Economic Policy U-turns – A story of the country’s economic journey in the wilderness(Part1)

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File:The Mining industry contributes 65 percent to Zambia’s national treasury and the major mining operations are in North-Western Province where, among the mining firms, are world-renowned mines like Kansanshi Ming PLC owned by First Quantum Minerals (FQM) and Barrick Gold’s Lumwana Mining Company. However, the road to Solwezi from the Copperbelt is in a deplorable condition and motorists are having challenges on the highway which is riddled with huge potholes. And in avoiding potholes, some motorists are causing accidents. But children from the villages on the Chingola-Solwezi road have resorted to patching up the road using mud, in exchange for money from the motorists as can be seen above

The Zambian Government indicated that it will be meeting technocrats to discuss whether the 10% tax slapped on export of maize was necessary. Recently, the Minister of Agriculture stated that the 10% tax slapped on Maize export will remain in force. According to the Minister, this would create employment for local people and encourage exporters to add value by exporting mealie meal instead of maize grain. These statements from the government have their merits. They are indicative of a government that is ready to listen and negotiate with stakeholders and is interested in employment creation through value addition. We should however, be mindful of the consequences of economic policy u-turns on the long term growth of the economy, and the Zambian government has a long track record of economic policy u-turns.

Some recent policies and their fate

1. In April 2008 Zambia introduced a 15% profit variable tax, 25% mineral windfall tax, and raised corporate income tax from 25% to 30% and mineral royalty tax from 0.6% to 3%. The 25% windfall tax and other taxes in 2008 were backed by the World Bank. On January 30, 2009 the Zambian government stated in a budget speech that it would abolish the 25% mineral windfall tax on mining companies effective April 1, 2009. Notwithstanding, the 15% variable-profit tax would be retained. In addition to the reversal of mineral windfall tax, the government cut duty on heavy fuel oils from 30% to 15% and removed customs duty on copper powder, copper flakes, and copper.

2. The mineral royalty tax was introduced to close loopholes that companies were using to evade corporate income tax. In 2012, the government raised the mineral royalty tax from 3% to 6%. During the October 2014 budget speech the Minister of Finance announced that mineral royalties on the norm value of base metals would increase from 6% to 8%
and 20% for underground mining and open cast mining, respectively. With the exception of mineral processing, the corporate income tax rate applicable on the mining operations was reversed from 30% to 0%. Variable profits tax of up to 15% when the taxable income exceeded 8% of gross sales, was abolished. These changes, effective January 1 2015, changed the mining tax regime from a profit based tax system to a revenue based tax system.

3. On April 21 2015, the Zambian government convened a special cabinet meeting at which the revision of mining taxes were approved. The underground mining royalty tax was increased from 8% to 9%, whereas the open-cast mining royalty tax was reduced from 20% to 9%. Other changes included a revision of the Corporate income tax on income
earned from mining operations to 30% and mineral processing to 35%. Variable profit tax of 15% was reinstated on income earned on mining operations exceeding 8% of the gross sales. These changes took effect on July 1, 2015. As a result of the changes in the law, an annual revenue loss of K2.3 billion was projected; however, to date, no conclusive data are available with regard to what the actual loss in revenue was.

4. In 2012 and 2013 , two statutory instruments, which are government or executive orders relating to subordinate legislation, were drafted by the Zambian government. Statutory Instrument No. 33 (SI 33) prohibited the quoting, paying, demanding or receiving of foreign currency as legal tender for goods, services, or any other domestic transactions. Statutory Instrument No. 55 (SI 55) was a balance of payment monitoring framework, which empowered the Bank of Zambia to monitor inflows, outflows and international transactions. On March 21, 2014, during a press briefing, the Finance Minister announced the immediate revocation of statutory instruments number 33 and 55. The statement below by the Minister is representative of the economic policy U-turns that have left many stakeholders pondering whether adequate consultations
and deliberate planning are employed when sanctioning these economic policies.

“Country men and women, you will recall that Government put in place Statutory Instrument No. 55 of 2013 and Statutory Instrument No. 33 of 2012. These regulations were passed principally to support the implementation of monetary policy.However, challenges have arisen in the implementation of these instruments. To allow for further consultations,Government has decided to revoke these statutory instruments with immediate effect”.

5. On March 12 2017, the Daily Mail reported that the Zambian government banned the importation of some fruits and vegetables in order to promote production and growth of the market for local farmers. According to the Ministry of Agriculture, the ban was necessary because the country had the capacity to produce and supply fruits and vegetables to satisfy local demand. A few weeks after the Ministry of Agriculture’s position statement, the Ministry of Commerce Trade and Industry issued a contradictory statement backtracking on the prior imposed vegetable and fruit importation ban. This economic policy u-turn was attributed to the trade protocols of the Common Market for Eastern and Southern Africa (COMESA). Once again, questions arise as to how these policy decisions are constructed without proper understanding of national and international trade laws and regulations. This raises the question as to whether politics triumphed over policy.

Conclusion

There are many reasons why the Government u-turns on these policies and not all reason are invalid. Most of the policy u-turns seem to be centered around mining, and this is not surprising. Zambia’s mineral resources are one of the country’s most important assets and according to the World Bank’s Zambia Economic Brief of June 2015, mining accounted for an average of 66% of the total exports for the period 2011 to 2014. Mining contributed 11% to the gross domestic product (GDP). It also accounted for 16% of the total taxes and other revenues collected by the government. Between 2000 and 2011, the world bank estimated that copper production rose by about 350%. Consequently, a lot of investments were deployed in the mining sector such as the acquisition of modern machinery however, some of the mines were yet to recoup their investments. Overtaxing such investments may lead to the stifling of the industry, resulting in a significant rise in unemployment. For example, a 2012 labor survey included in the World Bank’s June 2015 report, indicated that, the mining industry accounted for 21% of the formal private sector employment. If one in five Zambians is employed by the mining sector, any disturbance in this labor force will have adverse economic outcomes both on the individual and society as a whole. This is only an example of the effects of such actions, considering the plethora of potential consequences.

Zambia by all definitions is a commodity exporting country. The side effects of this is that the macro economy is hypersensitive to changes in monetary and exchange rate policy, thereby restricting the economic policy buffer zone accorded to the government. For instance, a fall in commodity prices can significantly affect government activities and results in an environment of panic, which ultimately leads to waivers and economic policy u-turns. When there are negative trends in commodity earnings, the government is caught between a rock and a hard place. This is because it may not be sure whether to devalue the currency to boost earnings from exports or leave it at the mercy of market forces. If the government decides to devalue the currency the unintended consequences that may arise include imports becoming very expensive and subsequent political backlash from the public. No government would want to be in such a precarious position and risk the loss of political office. Alternatively, the government may decide to keep the currency strong and u-turn on the mining taxes with the hope that this would encourage the mining firms to invest more in the mines, thereby increasing production and consequent boosting of earnings. It is important to point out that although the later reasons are genuine dilemmas that the government may find itself in, there are many circumstance in which politics have prevailed over policies.

In the last 10 years, Zambia has had four presidential elections. The cumulative sum of spending liabilities resulting from campaign pledges made on the campaign trail have taken a toll on the national budget. The outcome of this has been a very large fiscal deficit and inefficient government spending endeavors. Government has had its borrowing capacity stretched to the limit with all kinds of imaginable financial instruments, such as Eurobonds, T-bonds, T-bills, supplier credit and bilateral agreements. Some of these loans have been acquired in a bid to continue with multiyear projects whose financing model was based on expected earnings from mining tax policies which have since been curtailed. The government’s weakened fiscal position has resulted in a short-term economic policy buffer zone, that cannot withstand the long-term external shocks that result from policy implementation. This weakened fiscal position forces the government to u-turn on policies when these policies are expected to yield negative short-term results. Whether evidence of legitimate problems exists or this is a matter of economic policy teething problems is inconsequential considering that the first reaction is usually to revoke the policy cited as the culprit. Although our conclusions may not be exhaustive, one thing can be drawn from this; the U-turns on policies are a tale of a country’s economy wondering in the wilderness. The promised land still looks afar. The latest indication by the Government to meet with technocrats to discuss
whether the 10% tax slapped on export of maize was necessary is just one of the chapters in a long story of the country’s economic policy u-turns.

DR. CALEB FUNDANGA
IFE ZAMBIA PRESIDENT

9 COMMENTS

  1. vote

    Ok, Dr.Fundanga, a nice article which I HOPE in the COMING PARTS will CONCLUDE the BEST WAY TO GO in all the key sectors of the economy! This one is quite balanced as the perspective starts from way back to MMD,Magande and Musokotwane days. However, as observed, there have been more policy reversals under PF though when we examine deeper, the policies seem to have targeted more revenue collection from mines than ever before. How do you explain this:”Between 2000 and 2011, the world bank estimated that copper production rose by about 350%” and also during this time PRICES OF COPPER WENT THROUGH THE ROOF BUT THERE IS LITTLE TO SHOW AS BENEFITS TO ZAMBIANS.WHICH OF THE POLICY INSTRUMENTS SHOULD WE REVISIT FOR IMPLEMENTATION BUT IN A CONSULTATIVE MANNER?

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      Dr. Fundanga thumbs up! Cogent and objective contribution for the common good. Apa tepakuleka Zambia is our country we have to continue giving expert advisory that builds.

      @Kaloma Konde, for the love of mother Zambia we cannot take the terraces for helpless spectators. Constructive criticism is always effective. Remember iron sharpen iron. Matters of strategy beyond politicians have to keep flowing from patriotic intelligentsia. I have consistently said that Zambia does not need IMF funds because we risk chocking the economy worse off. We have the means to spike growth and put the economy on a steady stay with equitable development. Expert role is critical though.

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    Dr F,

    A broad article shining a lamp on some very pertinent issues. It’s a shame your article was captioned using commentary about Solwezi-Chingola Road and its terrible state. Are you aware that some of the mines up there (Barrick and FQ Mines) repaired the road when the Chinese contractors failed to? Have you travelled along it recently?

    Anyway – do take a look at the 2015 EITI report that summarises all the tax paid data that Government seem incapable of publishing accurately. The European Mine Production Monitoring Project will give Yaluma more ability to gauge production accurately so needs your support. My conclusion and I now that of the European monitoring project is that not all mines are the same and not all are transparent. I bet you can guess which mines are not…

  3. vote

    As it has been with past PF policies, so shall it be with many more to come except that the enduring ones related to the SOE shall become even more malignant. As Albert Einstein once said: you cannot expect the same people (minds) who have created the problems to come up with sound solutions to those problems. Impossible! Change is needed. Politicians are like diapers. They need to be changed more often! A democratic recall mechanism is required for non-performing governing parties and the term of office should be reduced from the current 5 years to 3 years! The fact is that will be a far-fetched prospect since Zambia is now under the SOE siege! Unfortunate!

  4. vote

    Dr.Fundanga.Good article.As a lay economic person,I was thinking on the same lines of writing on the list of policy reversals especially in the last 5 years which number more than 15 but i decided not to because any rational objective analysis, criticism and suggestions for those of us like you who are educated,experienced and exposed to other countries, is misconstrued to be anti government and belonging to opposition in this toxic and politicised environment.No place for independent and patriotic individuals.We will just all now keep quiet.

    • vote

      Zambia would never have attained it’s independence if the freedom fighters were to choose to keep their peace in silence. Silence is not golden when we allow of injustice where citizen rights and freedoms are opportunistically taken away under the pretext of protecting citizens and property. With all due respect, the weakest in our society are depending on all the educated ones to speak out and help steer this country back on course. Why should millions (PF included) be subjected to misery on account of a few isolated incidents? Please reconsider. Thanks!

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    @Kalima Nkonde,”those of us like you who are educated………”???Mind your language sir,there is a situation threatening a state of emergency.

  6. vote

    Hiding behind education.Why didn’t u bring advice when u served as bank of zambia governor?…that time u only minded stashing ur pockets…foolish, deceitiful and careless talk! Why talk sweet nothings which u cannot realise with your academics? Let Chagwa work!

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    What economic transformation can come from a population dependent on foreign mining skill,foreign airlines ,foreign supermarket chains ,foreign telecoms ….do you see where i’m going with this?

    Zambians are an uninspiring lot of underachievers .And in the same timeframe of since achieving independence ,the economic tigers of Singapore ,Malaysia and UAE have zoomed past us like stationary donkeys.

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