia Chamber of Mines) is that the introduction of the 2015 Budget will make a number of operations economically unviable. Barrick’s Lumwana copper mine has announced its suspension but Chambishi Metals will also close; it won’t need to wait for implementation of the 2015 Budget in January as CG ZRA’s withholding of VAT refunds will sink that mine anyway. Others may well follow.
    First Quantum has already delayed Kansanshi’s Sulphide Circuit and its Smelter Expansion on the back of the Ruling Party’s inability to provide business with any confidence; this Budget will see to it that their decision won’t be revisited any time soon. Mopani will cancel the Mufulira and Mindola Deep Shafts. Oh, and the Nkana Concentrator.
    The toxicity of the mineral royalty tax only budget will see the economics of mining shift: Mopani will see the end of life of the Mufulira mine come forward by over two decades. In its heyday this was the biggest underground producer of copper in the world; the mine will now close in 3 years’ time instead of the 25 that the cancelled Deep Shaft would enable.
    Once Sentinel Mine is operational this completes the pipeline of new projects in Zambia. There are no others and the consensus amongst investors is that nor will there be unless something major changes.
    Privately, Zambia Chamber of Mines estimates that in 2015 alone, as a direct result of the introduction of the 2015 Budget, subsequent closures and postponements of projects will lead to the loss of in excess of 12 000 jobs. The affected towns and communities of the Copperbelt and Northwest Province will suddenly feel significant economic pressure. Those around Lumwana are expected to collapse.
    Independent analysis from across the mining world estimates that Zambian production losses in 2015 will likely exceed 155 000 tonnes of copper. More worrying still, by 2020 lost production will almost certainly exceed one million tonnes of copper. Fiscally, in 2015 Zambia will lose over USD1 billion of export earnings, and a massive USD7 billion between now and 2020. This equates to approximately 30% of Zambia’s GDP. A cursory analysis suggests that these figures hold water.
    The Government’s own 2015 Budget calculation does not account for imminent mine closures and project delays. Whilst GRZ has assumed the Budget will raise an additional ZMW1.7 billion the reality is that the new system actually raises ZMW0.75 billion less than the current system.


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