Government has cut mineral royalties for underground mines to 6 percent, lower than the 9 percent which was expected to take effect on July 1. Presidential aide Amos Chanda has told Reuters that “Mineral royalty tax will be reduced to 6 percent from the earlier proposed 9 percent. It will remain at 9 percent for open pit mines”
The 2015 Budget had introduced a new fiscal regime that set underground mining royalty at 8% and open pit mines at 20%. This was reversed in April when all the royalties were set at 9%. We noted at the time that the changes did not make sense for underground mines because it meant an increase of 1%. Given the cost for underground mines are higher they should have lower royalty taxes compared to open pit, otherwise the incentives become skewed.
It is shocking that government is making these elementary policy development mistakes. We cannot understand why the Ministry of Finance is so incompetent in the way it conducts its policies that pays no attention to how policies change incentives for investment. Where are the economists in government? Is there really no one in all of government capable of seeing such elementary issues?
To make matters worse, it now appears that the public has been grossly misinformed about the scale of the government reversal. We are back where we started last year with only 3% increase in royalties for open pit mines. We will need to wait for the revised Budget this month to get a sense of how much government plans to borrow through another Eurobond to meet the funding gap.
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